Paradigm Huang Gongyu: Details of early investment in Zhang Yiming and trends in encryption technology

Author: MD, Source: Bright Company

Recently, Patrick O'Shaughnessy, the host of the well-known investment podcast Invest Like the Best, conducted an in-depth interview with Matt Huang, co-founder of crypto investment institution Paradigm, who previously served as a partner at Sequoia Capital. Currently, Paradigm manages more than $12 billion. In 2018, Huang founded Paradigm with Coinbase co-founder Fred Ehrsam.

During the interview, Huang Gongyu also recalled his experience of investing in ByteDance in 2012.

At that time, in his opinion, Silicon Valley no longer had much information gap; C-end applications had become very "predictable" for interesting work and considerable returns. A company he founded previously sold to Twitter, and during his vacation, he went to Beijing with the idea of ​​starting a Chinese technology company and visited six founders. One of them was Zhang Yiming, who was working on Toutiao at the time, but from Huang Gongyu's perspective, the possibility of success on this path was very small (similar projects in the United States all ended in failure). Zhang spoke to Huang through a translator, but Huang was drawn to the founder’s “nonverbal cues” — his gestures, expressions and intensity that painted a picture he understood without words.

During the communication, Zhang Yiming left a very deep impression on Huang Gongyu. In the interview, Huang Gongyu said: "I remember that I had a very deep feeling at the time that he was an extremely capable and very focused person. He was also very balanced. He would not be crazy enough to destroy himself, but he was extremely aggressive and had ambitions to conquer the world. I think this is a rare combination."

When leaving the apartment where ByteDance had just started its business (probably Huaqing Jiayuan), what he thought was: "I have to find a way to support this person."

Soon, Huang Gongyu wrote a check to ByteDance at a valuation of US$20-30 million, which was his largest personal investment at the time. With ByteDance now valued at $200-300 billion, his investment has grown roughly 10,000 times, and he still holds a majority stake, admitting that "this may be the best investment I've ever made." Huang Gongyu's education was also influenced by his East Asian family, and he once wanted to complete his doctorate at MIT. His father, Huang Qifu, is a well-known financial economist who served as the head of LTCM's Asian office; his mother is a professor of computer science.

The following is the interview text compiled by "Mingliang Company" (abridged)

Patrick=Patrick O'Shaughnessy InvestLike theBestanchor,Postive sum CEO

Matt=Matt HuangHuang Gongyu, co-founder of Paradigm, former partner of Sequoia Capital

Patrick:Today's guest is Matt Huang (Huang Gongyu), he is the co-founder of Paradigm, a leading Crypto investment firm with over $12 billion in assets under management. In 2018, Matt founded Paradigm with Coinbase co-founder Fred Ehrsam. Prior to that, Matt was a partner at Sequoia Capital, where he led many of the firm's Crypto investments. It has been widely reported that Michael Moritz called Matt the only regrettable loss in Sequoia's history.

In our conversation, Matt shared his framework for navigating the often-difficult-to-understand frontier of the Crypto space, how his early investment in ByteDance - which has now returned 10,000 times his initial investment - shaped his approach to identifying outstanding founders, and why he believes so firmly in the long-term potential of Crypto technology. His company, Paradigm, has not only invested in many industry-leading companies, but also built open source tools that are widely used by the entire Crypto world.

Matt has a rare IQ and EQ that enables him to understand technical complexity, bring together unique talents, and deal with the volatility that the crypto space is known for. Whether you are interested in crypto or skeptical, I think his perspective is valuable.

01 Early Life, Shaped by Education

Patrick: If you divide your life into early chapters, let's say until you become a professional, what are those chapters? What happened in those chapters? Why do you divide it this way?

Matt: Let me think about it. I would say there was a childhood chapter where, like many people, my main goal was to get into college. Looking back now, this is a bit frustrating for many reasons, and I don't want that for my children in the future. But it was a very original goal in my life. My parents are both PhDs and professors, so education was the North Star in our family.

Patrick: Guiding principle.

Matt: Yes. I was lucky that they were relatively open-minded in terms of stereotypical Asian parenting. So they were very supportive of me in the second half of my life when I took the risk and decided not to go that route.

But anyway, that was phase one. Phase two was probably a period of exploration in college, naturally figuring out what to do next. Phase three was starting a failed startup. Phase four was learning to be an investor. I guess I'm in phase five now, which is starting Paradigm and finding my way to express myself.

Patrick: When was the first time you consciously became aware of this family guiding principle during phase one?

Matt: It was only in retrospect. At the time it was like water. It's funny, I think back to family gatherings, where my parents would invite their friends or introduce someone they knew, and almost every time, like a title, they would say what college the person graduated from. So from a very young age, it was very instilled in me that this (education) was what defined a person's worth. I think that was completely wrong, but that's what initially drove me.

Patrick: Did you have a good time in college?

Matt: Yeah, I had a good time actually.

Patrick: Why?

Matt: I went to MIT, which is a super special place. I didn't realize it at the time, but it's probably one of the most concentrated places on the planet for weird people. I think there are very few such centers, I think Silicon Valley is one, Crypto is one, but they are relatively rare, and I think a lot of creative and interesting fringe activities emerge from these places.

I also met my wife here, which again I didn't realize it at the time, but now looking at some of my friends struggling with life after college, I don't envy them the environment they are in.

Patrick: Besides meeting your wife, what was your most memorable day at MIT?

Matt: Well, the most memorable… actually this carries over to the next chapter. Startups are very popular now, but around 2008, startups were relatively new. Maybe if you went to Stanford, it might be the default choice that a lot of people look at, but at MIT, most people went into other typical routes - finance, consulting, high-frequency trading.

I remember a close friend who was a year ahead of me, he told me that he was dropping out of school to join a startup called Dropbox in San Francisco. He was probably the sixth or seventh employee there.

It blew my world view at the time.Given my upbringing and the influence of my parents,the idea that one should not only get into a good college, but also graduate and maybe even get a PhD,seemed crazy to drop out.

However, this was a person that I had a lot of respect for, and I thought was very capable, and not someone who would fail in school or pursue something completely impractical, like becoming an actor. That was a real turning point, because it made me start thinking about what kind of train of thought would lead a capable person to do that. That led me to Paul Graham's article and Y Combinator, and to the whole Silicon Valley ecosystem.

Patrick: I remember reading Paul Graham's article. These articles or these windows can open up doors of possibility for you. Can you elaborate on what you had in mind and what you actually did next?

Matt: It was a very leveraging move. PaulGraham wrote some words on the website, and I think that changed the world tremendously, opening up a universe for nerds to start companies. In a previous world, they would have been completely at the mercy of the CEO who had an MBA. So I thought that was a really interesting topic.

But for me, it was very impactful because the metacognitive gains were very actionable. I was in a mindset: I'm going to MIT, and my parents want me to do a PhD. I need to figure out what I'm going to major in and where to apply. It wasn't clear yet what I should do in the summer in order to start contributing to research.

It wasn't even clear if that was something I should optimize for. One thing that was very liberating for me about Paul Graham's article was that you don't need to ask for permission from someone because that's the way all PhD programs are. You can just figure out what you want to do and just do it. There's a popular meme right now that you can just do things. I think it's a cliché, but I think there's a deep truth to it.

I found it very illuminating and it reshaped my worldview of what I wanted to do. I was an applied math major. I grew up making websites and playing around with Photoshop. A lot of kids did those things. But I didn't really learn how to program or the principles of computer science.

I immediately switched to - a lot of computer science courses actually counted towards the math major. So from that point on, I started learning how to build things. And then my roommate and I started doing things that ultimately led to our startup.

02Startup Ritual

Patrick: Tell the story of a failed startup. It's a necessary step in growth.

Matt: We applied to Y Combinator twice and didn't get in the first time. I remember clearly that we flew to California for the interview, and we interviewed with Paul Graham (PG), and then he called us that night. Maybe they still do this now, they respond the same day. He said, "We really like you guys, but we're really unhappy with your ideas. Can you guys come back one more time? Let's brainstorm and try to come up with something for you guys to do."

We did that, and we still didn't come up with anything that they were interested in. And then I think about a week later, he published a paper that was like, "Why Young People Have Terrible Ideas."

Patrick: You guys are very inspiring (laughs).

Matt: Yeah, that's right.

So I think we did fall into a common trap that young entrepreneurs have. You guys overestimate the problems that you're going to have in college, and a lot of young people are attracted to the problems that they're going to have in college, but college students are not a good representation of the average consumer.

From there, six months later, we continued to build and develop things. Eventually, by the next batch, we had a prototype that had users... but even so, it was still a terrible idea. If you remember that period, this was when streaming content first came online. Like Netflix and Hulu.

Patrick: What year was that?

Matt: It was 2010. So we raised some angel and seed funding at Y Combinator and continued to build, but ultimately it didn't go the way we had hoped. So we started looking to be acquired, and ended up being acquired by Twitter. That was an interesting chapter in itself.

Patrick: What did you learn from the M&A process?

Matt: That was a period where they weren't acquiring businesses, they were acquiring people. We interviewed at Airbnb and Palantir. I ended up going with Twitter, which was probably the least well-run of the three companies.

I would say that I don't think there's a lot of substantive things to learn from failed or failed startups, but I think there are some lessons. I'm definitely experiencing that more now as a parent than I was before. Some things you have to experience firsthand to learn. You can read a lot of things and you can think you understand them, but the real epiphany doesn’t happen until you’re there. I think the ambiguity of creating something new from scratch and the loneliness of being a founder, and the empathy of all founders, that’s probably the main takeaway that I got from that experience. I think that’s the biggest thing that helped me from that experience. Patrick: If I could go back to that period, to the last day of that chapter, and ask you, “Matt, what is your worldview? What do you think you would say?” Matt: Well, I knew I wanted to work in technology and build things. I wasn’t really sure if Silicon Valley was the ideal place to do it. It actually had to do with… I briefly considered going to China to start a business. Because this was 2012. At the time, everyone in Silicon Valley felt like it was a little bit saturated. Obviously it wasn’t, but the iPhone was released in 2007, and a lot of mobile apps had already been built.

I think 2012 was the year that Instacart and Snapchat were founded. Those were probably the last of the big mobile-led consumer wins. That's what I was interested in. Enterprise applications are very interesting to some people, but not to me.

So China seemed like an area where you could have this kind of compound annual growth rate. I thought, hey, I'm Chinese American, maybe I'll have some advantages there. And then when I went there, I realized, no, I'm not really Chinese.That's a whole different thing.But that also ultimately led to the investment in ByteDance,which we can talk about in detail. But when I came back again, I felt like there was a potential multi-decade compound growth opportunity there, and the Crypto space was one of those spaces.

03 Talking about early-stage investmentByteDanceand Zhang Yiming: Very focused, aggressive, ambitious, and not out of control

Patrick: I have a picture in my mind, like we are making a movie about you. The opening scene is you boarding the plane to China on that trip in 2012.That will be the opening shot. Can we do this in audio format? Can you tell as much as possible about every detail you can recall about that key trip?

Matt: I'll try my best. If you think back to 2012, every venture capitalist and company in the United States was trying to get into China. China was entering Hollywood. Globalization was at the forefront. I thought maybe that's where I should be.

I took a week off from Twitter. I had some mutual friends who knew people in the VC or tech world in China. So they helped me set up some meetings. So, I landed in Beijing. I had been there before, during my summer at MIT, to learn the language. But even in that short six years, the whole city had changed so much. As soon as you land, you realize it’s a huge city, it’s gray. But I remember feeling this energy on the ground, this was a culture that was experiencing hypergrowth. Whereas Silicon Valley at the time, despite all the enthusiasm for startups, the culture had become a little complacent in some ways.

It was very inspiring.

So, I went from meeting to meeting, not intending to invest in anything, just trying to learn. I met with the Dropbox of China, and X and Y of China.

I remember arriving at Bytedance, which was an apartment building that had been split into two apartments. I brought a translator with me. We took the elevator up, and the floor was very spartan. I was pulled into a small kitchen, and you imagine an old-looking refrigerator that was probably dirty inside. And a very simple Ikea-style kitchen table with some stools. I was sitting there, talking to the translator and the founder of ByteDance, Yiming Zhang.

One of the things that was really interesting, we had a mutual friend, Graham Duncan, who talked about interviewing, referrals, and watching people. Looking back, it was a very unique experience, I probably didn't quite understand what he was saying when he was talking, and then the translator would translate it for me so I could understand. But when he was talking, I could concentrate on his nonverbal messages.

I remember having a very deep feeling at the time, This is an extremely capable, very focused person who is also very balanced, not crazy enough to be self-destructive, but also very aggressive and has ambitions to conquer the world. I think that's a rare combination.I also didn't like the idea, which was a personal news app (i.e. Toutiao). This was before TikTok or Douyin, so their main business and the idea of ​​building the company at the time was a personalized news app.

I remember that idea didn't work in the United States at the time, and a lot of people tried it. I now have some hindsight understanding of why it worked in China, but at the time I didn't like the idea. But coming out of that meeting, I was like, oh my god, I have to find a way to support this guy.

Patrick: How did you do that? Did you just take $20,000 and say, "Let me invest in your company?" Like, what was the actual conversation and the process?

Matt: After we left that trip, I talked to some other investors who we had also met through introductions. My takeaway from that trip was that he was the guy.Then that group basically begged the existing venture capitalists to find a way for us to participate. They were very kind.

Patrick: What was the valuation when you invested?

Matt: There were a few different types of shares, but it was somewhere between $20 million and $30 million.

Patrick: Okay, so what started to coalesce and get you into the investor brain and the investing chapter? Was there a sense of, like, "Wow, this is something I want to do over and over again?" What changed for you?

Matt: I think at that point in my life, he was probably the most impressive person I'd ever met -- you must have been there a lot -- an impressive person that I'd ever really spent time with. I've read a lot of stories about impressive people, and it's very inspiring and a little bit addictive. Now as a venture capitalist, we basically do this all day long.

Patrick: So, going back to, you mentioned two qualities of him, that he wasn't out of control, he was very controlled, but also bold and aggressive. Maybe expand on that, if it wasn't those two qualities, try to describe that meeting in a little more detail. What did you see and what did you feel. Matt: He had a very clear vision of what he was going to build and why. I recently reread Elon Musk’s Tesla master plan from 2006. If you read that document, there’s an extremely clear description of the business strategy. Zhang Yiming also had such a clear vision of this idea of ​​personalized news—personalized news underestimates it. I think he saw what it would eventually become, which was a global market for attention and media. Just like before algorithms, you might have used social networks to get information. Before social networks, you used newspaper editors to do that. But this was the high-frequency trading version of the media market, and he saw that at the time. It took me longer to fully understand that. But his clarity and his radical ambition, I think from day one, he was very focused on building an international business. At the time, every Chinese business was a Chinese business, even Tencent, even Alibaba. So it was very bold that he actually believed he could do that.

Patrick: I'm assuming you've held onto this investment for a long time. What I'm wondering is, do you still hold onto it. We can also talk about this from the perspective of Cryptocurrencies. Many of my mutual friends were early investors in Bitcoin. One notable phenomenon is that they were wealthy at the beginning, which made it easier for them to hold onto it.

Where the first big success investors, if they get a 100x return, they might sell because they've made a lot of money. But then, that might have made them miss out on even bigger gains because they didn't hold onto it longer. So, do you still hold onto it? If so, what's it like to hold onto an investment like this that's worth far more than you might have initially expected it to be?

Matt: I hold onto most of it. It's a weird situation because it's illiquid most of the time. So it's much easier than with Cryptocurrencies. I think when there's a healthy secondary market and it's possible to sell, I don't know, I haven't compared to the original cost. At that point, it's always possible that it's the largest company in China.

It must be confusing for you as an investor because it’s probably the best investment I’ve ever been involved in.

Patrick: What’s the return on investment?

Matt: I haven’t run the exact numbers in my head adjusting for dilution, but the Secondary market is trading at somewhere between $200 billion and $300 billion right now. The simple math is, that’s a 10,000x return, let’s say it’s a 5,000x return…

Patrick: Pretty good.

Matt: If a U.S. company had those numbers, it would be worth $1 trillion to $2 trillion. So it’s probably going to grow another 10x.

Patrick: Yeah. Is it weird to know that this is probably the best investment you’ve ever made?

Matt: Yeah, that's weird. I find myself accepting that reality more and more, but let's not pretend that this is some great skill.

I think I have some gut feeling that this is a good investment. But like many early stage investments, it's just a chance to say "yes".

Patrick: Yeah, and what I'm wondering is, if I ranked my five most successful investments from 1 to 5, how many times did they share that "energy signature" that you describe? Maybe list what they are?

Matt: Yeah, I guess that's true for all of them except for the crypto currency investments.

Patrick: Sure.

Matt: I think there, there's the analogy of the "energy signature" of a community or a meme.

Patrick: Yeah. Give me a sense. What do you think are the other four most important investments?

Matt: So I don't have a spreadsheet. Somehow, I don't track this.

Patrick: You can tell by feel.

Matt: Yeah, that's right. If I had to guess, I would say ByteDance, Bitcoin, Ethereum. Are these personal or do they include funds?

Patrick: Both.

Matt: I should take responsibility for Uniswap, which we can talk about in detail later. There are also some general tech investments, such as Instacart, for example, I participated in the seed round.

04 Lessons Learned from Sequoia's High Demand

Patrick: Okay, so let's move into the pure investor chapter, specifically Sequoia. So how did you get to Sequoia? This is a transition story. And then I had a lot of questions about my formative experiences there.

Matt: So I was sitting at Twitter and a random email popped up in my inbox from a recruiter about a job opening at Sequoia. I had no real ambitions or intentions to be an investor or venture capitalist at the time. So I initially thought the email was a mistaken spam. Why would they email me? They don't go to people who might go into the investing world, like bankers or something like that, who might go into investing.

I didn't really understand the diverse backgrounds that went into that at the time. But I was intrigued and ended up on the phone with Pat Grady, who I think you know. As he introduced me to Sequoia, I started to get really interested in it. I met more and more of the team. I still think it's one of the highest quality teams and cultures that I've ever experienced.

Again, I was interested in investing, but I wasn't sure if it was something I wanted to do, but I decided to join based almost entirely on the strength of the team.

Patrick: Thinking back to that time you were there, how long were you there?

Matt: Four and a half years.

Patrick: In those four and a half years, what has changed? If I were to talk to you on the first day and the last day, what would be the “therapeutic effect” of Sequoia on you?

Matt: It’s definitely been very profound. I think the biggest thing is probably the exposure to high standards.

It’s probably the most demanding place I’ve ever been, including the startups I’ve been involved in, but also Paradigm.Their ability to maintain extremely high standards. I think having a storied history like Apple, Google, and Cisco helps with that.

Patrick: When you walk in, that wall is impressive. Those logo walls, pretty impressive.

Matt: Yeah, those posters and the S-1 documents. At 20% of NASDAQ companies that number is staggering. So I think that helps… When your track record includes that, even things that other people would consider to be huge successes are seen as small potatoes. So there are a lot of days when there are hundreds of millions of dollars of investment results that are seen as mediocre successes. I remember the day after I joined, which was the day the WhatsApp acquisition was announced, there was a very awkward champagne celebration in the lobby. They called everyone out and there were glasses everywhere and everyone was toasting, but no one was drinking. Five minutes later, everyone went back to their desks and kept working. So it wasn't a culture that celebrated a lot. But in general, the high demands—not just at the firm or the investment level, but in terms of personal taste and the demands that individuals make of themselves. They strive to operate at such a high level, and I think Tyler Cowen mentioned on his blog that one of the free lunches is raising the aspirations of the people around you. I think the high demands culture is this way of putting surplus out into the world. If you expose one person to that culture, you can permanently change their standards for everything.

Patrick: Is there a personal story where you felt that impacted you? Was it the team or a specific person that made you feel, "Oh, my god, I have to do better than I am now."

Matt: This question is kind of framed in a negative way, which is you're not doing well and you need to do better. There's also a version that's positive, which is you're great and we believe in you.

I would say that Sequoia—specifically Doug Leone—was a big influence on me.

I think the first investment I brought into a company was when I worked with him. It was an experience that increased ambition and confidence in that process, watching him work with the team and then having him validate my view on the investment and what we should do with this company.

But a lot of the high standards are unspoken. They're habits and rituals that you can see everyone embody, like a $100 million investment result. I would have thought everyone would have celebrated. Instead, everyone is saying, "This company is kind of a waste of time. Why did it take us six years to get this mediocre result?" That culture rubs off on you.

Patrick: How do you approach as an investor differently when you set your sights on the next Apple, rather than a billion-dollar company that we'll soon forget about?

Matt: In some ways, it's daunting because the bar is so high, but in some ways it's also liberating because as an investor, the temptation to chase "good" instead of "great" is so great at every level—whether it's the way you spend your time, whether it's actually making investments, the quality of the companies or the quality of the founders—and so unless you have really high standards, you can waste a lot of time chasing things that ultimately don't make an impact.

Patrick: There were a lot of incredible investors there when you were there, and of course, many of them are still there now. They're all very different from each other, and that's going to be a big topic for us, like this idea of ​​a "heterogeneous collection," which I think you do very well at Paradigm. What do you think is the key to creating a group of people that are very different from each other, very heterogeneous, while also making sure they work well together? Matt: There are a lot of different personalities at Sequoia, but there's also some impressive coherence along some key dimensions. Another takeaway from my previous experience at Sequoia was that for the first time I realized very intuitively that there are many paths to greatness, whatever you want to call it. Because at Sequoia, there were so many great people that, if you just look at their track record or what they've accomplished, it's incredible. And yet, their styles are very different. That was liberating for me, and I realized that I could find my own way and do it the way I want to do it. And that's actually a very interesting thing to pursue. You see this with athletes or performers of all kinds. Sometimes you can read in their interviews that they realized that they didn't need to follow some existing mentor or some kind of orthodoxy, but could figure it out on their own, and that ended up being the catalyst for their greatness.

05 Bitcoin's Adoption Curve

Patrick: I want to go back to two key parts of the timeline. The first part is your initial exposure to Bitcoin and Crypto currencies. The second part, which is related, is your decision to leave Sequoia and start Paradigm. Maybe start with the first one. Similar to the TikTok thing, how and when did you first encounter it? We just introduced the word "readable," which is going to be an important topic that we're going to explore throughout this discussion. Let's go back in time. What is readable and what is unreadable about Bitcoin? What was it like when you first saw it? What was it like when you first saw it? Just like, tell us about it.

Matt: So my first exposure to Bitcoin was when it was first launched…

Patrick: 2009?

Matt: 2010. The white paper. I was in college at the time, and I internalized it as a really beautiful concept. It brought together the intersection of computer science with math, economics, game theory, the history of money, and so on. It made me dive into some of the concepts that were involved.

Because if you look at the references in the Bitcoin white paper, people have been thinking about this for a long time.It references a lot of earlier work. So that was interesting. I had no funding at the time, and it didn’t seem like an investment, it seemed more like a toy.

My next exposure to it was in 2013, which was I think the first Bitcoin bubble, and I participated in it.I think one of the important points about Bitcoin adoption is that you almost need to lose money or do something stupid the first time you get exposed to it.Then I find that—and this is certainly true for me—you give up on it and maybe think it’s dead. And then when you see it come back again, you start to wonder, because there have been a lot of bubbles and things like the tulip bubble. But there weren’t multiple consecutive bubble cycles with tulips.

Patrick: They didn’t come back over and over again, yes.

Matt: There wasn’t a second, third, fourth cycle with Beanie Babies either.

Patrick: That’s a key point.

Matt: And there is a time-delayed adoption curve, if you think about Bitcoin adoption based on exposure to Bitcoin. So 2013 was the first cycle for me. I don’t think I was a professional investor at the time. I was day trading on my Coinbase account, and I bought in at $200 or $300, and it went up to $1,000, and then it went down to $600, and then it slowly went down from there.

Actually, right around that time, I joined Sequoia. So this was before I joined. I remember thinking, this is a topic that I was very interested in. When I interviewed at Sequoia, they asked me to prepare a one-page report on the companies that I thought we should invest in.

I chose Coinbase, which at the time only had seven employees. This was before a16z invested, so it was just Union Square and Ribbit. I was a firm believer that this was going to be an interesting space and this company was probably the best in the space.

But after joining, and after that crash, I kind of stopped paying attention to it. Bitcoin was just an asset and there were some companies serving it, but it wasn't clear that it was a really innovative software platform. It wasn't until a few years later when I saw the activity happening on Ethereum that I got back in on it.

Patrick: So when was it, let's say it was at Sequoia, that you first felt like, I need to make a bigger bet in this ecosystem, which ultimately led to you and Fred starting Paradigm?

Matt: I had stopped following crypto. I still owned some bitcoin, I still followed some accounts that would tweet about the price of bitcoin. I think in those few years, they stopped tweeting about the price, or maybe I missed the news. But when I saw the price going up again, I started noticing these signs that this ecosystem was alive.

And then I also noticed the activity happening on Ethereum. It wasn't just a digital asset like bitcoin, there were actually these projects. Like Augur, which was an early prediction market. I thought, okay, this is not just an asset, it's now a startup platform. So, I started investing time there, and Sequoia was very supportive of that. We made some interesting crypto-related investments on behalf of Sequoia.

And, to be honest, I think the great thing about Sequoia is this multigenerational team, there are 12 opinions on any given technology idea, and then there is an intellectual debate to find the truth. And in the crypto space, that debate was missing.

So I ended up looking for thought partners outside the firm to test my ideas and learn from them. And Fred was one of those people who left Coinbase and he started angel investing in early 2017. We looked at a lot of projects together, and it was during that process that I found that, sitting down and talking to him, as he started to lay out his ideas, I had a strong feeling that this is someone I want to work with in some way. I don't know, I certainly didn't think about starting a company, but maybe I would invest in the next project he did. And from there, the seed of Paradigm was born.

Patrick: People often mention you and say, oh yeah, Matt is the partner who left Sequoia, and they really didn't want to lose him. Let's explore that. What was it like when you told them you were leaving? Did they try to keep you? How did that all come about?

Matt: First of all, I don't know if that's true. I know it was hard for me. I remember when I came to Sequoia and experienced the culture, all the great personalities, the standard of excellence that everyone aspired to - I thought, wow. I could stay there for a long time. This didn't feel like a job. This felt like a place I could retire.

And then eventually, I got fascinated by Bitcoin. That's the simple answer. I did feel very strongly that this was going to be one of the most important techno-economic trends of the next few decades, and that developing this technology was going to be very important to humanity in terms of financial freedom, privacy, and individual sovereignty. For the first time, I really felt like this was a sense of mission to make this happen. So from there, intellectually, it was the right choice. But on a relationship and personal level, it was hard.

06 Building Paradigm’s Vision

Patrick: So finally we can finally talk about Paradigm and Cryptocurrencies and everything that’s going on in the world today. Paradigm today is a Crypto-focused asset manager with over $10 billion in assets under management. Maybe just give a quick introduction, how do you see Paradigm, what it is, and what you hope it will become, a general overview?

Matt: Well, the founding insight when we founded Paradigm was that Fred and I both firmly believed that Cryptocurrencies would become one of the most important techno-economic trends. We believed that to invest in Cryptocurrencies, you needed to be what is called “Crypto Native.” We work hard to build that environment.

We don't have a top-down plan. For us, it means making sure we have the right team that can handle an uncertain future. Back to the question of readability and unreadability. I think crypto, even today, but certainly at the time, is an extremely unreadable frontier. It's hard to understand what's valuable, what will be valuable, how to distinguish noise from signal.

It's a deeply technical field, and we knew that hiring investors from a central casting wasn't going to work. We were lucky that our first batch of hires tended to move us in a more technical direction. I would say today, I think there are two main things that drive Paradigm. One, we see our mission as advancing the frontier of crypto. We certainly care about return on investment, but we're not primarily optimized for that. I think if we advance the frontier of crypto, make crypto work, and expand the size of the pie.

Patrick: Make a lot of money.

Matt: A little luck. I think we'll also get a good return on investment. But primarily the first thing is, this is a set of technologies that really need to exist. We believe that a lot of value is going to be created as well.

The second thing is,we tried to build a team that embodied the idea of ​​"builders" rather than just "investors." Part of that was aesthetic.I think Fred and I both like to build things, and so do a lot of people on the early team. We just tend to think about where the frontier should go, technically or product-wise. But part of it is also that we think that's one of the best ways to invest in the space.

Maybe an analogy to biotech, it's such a technical space that you really need subject matter experts to understand what's going on. That's not enough in itself because you also have to combine that with business sense. But we think there's a lot of things that can come out of thinking about ourselves not just as an investment firm, but as a place to build products and do research.

Patrick: The original chapter of Paradigm was really interesting because I think you guys raised hundreds of millions of dollars and effectively put all of them into Bitcoin. You can tell that story because it turned out pretty well.

Matt: It sounds brash when you describe it like that. But I would say that our founding idea was to create a very flexible vehicle - we didn't even consider ourselves venture capitalists. We wanted to create a vehicle that could participate in the value creation that we saw in crypto currencies and contribute to it. And, it wasn't clear at the time what form that would take.

In the early days of Bitcoin, there was always a question of, should you invest in Bitcoin startups or just buy Bitcoin outright? I think a lot of people got caught up in that question. The right answer is to do both. But for us, it was really important to be able to participate in the entire stack from early stage investments, to the currency itself, to tokenized protocols.

Patrick: How much money did you raise? What were the first few months of action like?

Matt: The first fund was an evergreen fund that could hold public companies, private companies, and everything in between.We raised $400 million, which was an interesting process in itself. Cryptocurrency was kind of hot the year before, so it was on everybody's radar.

Patrick: This was 2018.

Matt: This was early 2018. Yeah, early 2018. It was still very controversial, and there were a lot of skeptics about Bitcoin almost everywhere we talked. But we raised $400 million, launched at the end of 2018, and our plan was to start phasing into our most confident positions, which at the time were Bitcoin and Ethereum.

Patrick: Yeah, to give you an idea, the price of Bitcoin at the time was about - $3,000 or so.

Matt: Yeah, it was between $3,000 and $6,000. And Ethereum was $100. And then in the first year after launching, we raised about another $300 million to $400 million, about $700 million to $800 million in total. And then we raised another venture fund in 2021. That was $2.5 billion, and we're investing that fund now. And then we raised another $850 million in commitments for our second venture fund in early 2024, or I guess 2024.

Patrick: But it hasn't started investing yet.

Matt: It hasn't started investing yet.

Patrick: What's the team like?

Matt: We're 65 people, mostly in San Francisco, some in New York, some in Washington. The policy team is in Washington. What we call the "investment and research team," which is the core team that makes investment decisions and tries to figure out the future of crypto, is about 10 or 11 people.

Patrick: Does that size feel right? I've heard a lot of people say that when the number of people gets above that number, it stops being a team and becomes more of a structure. Matt: You mean 10 or 11 people? Patrick: Yeah, 10 or 11 people. Can you imagine it with 20 people? Matt: Well, we had 20 people on that team in 2021. Yeah, in hindsight, I think that was a little too big. There are a lot of ways to build a successful investment team. I think some teams are large, but the larger the team, the dynamic of a group of people making decisions definitely changes. I think it's still possible to have a full engagement, mutual discussion and search for the truth with 10 people or less. The larger the room, the more people are self-conscious and afraid to say something stupid or challenge someone more senior than them, or things like that. So that works for us. It's a diverse group of people. In fact, I don't think there's a single person on the team who would fit the criteria that other investment firms would hire. Everyone has a unique entry point into the future of cryptocurrencies one way or another. We have engineers, researchers, security experts.

Patrick: If I come in, sit down, and look over people's shoulders, the builders and the research activities that aren't investment activities, what do I see?

Matt: You rarely see Excel models. More often, a couple of people might discuss some math problems on a whiteboard. You'll see Georgios with three screens, 200 tabs, typing out code. A lot of the work we do is really in the details of the protocols and the mechanisms that we think are important to crypto. The reason we spend time there is because we think they're huge leverage points.

On the open source side, the work that Georgios does, that code can be used across the crypto space. On the mechanism side, Dan Robinson, Dave White, and many of the people on the team, those mechanisms are at the heart of the protocol. For example, Uniswap, it serves thousands, millions, hundreds of millions, trillions of transaction volume, all from a mathematical formula.

In crypto, the leverage of getting the mechanics right is huge. We think that not only applies to what we've seen, but there's a new frontier that needs to be invented. So most of the team is focused on that - these mechanics will eventually manifest in the product.

07 Dealing with volatility in the crypto market

Patrick: One story that's emerging is that you're a personality type that excels on top of volatility. Whether it's the team, the asset class, or the returns. You're in a unique structure that's a long-term structure. But the day-to-day volatility in crypto is completely crazy. Can you talk about that experience?

So, like you mentioned earlier about the numbers. If you just look at two points in time, the funds raised and the funds today. Wow, that's awesome. 12x or 13x or some ridiculous number.

I'm interested in the painful aspects of the team and the performance. So this is a super volatile asset class. You have a high variance team. You seem to be a very solid, calm person standing on top of both of these. But I'd love to know what the painful, hard parts have been for you historically so far, both in the team and the assets.

Matt: Honestly, the assets are easier for me because that's just a number. I think when you have a clear long-term nature to your belief in Bitcoin or crypto broadly, there's a lot less volatility. If you look at the underlying volatility of our belief in Bitcoin or crypto broadly, there are definitely ups and downs, but they're much smaller than the price. That's easier by comparison.

The organizational effects and the people effects are much harder. You can see this across the crypto space, when crypto is hot and in the news, that's when it's easiest to recruit people in all roles, whether it's the company or Paradigm. If you think about the selection function, it's also people who may have gotten in for the wrong reasons, or may not really believe in the 10-year time frame of Crypto currencies, but today it's the hot stuff. So, in times of volatility, that creates a lot of volatility. So, we've always been a little bit leaning that way, but even more so today, we're very focused on locking in the people who really understand it and are in it for the long term.

Patrick: What was the biggest peak to trough drawdown you've experienced?

Matt: I don't know.

Patrick: Do you know when it was, if not in percentage terms?

Matt: When it was, it would definitely be after 2022-2023.

Patrick: Talk about that time. What happened? What did you have to do? Were you caught off guard? Or, you know, I've been through five...

Matt: On the public side, we think in a peer-to-peer way, so our focus is less on the swings in the middle. So, most of our focus is on, this obviously impacts the entire private portfolio - the runway of these companies, the ability to raise money, employee morale, revenue, etc.So, most of our focus is on triaging to make sure that the other companies in these cryptocurrencies survive.

And then, we did a lot of reflection on 2021 because, it was a very unusual time in crypto and in tech broadly. So, waking up to basically 2022-2023, a lot of the decisions that we made in 2021 were not appropriate for how we expected to be in the next five to ten years.

Patrick: If I tried to identify the best criticism of Paradigm, what would you think it would be? What kind of criticism would you think, when someone says it, you think, "Oh, shit" - that would really hit home.

Matt: I think the tradeoff of having a deeply technical, very building and research-focused team is that we inherently have strong views on the technical future of Bitcoin. If you think about the idealized version of the investor, that would be much more agnostic. It's a conscious tradeoff that we always have to weigh. But I think a fair criticism of Paradigm is that sometimes we get too attached to our technical views.

Patrick: What's the worst thing that's happened in Paradigm's history?

Matt: The most obvious one is that we invested in FTX. I don't actually know what the correct conclusion is about SBF. He's a unique and idiosyncratic individual, but so are a lot of great founders. The other one is that we did find what ended up being the core issue, which was the related-party nature between the market makers and the exchanges.

We actually dug into this in our due diligence and ended up getting lied to. So, I think it’s very difficult to do venture capital when a founder is willing to do that because the whole ecosystem relies on trust and it’s hard to do due diligence on lies.We had no reason to think he was lying.

Patrick: Was that the most stressful time for you personally in the history of Paradigm? You seemed pretty calm, but…

Matt: Yeah, probably in the first few days when we didn’t fully know what was going on.

08 Unreadable as an investment advantage

Patrick: Maybe we can explore this concept of “readability” in more detail and how it relates to your views on Bitcoin and investment opportunities. I know you’ve been thinking about it a lot. Let's get your thoughts. Why is this topic interesting? What do you mean by "readable"? How does it relate to investment opportunities?

Matt:I think the less readable a field is, the harder it is to understand by others, the more likely it is that the potential returns will be inversely proportional.Because it's almost certain that the more understood a field is, the more(easier)it isto be priced, in other words, everything should be taken into account.

Silicon Valley is an interesting case study because it's always been some kind of frontier.But in some ways, the Silicon Valley ecosystem has also become more and more readable.Things that used to be custom-made are now a little bit more factory-like.I think the frontier of AI is still very unreadable right now, and it's a very interesting space for builders and investors.Software as a Service (SaaS) is no longer unreadable.Perhaps the perfect pricing of SaaS valuations by companies like Tiger and Coatue is exactly what was expected.

I think there’s a strong pull to readability. Or to put it another way, making things readable inevitably reduces accuracy. So, there’s this idea that the map is to the territory. We create readable interpretations to understand things better, to communicate and spread ideas better, but they’re always approximations of the full texture of reality.

I think in the cryptocurrency space, especially right now, there’s a strong temptation to make it readable too early. I think in some cases there’s some value in tolerating unreadable. For example, a lot of people are asking, what are the use cases for crypto currencies? First, I think we can get to that point. But money and finance are obvious. But a lot of people want to know, what after that?

I think there’s a temptation to throw around the term “Web3,” which I think is useful in a way because it’s an analogy that helps technical people understand what crypto currencies might be, but it also introduces a lot of false comparisons. So if you’re building in the crypto space and you take this readable meme too seriously, you might actually be building something very wrong because you’re misunderstanding the underlying complexity that’s possible.

Patrick: That reminds me of…what’s the author’s name?…James Scott or something like that—that book called The State’s Perspective.

Matt: Exactly.

Patrick: My memory of that book is that the desire to make something understandable from the top down distorts things. So you plant trees in neat rows. The first generation of trees is fine, but all the complexity that happens in an organic forest is lost.The second generation of trees can’t grow. You lose complexity by oversimplifying things that shouldn’t be simplified.

Or even the way cities are laid out. Should they grow organically from the bottom up, or should they be designed from the top down? It's hard to design a great system from the top down, and that's a big point in the book. Do you think the book's ideas have a place in your thinking?

Matt: Absolutely. Maybe the modern version of the book is to see ameemenecosystem that chooses those very simple memes because simple memes can gather a lot of power and energy and spread. You see it on Twitter almost every day, the current topic, people are arguing about higher dimensionalmees, and thesemesrescandsores, and thesemesrentheresonit'snwithoutmes. It's not clear what to do here, but the same thing happens in the investment world. Peter   Thiel hates buzzwords. Once an ecosystem has a buzzword, run away.

Patrick: Stop. It’s too late.

Matt: Moritz said, “Look for the interesting, complex bird, not the flock of birds.” I think they’re both trying to make the point that outliers are unique. If you invest by meme, you actually lose all the underlying texture and complexity.

Patrick: Does this also speak to an appreciation of “product selectivity,” where the world tends to interpret possible products through the lens of existing markets and not appreciate that a new product or platform technology just creates something we can’t imagine, and most of the returns come from this unimaginable part? Is this why unreadable things can produce better returns?

Matt: I think some of the most foundational platforms, these things that produce generative outlier results, were the least readable when they started. I think the internet is an example of that. Today, everyone takes the internet for granted. But if you think about it, even the idea of ​​Google, the pitch was, “This helps you search the internet, but what is the internet for?”

Well, Google is a use case for the internet. There’s a circular reference there. And it turns out that over time, more and more things appear on the internet and become very useful.

09 Crypto-assets Positioning, Restructuring of the Financial System, and the Intersection with AI

Patrick: Let’s apply this to today. Describe your thoughts on Bitcoin in your own words so that people who don’t follow it can understand it.

Matt: So, I think Bitcoin is a very fundamental change in the way humans coordinate.

Patrick: What do you mean by “fundamental”? Matt: What I mean by foundation is, it's a very basic building block. The changes that are happening at the bottom of the building. Historically, we've always coordinated through centralized institutions, companies, governments, monetary systems. Bitcoin allows us to coordinate in a decentralized way. I think it turns out that the most valuable application of this coordination style is currency. I think Bitcoin is going through three broad phases. First as a currency, second as a financial system, and third as an internet platform. I think it's becoming increasingly clear in the first two. It's useful as a currency, as a financial system. I think the internet platform is probably the least readable part right now. But in terms of currency, I think Bitcoin is the most valuable startup of the last 15 years. Except most people don't think of it as a startup because it competes in a very unusual market - the currency market. It doesn't have a traditional corporate structure, team, or CEO. But if you step back and think about it, I think it's pretty remarkable that in a brand new industrial organization, Satoshi published a nine-page white paper, wrote some initial code, and then an entire ecosystem grew up around it that's now worth trillions of dollars.

It's not just the most valuable startup. I think if we had said at Paradigm in 2018 that countries would discuss or even adopt Bitcoin as a treasury reserve, we would have thought you were crazy. We thought it might be 10 to 15 years from now. So, to be honest, I've been very surprised by the growth in legitimacy of Bitcoin as a monetary asset. This is not only at the government level, but also at the institutional level. I think in 2017, Larry Fink (founder of BlackRock) called Bitcoin an index of money laundering, and now he's on CNBC every month talking about it being the future, it's digital gold.

Jerome Powell (current Federal Reserve Chairman) was asked at a conference last month whether they would adopt Bitcoin or whether it was a threat to the dollar. He said no, it's not a threat to the dollar, it's just digital gold. Even the acceptance of digital gold, I think five years ago was very anti-establishment. If you think about the adoption of any new monetary asset, it's a process of building acceptance and legitimacy, and that's the real KPI. Price is the output of that process, but the main input is the number of people who believe that this could be possible.

Patrick: Let's talk about Bitcoin as a currency for a few more minutes. Why is that important or interesting? It's market cap is like... right now?

Matt: Just under $2 trillion.

Patrick: So let's say it's one of the largest companies in the world in some way. But as a currency, it feels like... If you put it up there with Amazon, Google, Microsoft, and other multi-trillion dollar assets, it's probably the most maligned.It doesn't have prominent backers like Satoshi Nakamoto, the creator of Bitcoin, and it's had some questionable characters along the way. Why is it valuable or interesting? It's a fundamental question from your perspective, but it seems important, and I'd like to hear your answer. Matt: I think there is value in the idea of ​​a non-sovereign currency. I'm not one of those people who thinks that crypto or Bitcoin should replace all fiat currencies. I think they can actually coexist very well, and the rise of stablecoins is a great example of that. But Bitcoin is more than just a hedge. It can also help individuals and families preserve value in the most unsafe places on the planet. You see, whether it's people fleeing Ukraine or Venezuela or other countries that are in trouble, crypto currencies have started to play a bigger role in that. So, I think it's a very valuable tool from a humanitarian perspective. Gold once solved part of that problem. But gold is physical, bulky, and inconvenient. There are a lot of reasons why a digital version is better. Patrick: Do you think of it as a currency or just a store of value? Or does currency mean a means of exchange, a unit of account, and a store of value. Matt: I think it's primarily a store of value at the moment, or more accurately, a bet on the store of value in the future. I think over time it might find some transactional uses, but I don't think that's necessary in order for it to be truly useful and interesting.

Patrick: Do you think it's extremely readable that institutions like Powell and Fink understand Bitcoin as digital gold, given that the potential return on Bitcoin itself is quite low relative to other options?It's already won in a sense.

Matt: It's already won in a way that's beyond what I would have expected a few years ago.

But I think we're still in the early stages of this really being understood, despite some of the commentary around it.

A crude way to think about Bitcoin adoption is how many people in the world, weighted by dollar amount, think they should own Bitcoin. And then there's another axis, which is what percentage of their portfolio is in Bitcoin.

I think we're at a point where a lot of institutions are starting to think, maybe we should start with zero. Maybe 1% to 2% to 5%. Even Fidelity is recommending baskets that contain that kind of weighting. I don't think we'll ever get to the point where people generally own 100% Bitcoin, or should. But I think it's going to be much higher than where we are today.

Patrick: So, let's go into the second basket. I think "Programmable Financial System" is the term that's used. Well, Bitcoin is still young but relatively mature right now, and most people's readable concept of Bitcoin is digital gold or something like that. So, where are we in this story about the new financial system in phase two, what's possible today, what excites you? And then we can go to the least readable frontier part.

Matt: I think one of the remarkable things about stablecoins is that they are primarily dollar-pegged tokens, they exist on a blockchain, but they're pegged to the dollar. I think the growth of stablecoins has been over $200 billion over the last few years, and they're starting to be used for real use cases, not just in the crypto space.

They were originally conceived as a way to facilitate the trading of crypto currencies. It was a way for you to onshore and offshore dollars on certain exchanges abroad. But now companies like SpaceX are starting to use stablecoins to move money around, and there are a lot of other companies that will use this enterprise finance use case for stablecoins, where they'll generate revenue in a country, say in Africa or Latin America, and then they want to repatriate those dollars back to the U.S., so they'll convert the local currency into stablecoins on a local exchange, and then they can send those stablecoins over the blockchain. That's ultimately a cheaper way to do foreign exchange than the traditional way.

Patrick: Yeah, and stablecoins are really interesting because it's a perfect controlled experiment. It's a dollar, it's not designed to replace or be superior to the dollar, or to be superior to the dollar. It's just a dollar. So in a kind of pure sense, it's really the technology part, the programmability and all that. So now that we've abstracted away the price considerations, what are the core features of these technologies? Why are they so important? What does the industry structure of stablecoins look like?

Matt: It's a 24/7 global and programmable payment rail. I think those are pretty critical. I think we live in a world where the internet is 24/7, but the payment systems are down on the weekends. So in a sense, this is just a way to modernize finance and payments, just like we've become accustomed to with the internet.

A lot of fintech innovation is really product and market innovation on top of an outdated backend. You can think of Crypto currencies as a new financial backend built from the ground up. I think one way to look at programmable finance or frame it is that it's a two-sided market between assets and programs.

So, every financial activity that we do through traditional institutions or through applications is a program. There's some logic that determines who pays who. Maybe there's an escrow, maybe there's a payment condition. Think about insurance, mortgages, or salary payments. All of these are essentially traditional finance with programmatic payment methods added on top. All of these can be built on the new Crypto rails.

But