Rob is the managing partner and CEO of CityBlock Capital, a venture capital platform issuing security tokens backed by equity or tokens in blockchain companies. Rob is also the co-founder and managing partner of Edgewater Equity, an early stage venture capital fund based in New York City. He manages a portfolio of early-stage companies around the globe. Outside of CityBlock & Edgewater, Rob advises a diverse group of operating businesses that range from restaurants to medical cannabis dispensaries. Rob holds a Bachelor of Science in Finance from Winthrop University and Master of Science of Law in International Taxation from Thomas Jefferson School of Law.
Why don’t we just start with the origin story, sort of how did CityBlock Capital come to be?
Sure. So I’ve been running my own venture fund for about three and a half years at the time. I was getting ready to raise another venture fund, and I think as a lot of people know, one of the big issues in venture is the long illiquidity period associated with investing. So I was looking for a solution to that and stumbled upon what Blockchain Capital had done. And I thought, “Well, this is a great opportunity to be able to build something that has more liquidity.”
And so I started on the path of trying to figure out how to do that, and quickly found out there were a lot of roadblocks, including how do you actually do this? How do you tokenize it? Are there vendors that you can work with to do that? And so I spent the last six months with a group of co-founders working with companies like Securitize, to help build out that platform and system so that we could issue a fund that was built on blockchain.
And so, what’s the status as of today of the project?
So, we’re in the process of raising capital. We’ve actually already deployed some capital into a few companies. We’re in the process of moving through to get to our first issuance. I think what we realized going through this process is that liquidity is a function of what we’re doing, is a feature. Liquidity is not kind of the main reason that we’re doing this. We’re investing in blockchain infrastructure. We think that’s really important, we think there’s a lot of investors that want access to blockchain infrastructure ecosystem. It may have very little knowledge of blockchain in general. They may be still very skeptical of cryptocurrency.
And so we see this is a way to bring investors in, that don’t have access to this, and oh, by the way, we’re kind of putting our money where our mouth is, which is we’re building this as a digital asset, as a tokenized security ourselves. So we sell it as, “listen there maybe the opportunity for liquidity a few years down the road.” As more exchanges are built out, as more issuance platforms are built out that help more people enter this industry. We just think it’s a better form of ownership, instead of paper ownership and that it’s forward thinking. In a couple of years we think the majority of venture funds will be built this way.
So, let’s follow that thread a little bit. So sometimes it’s been suggested to me that certainly there’s advantages for tokenized funds, but that maybe not all funds will go this way if they already have a lot of oversubscribed from LPs. Do you think that it’ll be a segment? Well, let’s start with the ones primarily focused on blockchain and spread out from there.
I think it’s [inaudible] who says innovation always comes from the fringe. So what’s funny about that is that his VC fund in Sequoia and Andreeson, like they’re not going to be people that start with these funds. And actually, what’s interesting is that you’ll see ... So I think all funds will eventually become tokenized or digital assets, but I think it will be the LPs that drive it. So someone like Harvard endowment in 2008, financial crisis, had to sell some of their illiquid assets at a significant discount, 50, 60, 70%.
And that’s because there was no marketplace to sell these securities. And so I think what we’ll see is the LPs will start demanding. They’ll say, “Listen, we want to be able to have this as an option.” And so I think that’s really what will drive it. Not so much from themselves. And they’ll learn, what they’ll see is that it’s not much different than its own today. There’s just the option here to exit a position sometime in the future.
Okay, great. So take us through the logistics of your offering, are you accepting fiat? Are you accepting crypto? How does the token issuance work?
So, we accept Bitcoin, Ethereum in US dollar. We do it through the securitized platform. At the time we started working, they were the only people that were really ready to go, that could actually do this. They could actually go out and issue a product. And I went out and I met the team in San Francisco. I liked that they took a compliance first approach and so we started working with them through the process. And so that involves working with other external vendors. So Custodians, people doing KYC/AML and then also interfacing directly with investors from a variety of different fields, Which is very traditional investors. It’s a people that have made money in cryptocurrency.
I think what we’re finding is that the majority of assets are coming from people that have never had exposure to blockchain before. So we think that’s really, really interesting. And to steal a line from Morgan Creek who is investor in city block is that, we’re trying to help people get off zero. Which is people want some exposure to blockchain, they know they should, but how can they do it in a way that they feel comfortable. And this is a format we think that they can get really comfortable with because at the end of the day they’re still getting limited partnership agreement, they’re still getting a private placement memorandum, they’re still getting a subscription agreement. They just had these digital representations which are tokens, which we can work with a third party custodian to do custody for them.
So it’s not something that’s super scary for them. It’s not an experience, like it’s not a bare instrument. And I use the die-hard example all the time. If people remember the movie die hard. They broke into sealed bearer bonds, right? Well, that’s like Bitcoin. If you have it, you bear it, you own it. They weren’t breaking into sealed stock of the company. And so there’s not this security risk that exists with regular instruments. So we think we can get investors really comfortable around the ownership structure. And for that reason we’re finding a lot of people, because we have really low minimums, like 25,000 in the US, they feel really comfortable writing a check into this and say, “Hey, I want exposure. I want to see where this goes.”
So then to get an investor off zero. So there’s definitely some ... The power of inertia is strong for some. So what are the strategies to get them off zero? So how does the pitch go? And I guess more from a logistic standpoint, are they setting up their own wall? Are you sort of helping them set up a wall? Or literally just holding the tokens? Because that can be scary sometimes for people that are on zero and haven’t interacted in this ecosystem previously.
So, from the token example, we give them the option to self-custody or we hold them in a third-party custodian. If they don’t want to. I think what we tell people is this is the third wave of technology we’ve seen. The first being the microprocessor and the second being internet and we believe blockchain is going to be the third 20-year wave. It’s coming through. So right now we believe the place to invest is in infrastructure. So I don’t think I can select the next protocol, like what’s going to be big, and I think there will be, probably one dominant protocol, but we say, “Listen, we invest in companies that could work with multiple protocols that we believe are going to be building the infrastructure for this.”
So I say it’s like investing in the Sun Microsystems. We’re not even to Google or Yahoo or any companies like that. This is really early days. So we like companies like Coinbase, like Bakkt, we think Coinbase is building the Google of security tokens or of cryptocurrency just like Google built for Search. The pipes for that. So we look at that and look in a very basic way, how can we find companies as venture capitalist something we know how to evaluate that we think are going to be dominant in this ecosystem?
So, then some may contribute with Crypto, some may contribute with Fiat. So on the back end when these positions are liquidated, actually maybe the first question is this an evergreen fund or a horizon fund? But when positions are liquidated, how does the capital come back to the investor?
That’s actually a really, really interesting point. So it is a closed end fund, like a regular venture fund, 10 year time horizon. As investments, we have exit, we force buy back tokens, pro rata from investors and then send them Ethereum. And it’s interesting for a couple reasons. One, it’s because I think that security tokens will actually drive the adoption of cryptocurrency for mainstream investors. So I think what will happen is they’ll see, “Oh, I got this Ethereum back which I can convert to dollars.” But it was really easy. I didn’t have to wait two days for the money to get here via wire. It showed up the next day. And I think when people start seeing that and how easy it is to use, then it’ll actually start driving adoption, especially, institutions start getting into this space, more family offices.
So where a lot of people are thinking, “Hey, crypto is going to drive the adoption of security tokens.” Actually, I think it’s going to be other way around. And that’s why we primarily are marketing toward these traditional investors. And we use it as an education tool of, “Listen, you may not believe in crypto currency today.” Which we get all the time, but if you believe that there’s a better form of asset ownership and we can get them to buy into that, then over time we get them to buy into, “Okay. Look, cryptocurrency is a real thing, like this exists.” Will it replace off all fiat currency? I don’t know, probably not. In the short term. But it’s another form of ownership that can be advantageous.
So, I noted from your website that you accept global investors as well. How is that process working and how much demand do you see in outside the US?
So, it’s interesting. Our minimum in the US was $25,000 internationally. And what’s interesting about that is we’ve had investors come from all over the world. Particularly, strong demand from Japan, which is really interesting. Also Europe, various places around the world. But I think what’s interesting is for the first time someone anywhere in the globe for a thousand dollars can have access to a manager here in New York City that’s investing in this, where that would have been a $250,000 minimum before. And so we’re working within the existing regulatory framework, but we’re maximizing it to allow the maximum amount of investors under the exemption that exists. The 506 Reg D, Reg S exemption.
So we think it’s a way, eventually for a lot of investors around the globe to participate in asset classes that they weren’t able to participate in before. And we’re really excited about that opportunity. I think it’s going to take some time to build out, but I think cryptocurrency really built pipes that didn’t exist before for that. And it’s still new and it’s still being built. But the idea that someone could invest in asset managers all over the world is new, and we think that’s going to be big, long-term.
I agree. And that is a great thought to end on. I know we’re out of time and you got to catch a plane. So thanks so much for joining us.
SecurityTokenAcademy.com is a platform for information about the new world of Security Tokens. We are not a registered broker-dealer or investment advisor. We are not a Security Token or blockchain platform, nor can you purchase or invest through our website. We do not offer investment or purchase advice; nor do we endorse or recommend purchases or investments in any Security Token, and we don’t tell you if any purchase or investment is suitable for you. Additionally all investments entail risk, and investments in start-ups as well as Security Tokens involve a potentially greater risk.
Copyright © 2020 SecurityTokenAcademy.com®. All Rights Reserved.