Antoinette Schoar: An Unconflicted Analysis of Crypto, Blockchain, and NFTs

Guy Kawasaki:
I'm Guy Kawasaki, and this is Remarkable People.
Being remarkable is a long and painful process, we're trying to shorten and kill that pain for you.
Our mission is to make you remarkable.
Helping me today is Professor Antoinette Schoar.
She's a Professor of Finance and Entrepreneurship at the MIT Sloan School of Management. Her current research concentrates on new financial technologies, consumer finance, and entrepreneurial finance.
She's won many awards, including the Kaufman Prize Medal for Distinguished Research and Entrepreneurship, and the Brattle Prize for Best Paper in the Journal of Finance.
Antoinette is also a co-founder of Ideas forty-two, a non-profit that uses research and behavioral economics and psychology to solve social problems.
She has a PhD in economics from the University of Chicago, and an undergraduate degree from Germany's University of Cologne.
I first learned about her when I listened to her comments on Stephen Dubner's Freakonomic Podcast.
Her analysis of cryptocurrency was the most cogent I had ever heard, so I asked Stephen for an introduction, and here we are today.
I'm Guy Kawasaki, this is Remarkable People, and now to help you understand crypto, blockchain and NFTs is Professor Antoinette Schoar.
I hear a lot of crypto evangelists say something to the effect of, "Look at the internet, people didn't think it would be too big."
And what they're trying to say is that whenever people doubt something will be big they're wrong, and it will be big.
On the other hand there was Tulip mania, there was Theranos, there was WeWork. So my first question for you is, how do you distinguish between irrational exuberance and revolutionary change?

Antoinette Schoar:
That's a great question.
Guy Kawasaki:
Easy question, right?
Antoinette Schoar:
Actually yeah, not at all. So let me start by saying that there is actually research that shows that the two things are often quite connected.
So it is often the case that new changes that truly change something, like the internet, also lead to a bit of mania. And in some sense overshooting, so people see that there is a big economic or technological change, they embrace that change, but then they might overshoot their expectations of how big it is.
And some people would even argue, for example a former student of mine, Raman Ananda, have papers that suggest that actually this enthusiasm or mania sometimes helps even the real technological change, because by people being over-optimistic they're providing really good terms of financing to these new technologies, and therefore facilitate some of the risk-taking that maybe otherwise would not have happened.
But as you said, then sometimes it can really go wrong, like the Tulip mania and other events. And so this is what often makes it so difficult to know where does high valuation, because of real technological change, stop, and just people being insane about certain technologies start?
This is why this is not an easy question, and this is indeed why it often looks exposed, like the market is so stupid, how could they not see this? But there are good reasons why this is difficult.
Guy Kawasaki:
But you're an MIT professor, I want the real answer. How do I tell? Do I go and buy Bitcoin now that it's below $20,000, because it will be a real big thing? Or do I say, "These people are nuts?"
Antoinette Schoar:
So to me, as an economist, the real change and the real technological advances come from situations where we can see new applications, truly new utilization of technology.
And here, I personally draw a huge distinction between cryptocurrency and blockchain technology.
Because in my mind, and from everything I've seen, the blockchain technology, the fact that we have this new, encrypted, open ledger, that it can be accessible from many different places, can really help in changing the way we think about settlement of contract, settlement of trade, these are real applications.
Bitcoin for example is very different, because Bitcoin is at its core an unproductive asset. It doesn't solve any real problem in society, it doesn't allow you to have a new contracting platform, let's say.
And so it is ultimately very limited in what it can solve for society.
Again, this is separate from say the blockchain ledger and the potential say to have smart contracts embedded in platforms.
Guy Kawasaki:
So would you lump NFTs in with blockchain as a technology that has a use and a purpose and can really change the world?
Antoinette Schoar:
So change the world, lots of things have always been suggested to change the world. But change some ways of how we do business, probably.
So I think NFTs, similar to the blockchain ledger technology, can have, again, applications in contracting, in record keeping, in how we think about even say the way we manage patterns, or we manage ownership as famously, right, people have already explored in art and so on.
I want to say though, and I think this is something that people often get confused, is that even that new technology, technologies like NFTs, don't do this automatically. Because the enforcement of property, and say the enforcement of patterns doesn't just happen because I have an NFT.
Somebody has to decide, how close is my say NFT on a certain piece of art to some other piece which looks very similar but might have a tiny wrinkle that is different?
Because if that is not established, actually anyone can make your expensively built piece of art suddenly very invaluable, because you just create something that's very similar but not the same.
And so, how we determine where one new either pattern or new piece of art starts and the other stops will have to be something that society has to figure out through how it enforces rules, and how it enforces property.
Guy Kawasaki:
Let's take an extreme case with NFTs. Let's suppose that Annie Leibovitz takes a picture of Michelle Obama, and she makes it into an NFT. Do you think that is more valuable than Annie Leibovitz takes a picture of Michelle Obama and puts it up for sale on Getty?
Antoinette Schoar:
I would say, maybe Annie Leibovitz, who is already very famous, and whose art and photography can command already a high price, and therefore has name recognition, and photo recognition, and so on, she might not be necessarily the best beneficiary of this.
Because probably she can get paid for her photos already in the current situation, and then she can enforce when people plagiarize her work or something. But I think where in my opinion a lot of, say, applications of NFTs or application of blockchain contracts, especially smart contracts come in, might be for high-frequency, small-ticket items that in our current environment might take too much resource cost, or even too much acting cost to enforce, and those things might really transform.
Just to be more concrete and don't sound like I'm talking fluff, think about the following situation in our world. There are many situations, actually at least in my life, where I might want to hire a contractor, or a plumber, or somebody to fix a hole I have in the ceiling that is a really small contract, and let's say a bigger contractor who I might know would not want to do that small job.
So then, what could happen? Or actually it happens to me all the time, and friends of mine tell me this also all the time, is that now you are in a situation, let's say a very, very reputed, well-known contractor doesn't want to do your small job.
But then you might think there are other people who do this in their spare time, or who are not known yet, who are new, but who would do a good job.
But maybe I could never contract with this person, why? Because I don't know if this person does a good job, and they might do a crappy job, so I don't know. Therefore I don't want to pay them upfront.
But they don't know me either, and so they might not want to work for me unless they know I will pay them, because they might be afraid that then I run away after the job has been done, or I give a fake excuse why I don't like the job and I might say, "Oh, you haven't done it good enough, or what I wanted, so now I'm not paying you."
And so both sides, because they can't trust each other, they don't contract. And then lots of valuable interchange doesn't get done, and here I actually think that say applications of blockchain technology with automatic enforcement maybe by recognizing what is a good job, by just using artificial intelligence and aggregation of information from the web, could actually mean that I could contract with somebody completely unknown.
And I could write a smart contract that says, "If this person does a particular job for me, where afterwards we take a photo of the wall that the contractor painted for me, and it looks exactly how on the web a good job looks like, then the payment will be released automatically."
So I can't hold up my contractor, but I have the guarantee that this smart contract only executes if there's a minimum threshold for how good the job has to be done. This is just one really stupid, simple example, but think about in life, many of those interactions, and you can think of a myriad of them, don't happen.
Because had I to do this currently, I would have to go to a bank, set up an escrow account, agree on some legal procedure of how to enforce the quality of things between us, and that would not be fun.
And it would be expensive, so we don't do it. So sorry for this very lengthy example, but it's just to give you a sense that sometimes things that look small maybe can actually transform how we work.
It's exactly as you said at the beginning, we all don't want to be the person who in 1992 said, "Oh, why do we need internet? The mail service works so well.
How much more can you just do because you send a piece of mail electronically," right?
Guy Kawasaki:
Somehow, I don't think you need to worry about that.
So, are you saying that TaskRabbit and Yelp should incorporate blockchain into their business, or are you saying that new companies are going to do what TaskRabbit and Yelp have been trying to do with voluntary rating systems?
Is TaskRabbit and Yelp going to be Blockbuster, and new companies will be Netflix?
Antoinette Schoar:
Let me say, this is a very good question, and this in a way I feel is beyond even crypto. Because in the economy, we have seen often that the existing companies are late in embracing new technologies, maybe because they are afraid of cannibalizing their existing business, there are hundreds of business case studies written about Kodak and Kodak missing the digital photo revolution, all these type of things.
And so some of this I'm sure they happen in crypto, and it is happening in crypto. But actually, also to be fair we are starting to see that existing financial intermediaries and banks and so on are also embracing some of these new technologies.
Actually if you think in fintech, it was also the same thing. Early on people said, "Oh, fintech VCs are investing so much in it, the banks are late to the game."
But then in the end, the big banks, at least in the US, have now adopted these technologies and incorporated them in their offering.
So what I think is likely to happen is that some existing players will indeed be smart enough and quick enough and incorporate these technologies, and then actually find beneficial applications. And yes, others will miss the boat.
The one concern I have, and that to me is actually an important thing, is that we want the regulatory environment, especially in the financial service sector, to be such that actually that there's a level playing field in the competition between different financial institutions, so that they all can participate in new technologies in a way that is safe for their customers.
And what we don't want, and I think this is what I'm a bit worried about is happening in the US right now, is because the US has been so late in defining the regulatory space for cryptocurrencies, that means, or that has led to the fact that many existing players are actually reluctant to engage in that space because they're afraid that exposed afterwards, the regulator will kind of slap them.
But of course the startups who have nothing to lose, they are very happy to charge ahead and potentially carve out an environment without caring so much for, say, consumer financial protection.
Because they know if they get sued, they have nothing to lose, they're just going to shut down and done. That is not, in my mind, the way to go about designing the competition within an industry. Because we want the competition to bring out the best in firms, not to bring out the best ways of taking advantage of your customers.
Guy Kawasaki:
Would you explain the desirable characteristics of a currency?
Antoinette Schoar:
So a typical currency, what we look for with money or currency is supposed to provide for us is three things. Number one, that it is a payment system, and means of exchange that allows us to trade between one another.
So this was the earliest thing that societies realized, is that exchanging a cow for a goat, for ten hours of my working time is very clunky and cumbersome. And so we want a means of exchange that allows you and me and so on to trade whatever denomination and fractions of value we have, and that we need.
So, that's one thing. The second thing is that currency typically should be a store of value, a store of value meaning that if I have worked for a certain payment, and I store this for... Maybe save this for tomorrow, or even for my pension, a good currency should actually keep its value and not engage in hyperinflation, and then lose value very quickly.
And finally, obviously ideally a payment system should also be a ledger or recordkeeping, so that we know that you and I exchange money, and you will have certain amounts stored on your behalf, and it shouldn't be easily distortable with one another.
Guy Kawasaki:
It seems to me that crypto embodies none of those three characteristics. What am I missing?
Antoinette Schoar:
Okay, I would agree with you. This is exactly why before, when we discussed what I told you, is that to me the blockchain technology, that can even function without cryptocurrencies, has a lot of promise.
Cryptocurrencies right now, I feel the jury is very much out. And from everything I've seen, I think the main user for it right now really is that it's a speculative vehicle for people who, interest and preference to speculate.
Because to your earlier point, and this is actually quite serious, what we have seen is basically that if you look at cryptocurrencies, especially the large ones, even Bitcoin, Ethereum and so on, even now that their market cap over the last several years has been actually quite large, the exchanges on which they are traded, such as Finance, and Coinbase, and MOBI, and what have you, these are quite liquid exchanges.
And despite all this, the volatility of these cryptocurrencies is still extremely high, which of course means it's bad as a store of value, it's even bad as a payment mechanism because anything that overnight can change its value, or even drop in value, and then you want to pay your groceries tomorrow, not a great situation.
That is definitely something that is obviously concerning, and there are now of course lots of studies that have shown that if you look at the statistical properties of cryptocurrencies, even say as a store of value, forget even payment system, it doesn't have good properties.
What I mean with this is that very early on, when crypto was really small, some people ran regressions and said, "Oh look, cryptocurrencies don't load on the typical risk factors."
Like the market, or other commodity or macroeconomic risk factors. But now they're talking ten years ago, when crypto was really in the adoption period. And so then some people said, "Oh, isn't it therefore maybe a great hedge against inflation, or against macro risk?"
But where people forgot at the time is that of course when a currency, or any actual asset is still completely in the adoption phase, it doesn't necessarily correlate with the economy because it's very idiosyncratic reasons why new people are starting to adopt it in the first few years.
But as soon as crypto, as everything else, became adopted, especially by a large set of retail investors, and also institutional investors, we saw that these statistical properties of return completely changed.
So, what does this mean? Today if you look, crypto loads on all the known risk factors let's say stocks load on, or other assets load on.
In fact if you want even more strongly, in other words when the market drops so does Bitcoin, so does Ethereum. When the federal bounces that it's tightening interest rate, it's not that all crypto is this great hedge for us, no. It's losing value like all the other assets are too.
And so this promise, which anyway I never understood where people thought it should come from, that crypto is a great hedge against inflation or macro risk, has proven to be wrong. And sorry to keep on going about this, but it is actually important given that there is this, how do you say, misconception in the market.
Because you see, the assets that normally are good hedges against, say, macro risk or inflation risk are assets that are productive assets, that pay off in times when maybe the rest of the economy is not doing so well.
And so these type of assets, we also in finance call them low-beta assets, they are good hedges against many risk factors, or against market risk factors. But crypto, because as I told you it doesn't have a productive use, so it doesn't pay off anything whether good times, bad times.
Therefore, it's not a great hedge against these type of risks that we've been talking.
Guy Kawasaki:
I first learned about your work by listening to Stephen Dubner on Freakonomics, and I don't know if you listened to the whole thing, so you listened to what the other people said.
Antoinette Schoar:
A little bit. I don't listen to myself, because I find it horrible.
Guy Kawasaki:
I feel the same way, because whenever I listen to myself I hear all the mistakes I make, but that's a different discussion. In that Freakonomics, basically they interviewed I think the founder of Coinbase, and the venture capitalists and Jason Horowitz.
And both of them essentially said, "I saw the light with Bitcoin and cryptocurrencies, and to me it was so obvious that this was a great way to prevent hyperinflation." And I'm listening to this, and I'm saying, "What the hell are they talking about? This is something that went from zero to 60,000, back to 20,000. How is this a hedge against hyperinflation?"
So, what am I missing there? Something is wrong, either I'm stupid, or they're lying. There are a finite amount of explanations for what they said, and what you said.
Antoinette Schoar:
Let's not assume anyone is lying, let's just think about different ways of thinking about this. So, I would say the following. In its original design, a cryptocurrency like Bitcoin was meant to have a limited amount of coins in circulation, at twenty-one million at the end of it.
Which means that maybe the extreme tails of hyperinflation, by just printing money when a government, let's say like Germany in the 1920s, when after the war Germany was really ravaged and didn't have much money.
But also when the understanding of what brings about hyperinflation was still so limited by economists, we saw basically in 1920 actually the German then equivalent of central bank, literally there were articles that people wrote saying, "Oh, the reason we have hyperinflation is because the central bank is not printing money quickly enough. "That's why people are afraid they will run out of coins, so you have to print more quickly." At that point, people just didn't understand how monetary policy functions at all.
And if you think we would be in such a world where either your central bank is so stupid that they haven't understood it yet, or so ill-meaning that they don't want to fight against hyperinflation, you could say that I don't trust my government or my central bank, and therefore say the system that is based on some private consortium that limits the amount of coins in circulation is better than the really ill-meaning or stupid government.
And if that's your premise, I would say it might be right.
This is indeed why you see let's say people in Venezuela right now are using cryptocurrencies to send remittances to their families in Venezuela, because the government is so untrustworthy, has been willing to let the currency inflate, in order to also inflate their debt, in order to inflate away the savings of savers and so on.
But of course if you think the US or any kind of Western country going into a situation like Venezuela, I think we have bigger problems than dealing with crypto. So I would say if you think of the extremes of misbehavior of government, then maybe it could be that cryptocurrency is still third or fourth-best relative to such a government.
But as long as we are in a democracy where at least institutions like the Federal Reserve has to answer to some public accountability, given what we know about finance, what we know about monetary policy, what you can see is that ultimately even in the current situation where we have inflation.
If you look at inflation expectation of the population in the US right now, over the next year even, online surveys show that inflation expectations a year from now are really low.
Why? Because actually, it shows you that actually the population trusts the central bank to be able to get inflation under control.
And so you see, this is basically saying that, "I always feel in a democracy we are much better off trying to make sure that our institutions are well-governed, are accountable, that we are engaged with our institutions to keep them accountable and well-functioning, rather than somehow dreaming of an alternative digital reality.
And here I'm just talking about the fiat accounts, and remember I am not talking about the applications to the ledger.
But basically a world where somehow some algorithm does the enforcement of institutions for us. Because everything we know about the history of humanity is that governance doesn't come for free. This is like a beautiful dream, but it just doesn't happen.
Governance comes from enforcement and engagement of the population, of people keeping their judiciary and their regulatory institutions honest. And if we lose this, crypto will not help us either.
Guy Kawasaki:
As an aside, we are at a point where we really could lose this, but let's not go there.
Antoinette Schoar:
I agree, but let me be honest. Look, I totally understand that people on both sides of the political spectrum in the US are currently concerned, because the country is polarized, people see examples of where one side or the other side feels aggrieved, or taken advantage of.
Absolutely, I'm not making a judgment about this. But what I'm trying to say is, if we cannot fix our consensus about how society should actually enforce laws, what is basically rule of law and how it should be enforced, cryptocurrencies will not do this for us.
Guy Kawasaki:
You said, "You can either trust the fed, or you can trust a mysterious Japanese guy who says there's only going to be twenty-one million of these things, and trust me, this is better hedge against hyperinflation than a government-issued currency."
To me, the investment thesis of Bitcoin is, there has to be people more stupid than me.
Antoinette Schoar:
I agree with this fully. You will have to truly trust that at the end of it, this consortium of miners and participants in the Bitcoin universe will, for example, not start inflating, not issuing more coins, not changing the state of circulation of coins, all the things that typically drive inflation.
So this is exactly what I was trying to say, if you think you're in Venezuela, maybe this shady, unknown consortium of people you trusted more, because your government really takes advantage of people.
But if you are in a halfway, say governed country, you might want to rather invest in keeping your institutions well-functioning, than investing in something else.
Guy Kawasaki:
What a concept, what a concept. What do you think of venture capital as an asset class, while we're on the subject of asset classes?
Antoinette Schoar:
You might know I've done a lot of research on venture capital, in particular venture capital returns and private equity returns over many years.
Guy Kawasaki:
That's why I asked.
Antoinette Schoar:
So I want to say two things, so I think venture capital and venture capital investment as a means of supporting and facilitating risk-taking, and innovation, and new ventures in the US, has proven to be a phenomenal driver of kind of new startups, and of technological success in the US. I just want to be really clear about this, and I think especially over the last two decades, you can see that in the US a very deep, sophisticated, professional market of many different players, many participants who have learned how to rationalize these risks and how to manage them have evolved, which is quite unique.
And many countries have tried to emulate it, but have found it actually quite difficult.
So this is actually really something unique, and I think the US has really... Our economy, our society has reaped a lot of benefit from it, be it in healthcare technologies, fintech, the internet, many applications, software development.
Having said that, my research however shows that despite this phenomenal value creation and success that venture capital actually has facilitated, the funds that are investing in venture capital show massive heterogeneity in their returns. And it's very different say from mutual funds, or the publicly traded stock market.
We find that in venture capital, there are actually big differences in returns of say the top quartile versus the bottom quartile funds.
And those returns are somewhat predictable, meaning that top partnerships tend to have higher returns fund after fund, and at the bottom some partnerships actually have pretty crappy return, fund after fund.
And that of course is very different from publicly traded market, because if there was predictability then it's easy, right, to arbitrate the way and make money off of it.
Guy Kawasaki:
Let's fantasize a little, and let's suppose that venture capital has been this phenomenal growth engine, and provided great returns. So, let's take the top quartile.
Now, do you think that something like Regulation D, is it preventing old people, retirees from getting swindled, or is it restricting this asset class, which is so great to only rich, white, male venture capitalists who live in Silicon Valley?
Antoinette Schoar:
So, lots to unpack. I would say the following, even the returns of the venture industry now shows is that investing in risky ventures is very difficult, and actually most VCs themselves don't get it right.
This is exactly this research that I was telling you about before, shows that the majority of venture funds themselves, or even professional investors have pretty bad returns, and are not even beating the public market benchmarks.
So there are only a very limited set of top venture funds that persistently have very good returns.
This already tells you that even for professional people who do this day out, day in, have lots of resources to do due diligence and so on, this is a difficult game. And so what this also means is that unfortunately for, you said the pensioner and everyone else who's saving for retirement savings.
If they are left to do this on their own, it will be actually very bad, because people just don't have the knowledge but they also don't have the time to pour over the books of a startup that doesn't even have revenues yet, where you have to understand the deep technology and the markets.
Who can do that? Most people just don't have that knowledge. And so we don't want people to take these insane risks in their retirement portfolio without the help of professional intermediaries.
Now, having said that... So this is why actually it's good to have these regulations in place. Unfortunately, and I think this is something that people often misunderstand.
But it does mean of course then that access to these investment opportunities is restricted to people that have the know-how, and that have the financial capabilities, and wherewithal, and the background and so on to make good investments.
And unfortunately, sometimes that means that if we are in a society where, you said white males in Silicon Valley were the ones who happen to have had more access to this type of education, to being in tech, having STEM background, having studied finance and so on, then they do have more access to these technologies.
But I don't think we should solve that problem by allowing people to hang themselves with bad investments.
What we should do of course is to make these opportunities, especially these educational opportunities and then also these investment opportunities, available to people of many different backgrounds, including women, including minorities. I've now been teaching venture capital private equity for twenty years at MIT, and I'm actually very pleased to see that when I started off I was the only woman in the room, because all of my students were men. And sadly, they were also all very homogenous and so on.
But that has changed, I have many more female students, I have many more students of color, international students from all over the world. Yes, progress is slow, and I even feel it's too slow in diversifying the field of people that have this knowledge.
Guy Kawasaki:
Many young people ask me about how to get into venture capital as a profession, and how they want to go to work for Kleiner Perkins or Sequoia. And I tell everybody who asks me this question that being a venture capitalist should be the last job in your career, not the first.
Am I right or wrong there are... It seems to me, how can you be a venture capitalist if you just graduated with your MBA, and you worked for Goldman Sachs as an intern, and now you're going to go make investment decisions and advise entrepreneurs.
Help me wrap my head around how that works.
Antoinette Schoar:
I won't argue against you, that's exactly what I tell my students, what we at Sloan tell your MBA students, our MFIN students, is you should not dream of starting your career as a VC. You should work for startups, you should maybe be employed in a new venture. You should be working on deepening your understanding of technology management, all the kind of real know-how that then once you maybe get the chance of being an investor, allow you to have the type of pattern recognition that a good VC has to see the different development stages of the firm.
When does a firm need to add a new management team, a new Salesforce, more professional CEO?
All these type of things are often lived experience, and if you haven't seen this in action a textbook will not really tell you that.
Guy Kawasaki:
Do you see fundamental differences in how women make investment decisions than men?
Antoinette Schoar:
That's an interesting question. In terms of stock market investments, there is a lot of research that shows that women are indeed less risk-taking than men in their, say, retirement savings and other savings.
But they are also willing to take more good advice, they are often willing to be following the finance theory more, meaning they are more diversified, they don't want to take very idiosyncratic risks, their portfolios typically actually have better Sharpe ratios than that of men.
It seems that there is maybe some difference in the type of risk preferences that men versus women display in their personal investment. And honestly, there is no research that tells you whether this is innate, or maybe whether this is a function of the fact that we educate girls differently, or that the goals that girls get told that they should have for their life are different than boys.
Who knows, maybe boys are given permission to take more idiosyncratic risk in everything in their life, while girls always have to be careful to be also nice, and friendly, and decently dressed, even when they're very smart and they're good at math, while a boy might everything forgiven, even them not having taken a shower for two weeks.
Which, by the way, given that I teach at MIT, I can tell you this happens quite a lot.
But having said all this, I would venture to say that I think at the top the female VCs, for example, that I've seen make professional investment decisions, I don't think that the quality of their investment decision is very different from what their male colleagues are trying to do.
I think where I have seen some difference is that often it is left also to the female VCs to develop female founders, to reach out to female entrepreneurs. Similarly, by the way, it's also often that it's African Americans who... Say, venture capitalists of African American investors who in a way are being asked to carry African American investments, and even say develop this investment community.
Which seems to me a very unfair charge, because why should people that come from certain minorities work even harder to not just develop their own career, but also develop the entire ecosystem around it? It should be society as a whole that supports these type of developments.
Guy Kawasaki:
Let's say that your daughter, senior year of college or just graduated from college, wants to be the next Steve Jobs. I mean that in a positive way, it can be taken many ways, okay? I mean that in a positive way.
Antoinette Schoar:
I would mean it in a positive way too.
Guy Kawasaki:
She has a brilliant idea, and she says, "Mom, how should I raise money?" What do you say?
Antoinette Schoar:
You will hate my answer, but my answer is “it depends." Because it depends on the idea that she has, right? So, say if this idea, it's something that actually, say, is a social media application that has the potential for very organic growth, I would tell her, "Raise a little bit of angel funding, test out your idea.
And if indeed you can de-risk your idea, only then go for big investments, by say venture capital funds. Or maybe even forego this investment altogether, and try to fund yourself through retained earnings, through your subscription model, et cetera."
This is like the beauty of the Bloomberg model, Mike Bloomberg never really had to raise a lot of capital because he funded himself through the subscription of his customers.
Fantastic if you can do it, because that's a much cheaper way to go.
But then if my daughter was, say, in biotech or nanotech, where this just doesn't work because the big investment dollars come upfront, I would tell her, "Go big, give it your best chance."
Which means, invest with the best professional investors you can, because quality begets quality, and you should aim high, and you should aim to work with the people that can make you the best you are.
Let me say one thing that I also tell all our students, which is the beauty of having a really good education, especially in a place like the US, is that especially when you're young you really are an option value in the best sense of the word.
Which means that you can take really big risks to really do something transformational, to invest in something truly exciting.
Because if it fails, what's the downside? The downside is that you have one failed firm, but you can find another job, you can either try another firm, but you might also try and go to a kind of employment in a big firm, work for a consulting firm, what have you.
So the beauty really is that in the type of labor market where education, and in particular say STEM-type education is very valued, you can take very big risks.
And I actually think that young people should understand this, and should embrace it, and try to do something that's truly exciting and transformational.
When you are old like me, then you can say, "Okay, now let's play it more safe."
Guy Kawasaki:
Why did you think I would hate that answer?
Antoinette Schoar:
Ah, because I started off by saying it depends, and people sometimes feel, "Economists, they don't want to say one thing, they give me lots of answers."
Guy Kawasaki:
Okay, well I have a broader horizon.
Do you think that the traditional product life cycle curve is still relevant, in the sense of pioneers, early adopters, the main street, the kind of Geoffrey Moore theory?
And further on, that people at the top of the pyramid are telling the rest of the pyramid what to do?
Antoinette Schoar:
That's interesting. So, now we are venturing outside finance, which is not really... Just being very honest, this is not something that I have studied per se.
But what I would say is, I think at least in the investment model we have seen some changes that seem to go away from a very hierarchical investment model, I believe. Because what you can see is happening in venture over the last decade at least is that it used to be the case that, say, venture capitalists would invest into a startup firm after doing often three months, six months of due diligence, and trying to figure out in a particular product space, what is the best firm?
And then they would invest in one firm, and then try to make this firm go all the way to the top. What is happening now is actually a very different model.
So, what you can see is that sometimes people like to call this also ‘spray and pray’. But what does that mean? What this means is that many venture capitalists actually invest in several startups that are in the same space at the same time, that give each of them just a little bit of money.
So that lots of different entrepreneurs can try and prove themselves. And then the ones who are growing the most within a given time period are the ones that then receive follow-on funding.
Now, what's nice about this is that actually it allows many different people, many more people than in the past to get into the entrepreneurship game. And if they want to try out how good they are at being entrepreneurs, and how good their ideas are and so on.
So in a way, it's a much more inclusive model, and therefore I think it's also a more bottoms-up model. But it does mean that it's the entrepreneur who does take a lot of risk with their career now, because it means that for every successful startup there might be four or five of them who got shut down, and basically spent a year of trying, and then however not going all the way to the top.
So you see, this is why I think it's not so clear to me that this very hierarchical model is still the one that is dominating the investment space. But sorry, the one thing I do want to say which is also true in say venture capital in particular, is that the very big-name funds are raising disproportionately more money.
Early on when the VC industry was young and new, there were many more funds, and the size distribution of general partnership was somewhat flatter.
But especially over the last decade, the return to name recognition, to being a very established fund, like the Sequoias, and the Anderson Harvards as you just mentioned, they are now raising ever-larger amounts of funding.
Guy Kawasaki:
How do you feel about crowdfunding for products, as opposed to equity?
Antoinette Schoar:
I think there are applications where this is a great idea, especially I think in products that have intense personal interest from a subset of customers, in art markets, in music, in particularly bespoke products, I think it's a fantastic idea.
And it seems to be a better vehicle of raising funding, because the customer really seems to then buy into the funding itself. And so then these type of platforms generate money at a better cost of capital than equity would.
But for other type of applications where the customer is not the best person to fund the product, it's not a good idea.
Guy Kawasaki:
I have watched dozens of venture capital panels, and every time the moderator asks, "So, what do you invest in? The team, the technology, or the market?"
And every panelist always answers, "I invest in the team, we support the founders." Which I think is total bullshit, because at the time that you have the squeeze the trigger on being the first one into Google, or Apple, you have no idea how good the team is.
Now, after Apple becomes a trillion dollar company, or Google becomes a billion dollar investment for you, yes, you can say, "I knew Larry and Sergey were great entrepreneurs."
So I'm not just trying to have this whole diatribe, but from a sort of academic, scientific, mathematical, intellectual space, truly what do venture capitalists invest in? Team, technology or market?

Antoinette Schoar:
The donkey versus the horse. And I would say actually, the answer's a bit, they invest in everything, but at different stages.
So for example, what Steve's work also shows is that it's true, venture capitalists always say they invest in the team more so than in the technology.
But Steve's work for example also shows that VCs are willing to change the team when the time is right for it, or when the existing team is not working out.
And so I think what I would say to this, and also what I have seen happening in the market, is that I do believe that VCs indeed try to figure out who are the best entrepreneurs who basically can develop the technology?
But I think they are also very cognizant of the fact that when the technology has proven itself to be great, you might need a different team.
I guess you have Sergey Brin at the beginning, or you have the Uber founders, but then you need a CO like Schmidt so that you actually professionalize the firm, you make it possible for this firm to grow and be the multi-trillion dollar company that maybe it will be.
So I think a good VC actually knows when a particular team serves the technology that the company has developed.
Guy Kawasaki:
You are just a breath of fresh air about truth, and honest, and realism in crypto, and that kind of stuff.
Antoinette Schoar:
Thank you.
Guy Kawasaki:
So, thank you very much.
In my humble opinion, you have just heard one of the most cogent, unbiased, and rational explanations of crypto, blockchain and NFTs.
Thank you, Professor Schoar. Notice that Antoinette never tried to get you to buy anything. She just wanted you to understand what you're getting into.
For the record, I believe in blockchain and NFTs, I do not believe in crypto as a currency or asset class. Twenty years from now, you can point out how clueless I was, I don't care, I'll probably be dead.
On that uplifting note, let me thank the Remarkable People team, Peg Fitzpatrick, Shannon Hernandez, Jeff Sieh, Louis Magana, and the Drop-In Queen of Santa Cruz, California, Madisun Nuismer.
Also, my deepest gratitude to Stephen Dubner of Freakonomics, he made this interview possible.
I'm Guy Kawasaki, this is Remarkable People, we're on a mission to make you remarkable. Mahalo, and Aloha.