Thinking Like a VC: Crypto Startup Investment

<p><strong>We analyze whether a crypto tied to real estate could become a widespread default currency. Benefits could include transparency and minimizing money extraction by institutions. Risks include incentivizing overdevelopment and mispricing assets. We explore impacts on society, investing prospects, and probability of mainstream adoption.</strong></p><p></p><p><strong>Malcolm Collins:</strong> [00:00:00] I hope that this talk has helped listeners who don't understand like what VCs are actually thinking or what's going on in the world of like people who are pricing assets or deploying capital how they think about things.</p><p>And and how they think about the future because I think this has been a good like educate to give like a broader picture on this. And I think it might be something that I might do, you know, if it does well, or if people like it recurringly just sort of analyze ideas in sort of a critical way that can help the average person understand what's actually going on with all this</p><p>Would you like to know more?</p><p><strong>Malcolm Collins:</strong> Hello!</p><p>It is wonderful to be with you here today. We have a guest today who was actually a fan of the show Chris Lehman, who reached out. You know, a very typical profile of a lot of the fans when we meet them, which is smart entrepreneur, you know, Harvard grad, like, working on a cool project. And we were talking about the project he was working on and it got me thinking oh, sorry, before I go any further, I do, I do need to point out why is Simone not with us [00:01:00] today? She has pneumonia and she is pregnant which means she can't do all the normal medications you would do if you got pneumonia. And so she's just been laid out, you know, in and out of the hospital recently, but you know, fingers crossed she's fine.</p><p>But I'm able to do this, this wonderful interview. So, so we were talking about his project is in the crypto space. And I was like, well, you know what I could do, what everybody does in the crypto space these days is there's all these shows that like shill projects in the crypto space, right? Like they're like, Oh, this is so cool.</p><p>And everything like that. And I was like, you know what I think our audience would prefer, which is like a really. Sort of, critical dive into one, the project, and I'm going to look at it from a few angles. Um, you know, will it make the world a better place? Which I think is always something you're sort of thinking of when you're talking about Web3 technology.</p><p>Two, is it a good immediate investment? Like if you had capital, like me as a former VC would I invest in it? And three, what is the probability of it achieving its long term [00:02:00] objective? And so that's what we're going to go over. So, maybe the audience is like this, maybe the audience won't, but I'd love you to start by talking a little bit.</p><p>And I, I always want to promote, you know, when I have audience members who are working on stuff, I always want to do what I can to promote that stuff so long as I think it's, it's like broadly in line with, with what we're doing that the community is doing. So start by going over what your project is.</p><p><strong>Chris Lehman:</strong> Yeah, absolutely. And thanks for the kind words and hope someone feels better soon. Definitely wouldn't want the, the kids go kid gloves treatment here on the podcast. Uh, um, but yeah, so, so I guess to start briefly before I go into the, I guess, full pitch and envision groma, which is my current project is a real estate and fintech company here in boston, about three years old and has the long term goal of launching a real estate backed cryptocurrency will go into significant detail.</p><p>I expect about. Why that's actually a good thing. Or you know, people can decide on on the merits of that. But you know, I think fundamentally, the [00:03:00] project is motivated by the idea that society works best when financial gains are coupled with actual economic productivity. And in a lot of ways today, society is really not geared that way in ways that cause people to behave in ways that while they individually optimal are societally suboptimal.</p><p>And so we think that by fixing two of the biggest institutions in society today, money and housing. You, you can actually fix a lot of those incentive misalignments. And so the long term goal talking, you know, decade plus out is actually having a fully operational scaled real estate backed cryptocurrency, but there are a lot of.</p><p>intermediate steps that we're working on today to actually scale up and scaffold sustainably to get there. Yeah. So</p><p><strong>Malcolm Collins:</strong> I want to hear your hypothesis on the three core areas that I was thinking of as an investment. I guess we'll start with short term prospects as an investment. And keep in mind, like this is, we're not trying to get people to like give money to a crypto project or something like this is only [00:04:00] accredited investors.</p><p>It's like at the VC stage now. So this is all hypothetical from the perspective of our audience, but I think it will help our audience who haven't experienced what it's like to work in venture capital, especially mission driven venture capital, like the way they're going to think about things. So first, let's think just as an investment, like, what are your thoughts on, you know, Three, four year time horizon, why it would do well, why it would do poorly.</p><p><strong>Chris Lehman:</strong> Yeah. A good, great question. And, and I'll, I guess start by clarifying one thing about the organizational structure here, which is that we have a pretty classic op co prop co structure. And what that means is that we have one side of the company, which is the operating company where all the actual employees work that's kind of the VC funded tech company model, right?</p><p>So we closed our series a midway through last year, raised 30 million for that. You know, that's. VC high net worth you know, very much the standard raise for that kind of thing. And that's where you expect kind of the high risk, high return, typical VC profile. Before</p><p><strong>Malcolm Collins:</strong> you go further, I'm going to explain [00:05:00] a few of these words to listeners, because I think this is just great for listeners to learn about like what's going on in the world of VC.</p><p>Yeah. Opco PropCo model is a model that is used by any. Venture capital company. And venture capital is a high risk investments, which makes it different from private equity, which is typically looking for lower risk investments. So on average, only one in every 13 venture capital investments makes capital, like, like makes cash positive or is really a Financially relevant to affirm, but that means that these companies that are need to do astoundingly well, like they need to be like hundreds of times larger than they were when you invested in them off it, you know, and what this means from the perspective of property is property can almost never do that.</p><p>It's a high capex asset. So if a VC, when I am going to people and I am raising money, those people are called my LPs or limited partners. Those limited partners will give me money for me to deploy in this specific high risk, high reward [00:06:00] model. Unfortunately, what that means is if a company is doing something that sort of like has a lot of real estate or otherwise capital assets associated with it I can't invest in that given what I promised my LPs, the people who gave me all this money.</p><p>And so what a company will do is it will do something called the opco propco model, which is it basically creates an umbrella under it, which is a separate company, which raises money that is either debt, which is often used for real estate investing because that's easy to get on a real estate asset.</p><p>Cause you have sort of a hard asset or it's raising money from like typical real estate investors. Which are often different from both VCs and private equity investors. It's something, now we said classic OpCo, PropCo model. The truth is, is to my understanding, because I looked at doing something in the OpCo, PropCo space almost no one has successfully done an OpCo, PropCo raise.</p><p>Most of the OpCo, PropCo raises that you're familiar with, the PropCo, the property company, was actually either family money, A [00:07:00] company they had previously worked for, or they had worked at the firm that ended up doing the investment because it's actually fairly hard to get a real estate investor to invest in this, my guess is that you use some sort of like crypto investor who also invests in real estate.</p><p>Or did you get like a pure real estate investor to invest?</p><p><strong>Chris Lehman:</strong> Great, great question. So, so, on the, on the series a side, you know, again, combination of, of BC and high net worth on the real estate side. We, we, it was a pretty I guess. Eclectic array of people tending to skew again towards the high net worth individuals for the first fund.</p><p>And there are a few different funds that we're currently managing, though. The one that's do you hold on?</p><p><strong>Malcolm Collins:</strong> I'm going to go back and talk about a few of the other words you used here because, you know, we have a lot of people who watch this and they're yelling and it's really hard to learn about this. You know, if you're outside of the Stanford, if you're in the Stanford Harvard ecosystem, you hear this stuff, you immediately know what he's talking about when he's talking about a series a let's talk a bit about what a series a is, and I'm going to use this to dissect a lot of these broader concepts so that when [00:08:00] people come into this, they can one understand how they do this sort of thing themselves and what's going on in this world.</p><p>Finance. So series of a is often the second or third round that a VC fund is raising. You typically have if you're talking like rounds of VC, you have angel round, you have seed round, then you have series a, b, c, d, e, etcetera. Right. And this is just like the chain of of raises. It used to be series a was the first round, but series a kept inflating in value.</p><p>Right now, if somebody tells you that they've raised a series a Typically, if they're in now, now keep in mind, these, these rounds actually mean different things in different cities. If you are in Boston slash New York slash Silicon Valley series, a, I'm going to guess means that he raised between one and 5 million.</p><p>Well, if you're in Boston, right, you're in Boston. Was this awesome? Yeah. Yeah, so that means it's probably a raise, and you can tell me if I'm wrong, but between one and five million to [00:09:00] up to ten million whereas seed rounds these days are typically between half a million to three million, and angel rounds typically don't go above a million unless you're like a hotshot.</p><p>Would you say that's About</p><p><strong>Chris Lehman:</strong> right. So we had kind of an atypical story here in large part because my co founder Seth Prebatch, who had previously founded Level Up and then went on to run most of Grubhub had a big exit. And so he basically did kind of an informal angel slash seed round and funded the company up until we got to the Series A.</p><p>At which point we were at a significant enough scale that we were able to do a 30 million series A.</p><p><strong>Malcolm Collins:</strong> A 30 million series A. That's not unusual. So that is on the high end for a series A, but it's not like. And this is why, because a lot of people, they hear series A, they're like, oh, that's the first round, it must be like 10, 000, 500, 000, and then they hear, what, 30 million?</p><p>And typically you wouldn't be raising a series A unless you had people who had recently had an exit.[00:10:00] And keep in mind that this is also important to think about the information that you just heard if you were thinking about something like this as an investment. So that means that the company was founded by people who have had a previous success in the past.</p><p>And another thing is if you look at their resumes, I mentioned, like, for example, he went to Harvard. That also makes it less likely that he's going to lie to you as a project like this. And this came up to me once. It was the people are like, why would you say that? Right. It's because it can lead to things like if you like get arrested or something, like if you're actually doing like fraudulent work and you have a big public reputation that's tied to something like a Harvard or Stanford degree.</p><p>You don't want to tarnish that. Like, like you sort of get a foot in the door with your career, with a lot of things. And so doing something like a rug pull, a rug pull in the crypto world means like running away with all the money or something like that becomes very, or much less likely. Also, he's raising money from traditional investors which also makes something like a rug pull less likely because they're often going to [00:11:00] put things in place that prevent him from doing that.</p><p>And he's, and he's raising incrementally. Now, if you go straight to like a Sam Baikman Freed style thing, like FTX you know, he got so big so quickly he was able to really do whatever he wanted to. The crypto world doesn't work like that anymore. If he's raising from VCs, they're going to have a lot of financial controls on whatever he's doing.</p><p>Anyway, continue with where you were going here, right?</p><p><strong>Chris Lehman:</strong> For sure. Yeah. So, so, so, so all of that is describing you know, applies to some degree, both to the VC model op co as well as the prop co. And yeah, you're, you're, you're spot on, you know, a lot of the early investors, both in the series a and in the initial real estate funds were previous investors with Seth at, during the level up days during the grubhub days.</p><p>Yeah. And so, you know. Lots of skin in the game, both socially and professionally there. So. While the series A is closed and, you know, we're likely not doing a series B until 2025, I would say and that's again going to be, you know, really large dollar checks [00:12:00] from likely mostly VCs, high net worth institutions, et cetera.</p><p>We are also offering a bunch of different funds in the real estate side, where, as you were saying, the risk return profile is very different, right? You're not going to get. Insane to the moon returns of the sort that you get either with a VC investment or with some of the you know, more Mimi volatile crypto coins out there that, you know, we're very popular over the past few years because it is real estate, right?</p><p>Real estate tends not to go to the moon. It tends not to go to zero either. And, you know, obviously there's variation within real estate. You know, the Sun Belt looks very different from somewhere like Boston or New York or SF and meeting in Boston. It tends to be a much more stable market, but but also the corollary there is you're not going to see.</p><p>Insane growth, like you might have seen and say, like, damn, you're over the past few years. But the, the real estate investment vehicle that's most applicable to probably most of your listeners is the, the REIT. And so REIT stands for real estate investment trust. It's a pretty [00:13:00] well established model for real estate investment.</p><p>If you're familiar with an ETF, an exchange traded fund, it's basically an ETF, but for real estate, right? So you have a diversified. Profile of real estate based on some thesis that can be very broad or very narrow. I could be, you know, broad, you know, all residential real estate in the U S it could be something much more narrow, which is where we are now that we expect to be broader as we scale.</p><p><strong>Malcolm Collins:</strong> So I'm going to take an aside here and explain why he immediately went into ETFs and REITs and stuff like this. So when he first was talking to me, this was my first question and it's going to be most investors first question, which is how is this any different from a REIT? Right, because I'm an investor, right?</p><p>I want to put capital in real estate in liquid. easily divisible shares. Right now, the standard way I would do that would be to buy into an ETF or a REIT. Right? He's allowing somebody to do this with crypto. And my immediate question was, well, [00:14:00] differentially, where is the value here when contrasting this with an ETF or a REIT?</p><p>So that's why he's going into what this is. So</p><p><strong>Chris Lehman:</strong> continue, right? Yeah. Good, good, good clarification. So today as an investor in the REIT, Your performance is, is really not going to be massively affected by the fact that we are by the fact that we're doing this on crypto rails. So, you know, today, basically, and I'll get more into why this is relevant.</p><p>Later. We have both the reach shares that you can own and the properties that are owned by the rate. Represented both in blockchain formats and also in traditional financial and legal modes. So, for the REIT shares, that means they're held by a transfer agent, which is a specific type of financial institution that actually holds I don't think people</p><p><strong>Malcolm Collins:</strong> care about this.</p><p>What they care about, how is it different? Like, talk about it from the perspective of your average person, how is this different from putting it in a REIT? Like if I want to invest capital in real estate, why am I using this system instead of a REIT? Right. So, [00:15:00]</p><p><strong>Chris Lehman:</strong> so today, one of the big advantages that we have over a REIT is the level of transparency you get from the fact that we're recording all of the data about our properties on blockchain, publishing it on our website.</p><p>And and providing much more disclosure than is typical for reach down to the individual property level. This is something that you might expect would be standard for REITs, but it's really not. And this is to a large part driven by the fact that Most REITs are interested in big institutional investors, whether those are pension funds, whether those are banks, whether those are you know, other entities that are going to spend you know, tens, hundreds of millions of dollars at a time.</p><p>And when they do that you know, they're not going on the website and downloading a PDF that has, you know, quarterly earnings and a list of all the properties. They're calling someone up and they're saying, hey, like. Can I grab an hour, two hours of your time, talk to some analysts, talk to some, you know, MDs or whatever, and, and really get the full you know, in the no spiel of what you're investing in.</p><p>And [00:16:00] so, because that's where almost all of their money comes from. So REITs tend not to put a lot of effort into the kind of transparency and disclosure that that an individual retail investor</p><p><strong>Malcolm Collins:</strong> might want. So I'm going to quickly break this down, like my interpretation, right? If I was looking at this I would say that's, that's interesting.</p><p>And some investors may differentially value that. So, so you have a core asset, right? You have real estate. This is the asset that is, you're buying tokens of basically. Now. The way that that asset is treated by a portfolio manager can modify whether that asset is worth more or less within that portfolio than it is if it was broken up and sold on the open market.</p><p>So, and then, you know, he'd point out which you might have a thesis like individually. A thesis could be more transparency will either lead to more value within this asset, more value retention within this asset, or more predictability of value retention within this asset, or [00:17:00] this asset will track the thing I think it's tracking better.</p><p>And that last one can actually be really important especially when you're talking about the crypto space. So, A core tragedy would be you think you've invested in one thing, something that's going to go up when real estate goes up. And there was a huge thing when the crypto market crashed and a bunch of people thought they owned a specific type of I forgot what it was called, a specific type of crypto stock that would increase in value as the stock of crypto overall decreased in value.</p><p>But it was set up in a way where that didn't end up happening. And actually the opposite ended up happening if crypto was decreasing as fast as it was decreasing. So this is important. Like this is one area where you could get some sort of like marginal additional value here. However, the truth, like if you're saying like to me, the truth is an investor, the core value of this asset.</p><p>Like if I was to say, why would I put my money here? Like, why am I going to get any sort of differential value in this project versus just putting REIT? It would be because of the branding of [00:18:00] crypto which is not as strong as it used to be, but that can be of utility if you are the only person and this is the only project, there are some other, at least to my understanding, there are some other crypto real estate projects, but there's none that are totally where the, the asset itself is really treated more like a REIT instead of you buying into individual real estate properties.</p><p>So. Uh, crypto as a brand can cause some individuals to be more interested in it and can cause some individuals to over inflate it as an asset for a few reasons. One is, is they may see it as like, a great example of this is WeWork, right? So, WeWork became huge as a company, but they weren't actually, am I, am I thinking of the right company?</p><p>This is, yeah, yeah, they're not, yeah, we're not yeah. Yeah, like marginal office spaces, right? So, they were doing something that a lot of like private equity, very simple companies had done before and they really hadn't changed the model in any meaningful way, but they branded themselves as a tech [00:19:00] company and the other companies had them.</p><p>Branded themselves as private equity, real estate plays. Private equity, real estate plays have one way of valuing them. Typically, you're valuing them based on the EBITDA they have, which basically think of it as like the amount of cash they spit out. And then you apply a multiplier to that tech companies, especially venture capital tech companies are often valued on their top line revenue.</p><p>So that means the total amount of revenue that they're generating, which is the Often, especially with a real estate project like rework hundreds of times more than the equivalent companies that were trading on the market before that. And that's just a branding difference. So you can see this was in the crypto space sometimes making a project like this particular.</p><p>Now, there's another reason why crypto may differentially flow into this to one is that they've created A believable story about how they're going to make the world a better place and how this is the line was like the goals of web three and so web three people who believe in this often have sort of libertarian ideas [00:20:00] about things may put more of their capital in this because you know, they've made a bunch of capital in bitcoin or something like that.</p><p>Right? Two it could be that it's easier to transfer money or they're doing something fishy with their money. And it's easier to keep money within crypto projects than it is to take it out of crypto and then redeploy it on the traditional stock market. Although This is increasingly becoming less of a reason to keep money in crypto as the financial institutions become more savvy into how money is moved around crypto.</p><p>So the first thing I would say is, is just as a basic bet, like if I could get in on this round of it, right, I would say. And it's not costing me that much more than doing a traditional real estate play. I'd say, yeah, it's probably worth the marginal upside. Like I'm just thinking as a VC right now, but, but the longterm, that's where I have more, more questions, but continue with where you're going with this.</p><p><strong>Chris Lehman:</strong> Yeah. So, so definitely agree with everything you've said and, you know, I, I would agree that the value that the REIT shares gain from being you know, [00:21:00] structured off of blockchain today to the actual investors today is marginal, right? And you should be much more concerned if you're looking at those REIT shares at the actual real estate thesis that Grom was running off of, which I can talk at length about and I can do a brief treatment of it.</p><p>I assume we probably don't want to get</p><p><strong>Malcolm Collins:</strong> too deep. People don't care about that. They care about the long term vision. How is this going to change society now? Let's talk about that angle of things. Where where do you see this going long term? And why do you see this having a disproportionate amount of value long term or changing society long term?</p><p>Let's talk about this long term objective here.</p><p><strong>Chris Lehman:</strong> So, so I'll go through the I guess vision that I alluded to earlier, which is that society works well. When more people have an ownership stake in it and when financial incentives and financial rewards are aligned with what people actually contribute to it.</p><p>And so, money is obviously a core part of that architecture, right? What money is, how it's exchanged, who controls the supply of money has a big impact on the sorts of people, sorts of [00:22:00] decisions people make to earn money. And then aside from that, housing is most people's biggest asset in the world.</p><p>And therefore has a pretty, the way that rules around housing work and the way in which ownership of housing is structured has a big impact on how people behave and make decisions around the investment of their wealth. So I'll start with the money side of things. Fiat money has some advantages.</p><p>Obviously, there's a reason why it's kind of the dominant model of money today. You know, depending on, you know, across developed and developing world fiat's what you do. But obviously there are some pretty major problems with it most prominently over the past few years is the potential for inflation and happy to go on any segues you want here in terms of the no, I</p><p><strong>Malcolm Collins:</strong> mean, I'm happy to just talk about what I think about money really quickly.</p><p>Because people have some interesting ideas about money these days or interesting ideas about fiat. You know, I'll talk to a lot of people and they'll be like, I don't want to invest my capital right now, so I'm keeping it in cash. And that's a really [00:23:00] bad way to think about any capital that you have.</p><p>Keeping your money in cash is an investment in whatever currency that you have decided to keep that money in. Now, currency markets fluctuate, but on average, it's one of the only markets in the world that you could pretty much bet is going to go down over time. Now the question is, why does it go down on average over time?</p><p>I think a lot of people have wrong answers about this, especially when you're talking about the U. S. They think it's like generic inflation, like inflation, i. e. the government's being greedy and printing more money than it actually needs and stuff like that. I think this is an incorrect understanding of what's happening with fiat.</p><p>Fiat is a very unique system for trading money because it's quite different than the back systems. You know, you can have like a gold back system, which we used to have historically, or you could have a real estate back system, or you could have a system backed on any sort of a Bitcoin back system.</p><p>For example, you have a Set asset. And that is set asset in a world where the population is increasing exponentially, which we've historically been living in anything that has [00:24:00] a scarcity divisibility and trade ability is going to increase in value over time and be a good store of of. Value if you want your value to increase now, typically as a state, you don't want the default unit of trade to be something like that to be something deflationary at the state level.</p><p>And we're talking about cash. We use the term deflationary, but as an investor, you would say something that has good investment potential that is that is increasing on average, because when you have something of good investment potential, you don't trade it. You, you, you hoard it, you keep it, right? Like you're much less likely to be trading it because you see it as this valuable asset.</p><p>However, if I have cash and I know, and even my wife and I, you know, we talked about this recently. We've been spending cash a bit more recently now being like, well, we got to buy this stuff before this money's worthless. Given the, the high fight. amount of inflation that we're seeing in our society right now.</p><p>And I think general economic degradation in society. And so people can look at that and think that [00:25:00] this is an accident. It's not an asset. The thing that makes Fiat at the core level different than all other types of currency assets. Is it the state can manipulate it in order to maintain a healthy economy with the only other asset that really has any comparability to this being state debt which they also manipulate those terms to maintain a healthy state economy and often the small amount of inflation that if the system is working well, you're getting every year is intentional historically, whatever you would have an economic crisis you would intentionally create a slightly higher amount of inflation because that would bring more people to work.</p><p>The more inflation you have, typically the higher employment you have, and the less inflation you have, typically the higher unemployment you have. I'm not going to get into all the specifics of that, but a lot of people, they just learn that like fiat degrades over time, and they think that this is some government conspiracy against them rather than like a critical part of how modern economies work.[00:26:00]</p><p>Continue.</p><p><strong>Chris Lehman:</strong> Yeah, no, all of that's accurate, but, you know It is important to note the distribution, the reasons why governments do that, right? You know, it's some combination of both of those things, right? It helps the economy run more smoothly. It can be used in recessions, et cetera. But it does have important distributional impacts.</p><p>There's something called the Cantillon effect, which basically refers to the order in which newly issued money you know, in quantitative easing by the fed trickles down through the economy. The people who get that money first tend to be large financial institutions. They're spending it at the pre inflation price level, which means they're getting the full benefit of new dollars, whereas by the time it circulates all the way through the economy, down to people who are lower on the socioeconomic ladder.</p><p>They're getting it after the price level has been able to adjust by the issuance of new money. And so it effectively represents a transfer of wealth from people who are lower socioeconomic status towards people who are higher socioeconomic status. And, you know, you have to weigh that, of course, against some of the benefits that you mentioned, but it is something that.</p><p>You [00:27:00] know, we think, and many other people in crypto think should be taken into account by people who are deciding where they're going to store their wealth. And if you don't want that to happen with your wealth, then you, you may want to consider some other way to store it than just cash. Right? And so, this is the other side of it then too, which is people who have lower net worths tend to keep a higher percentage of their net worth in cash because they need to have quick access to that cash in order to cover.</p><p>You know, unexpected expenses. Whereas, you know, if your net worth is 10 million and you're, you know, say you keep 10, 000 in cash or something lower than that, right? It's a tiny portion of your net worth. And yet it can still cover any unexpected expense, more or less. And so the. Impact of inflation broadly, even taking aside the asymmetry of the impact of inflation impacts people more, the more cash they</p><p><strong>Malcolm Collins:</strong> hold.</p><p>Yes. So I want to pull back because you're assuming that you've said something that I think you forgot to say. The long term goal is can we make this a [00:28:00] standard currency? With the idea being what he just said, if we can make this a standard currency, a standard thing that people trade for things, like instead of Bitcoin or dollars, you're trading crypto shares of real estate, right, like you're literally directly trading an ETF.</p><p>And this is something you couldn't do with ETFs as they're structured now. I could not use, easily, shares of an ETF. As a current just financially, it's not really structured that way. And it would be very cumbersome and have big tax implications. If I tried to do that, he's saying with our system, you could do that.</p><p>And it, and, and then he's saying a benefit is if people started doing this. Is it your average poor person? I'm going to say poor person here, okay? I'm offensive, right? Base camp. Your average poor person is going to, if you can accomplish this, disproportionately have more of their wealth stored in well, so, so it's a question of defaults is really what you're looking at here.</p><p>You know, if you do something like, if [00:29:00] you're giving someone an organ donation thing that they're filling out when they are Getting a driver's license, right? And you have that box pre checked and they have to uncheck it versus unchecked and pre check it. It's a difference of like 70 percent sign up to like 30 percent sign up.</p><p>What you are doing with whatever the default, like. The tradeable asset is in society is you are making that an asset that a person is going to have disproportionately more of on hand at any point in time. And so he's arguing two things. One, this is a smarter investment asset to have more of your wealth concentrated in at any time.</p><p>And two, or, or at least a more honest asset which is to say, even if it goes up and down more than currency typically goes up and down, which real estate does at least you like really have some like tangible thing that is backing your money. And two, that it's not being peeled off by all of these institutions that are getting the value at different levels.</p><p>Like, [00:30:00] Carving off bits of value at different levels. I'm going to disagree on two. I'm going to say, okay, suppose you made this a core asset in society right now. Well, it was with fiat that the game, the way that people are profiting off of the system is getting like early shares of fiat as you're talking about with this, that the game is being a real estate developer and making more real estate in a way that can then go to the currency.</p><p>If those real estate developers are profiting off of that, which they. Almost axiomatically are going to be, otherwise they wouldn't be doing it. Then they are now taking the role of the person getting the first cut within the system. How do you see this as different? Is it because they're producing something of value?</p><p><strong>Chris Lehman:</strong> I think, yeah, I mean, I think that you, you basically nailed it, right? You know, when you expand the supply of dollars, no actual new asset that's usable has been created aside from the exchange value of the dollars. Whereas if you're creating new real estate, suddenly people have new places to live or to work or to learn or whatever they're doing with it.</p><p>Right. And you know, in many parts of the U [00:31:00] S most big Metro areas, there's a pretty dire shortage of real estate. So something that incentivizes a developer to add more. Real estate with the expectation that it will then be incorporated into the REIT and used as the backing for currency is a virtuous societal effect at this point.</p><p>And obviously, you know, we can talk about long term. How does that change with the equilibrium? But today, and, you know, for, I think, the foreseeable future next few decades, we're still going to be in a situation where the demand for that kind of real estate significantly exceeds the supply.</p><p><strong>Malcolm Collins:</strong> Yeah. So, okay.</p><p>So here I'm going to talk a little bit about my views on a few, one is I think like internally I'm going through, you know, as somebody thinking, how does this change the future? So the core thing that you would be doing with this is you would be like, like, how does this actually change what's, what's happening in society?</p><p>Like the, the actions of people. Well, because of the power of defaults, more people would hold this type of investment, real estate investments, then hold it in today's [00:32:00] society which is applying an externality on the valuation of real estate which is causing real estate to be more valued than it would be just as a place to live.</p><p>That's the core thing that would happen here. Now, this is going to have. Two effects. One effect is it will cause people to build more real estate than you currently have, because now you're getting this other reason to build real estate. But the other negative of, this is my perception, and you can argue against me here, like this is, this is what I think would happen is it would lead to real estate being valued More, i.</p><p>e. having a higher price than it should have as just a place that people live because now it has this externality attached to it. And I would argue, and when I brought up your idea to my wife, Simone, she immediately goes, but what about China? This is basically already the system in China. So for people who aren't familiar, in China real estate is 70 percent of all investments in terms of like, like individual household investments.</p><p>Which is very different from the U. S. In [00:33:00] the U. S. We have trust that when we put money on the stock market, it's gonna grow on average. They don't have that same trust in their local stock market in China. Get this much more manipulated. So real estate and we have a whole other video on like what we think of the future of China and how screw China is.</p><p>You can go watch that where we talk much more about the real estate situation in China. But they began to use real estate as the core, almost sort of alternate token to currency. So much so that they begin to build these giant Cities that no one was ever meant to live in. Right now, the over building state in China, that means if you housed every homeless person in China in one of the buildings right now how many could they fill?</p><p>It's 200%. There are literally three buildings in China for every household. Empty buildings. And that's because real estate has begun to become this tokenized asset. And, and that has And, and worse, all real estate in China is much more expensive for your average person than it is in other countries.</p><p>It costs, I'd say. Four or five times as much as it does in the U. S. And it's [00:34:00] begun to leak into other markets. Now, this whole system in China is about to pop right now. That's beside the point. I'm just using China as a model of what happens when you apply an externality to real estate in terms of, like, it becomes the default investment in the society.</p><p>That's the externality we're implying here. I'm wondering how you think things would play out differently in this scenario, or if you think that there's some hidden advantages to this. I'm not seeing. Yeah,</p><p><strong>Chris Lehman:</strong> so so answers to a few different parts of that question. Yeah. The first portion is, I guess, dealing with the pre equilibrium state of how the existence of this currency and demand for it would impact real estate, right?</p><p>So we're talking about before it is either the default or one of the default currencies essentially, you know, if people are valuing the currency more highly than the value of the underlying real estate, right? There's some additional use value that increases the demand past the real estate. In it of itself, that essentially just feeds into the growth of the ecosystem, right?</p><p>You have more money coming in and it accelerates that rate and you can [00:35:00] grow, you can acquire more real estate, increase the supply of the currency to accommodate that demand. And that all serves to push towards the long term equilibrium, which is the second point, right? And so once you get to the point where people are socialized on the idea of a real estate backed currency, and it is one major you know, Default currency that people use for transactions or as a store of wealth.</p><p>Whether or not you have. The value of the currency exceeding the value of the underlying real estate is basically a question of whether senior age exists, right? . So se senior age is essentially when the issuer of a currency gains value that exceeds the val the cost of issuing the currency, right?</p><p>And this is something that in our equilibrium, we really hope is, is minimized, right? We, we don't think that senior age is broadly a desirable feature of monetary ecosystems. And we think that the, the healthiest equilibrium would be one in which. Groma coins are competing against a wide basket of other currencies, whether it's, you [00:36:00] know, fiat, traditional crypto, other asset backed currencies, whether it's backed by something like energy or health care or other core inputs to the economy, such that, you know, if the price of groma coins.</p><p>We're sufficiently in excess of the value of the underlying real estate, you would see people begin to sell the groma coins to take advantage of that gap and put their money into the other currencies until you have those even out and the senior level of each of those currencies is minimized.</p><p><strong>Malcolm Collins:</strong> Yeah, so I want I want to take a bit and dissect what he's saying here.</p><p>So. The point he's making here is actually the argument here, and I think this is likely right. The reason why you get this over evaluation of real estate in China is not because real estate is the default investment mechanism, but because it's a mechanism that fuels the CCP, that's the governing party of China, and therefore they have a, Manipulate the markets to ensure that it's always growing in value outside of its core floating value.</p><p>So you cannot get [00:37:00] this arbitrage opportunity that he's talking about. This arbitrage opportunity, you'll see whatever you get like one fund that's holding something pegged to a floating market. So, one of the most famous example of this is I want to say it's called like the gray scale trust metric gray</p><p><strong>Chris Lehman:</strong> scale Bitcoin trust.</p><p>Yeah.</p><p><strong>Malcolm Collins:</strong> Yeah, well, yeah, but there's a word where it's like a, the percent on it or something. But anyway, one of the core metrics that a lot of people look at is how much we, so grayscale Bitcoin trust is basically like an ETF. Like we've been talking about this concept, think of it like a basket of Bitcoin.</p><p>That you buy shares in with dollars, with fiat. In the same way within his system you are buying shares in a basket of real estate with, with crypto or dollars or whatever you're, you're buying with. Well, the grayscale Bitcoin trust there's a percentage where the value of the Bitcoin in that trust is either over or undervalued.</p><p>When contrasted with the all of the individual bitcoins within it, [00:38:00] and you can use this because it's almost never exactly the same. Like people would think that this arbitrage is almost exactly the same. It's almost never exactly the same. This can be used to determine like where you think markets are going and stuff like that.</p><p>And it's an indicator that a lot of these quant guys who are like trying to play the market pay attention to. So, yeah, okay. I'll buy that. Another thing I'd note, which is a utility of this that he hasn't mentioned, but is, is worth noting. So, people who aren't familiar with the concept of a DAO, this is like a governing system or company that runs using Web3 or like, Crypto architecture as its engine.</p><p>One of the things that his system would allow for is DAOs to use his tokens, these Gromo tokens for rewards or various other things. I. e. you might want to DAO that for specific reasons, rewarded specific decisions are used within its internal machinery. The value of real estate was in specific areas.</p><p>An example [00:39:00] of this okay. People might be like, what, what the heck is he talking about here? Suppose I wrote, created a Dow to run a charter city. And one of the factors within that Dow was all of the, all the real estate in the charter city was sold proportionally like his is being sold.</p><p>I could create a mechanism where. When it, like, over inflates or it's growing over a period of time certain types of voters within that ecosystem, their vote matters less. So for example, within this ecosystem, I could divide voting power where you get voting power dependent on how much you're paying in taxes.</p><p>But I could Divide this voting power amongst a few classes. For example, I could say that real estate owners their voting power is, is, is considered like, has one multiplier attached to it. And people who are paying like generic income tax, their voting power has a different multiplier attached to it.</p><p>These multipliers could be changed when real estate is going up versus when real [00:40:00] estate is going down. to motivate different investment behaviors within this new charter city. And there's lots of reasons why having a tool like that is really valuable within a DAO. But most DAOs today are, from my perspective, you know, having read the Practices Guide to Governance, which is used a lot within the DAO community very simplistic and don't, Utilize mechanisms like this, but he's creating a core tool that would allow mechanisms like this to be developed on top of it.</p><p>But anyway, continue with what you're saying</p><p><strong>Chris Lehman:</strong> about the senior age and the China comparison. I want to hear. I</p><p><strong>Malcolm Collins:</strong> mean, you can say, is there anything about sort of your thesis that I missed in my summary there about why this wouldn't cause the same effect of real estate getting an externality associated with this value?</p><p><strong>Chris Lehman:</strong> So, yeah, I mean, On the China side, I mean, I, I think you, you alluded to this, but to provide somewhat more detail, right? There was just massive. I guess government interference in all kinds of markets. And as you said, there's really little faith [00:41:00] in the reliability, stability of kind of traditional equities markets, which led into this kind of pseudo tokenization of real estate.</p><p>And that was really the only way that people could get any yield on their savings, you know, not just equity markets, but also savings account, I think had caps on the amount of interest they could yield. And so it's artificially forced. Money into real estate and created demand for relay state in excess of the native organic demand for living space.</p><p>Whereas in the U S you know, it's a market system. We're not going to put, you know, a mega city in the middle of say, Nebraska, South Dakota, we're, we're going to put it you know, in a decentralized fashion where the demand is highest, where developers think they're actually going to get people who are willing to pay the most for it based on its utility as living space.</p><p>And, you know, we we've also seen, you know, China. With you know, in the past few years under, she has had kind of the legs cut out from under the real estate industry by, by cutting off their access to credit. You know, you, you, you also had, I think, in the. Proceeding years, there were [00:42:00] actual floors on the prices of real estate in a lot of these cities where people were clamoring for their investments to maintain their value in excess of the organic demand and vandalized developing offices when they were considering cutting prices.</p><p>And it's only been recently that. Municipalities have allowed developers to cut real estate, radically different situation from what we have in the U. S. today, where, you know, it's the opposite, right? People are asking about rent control or, you know, other artificial price controls to suppress the value of real estate.</p><p><strong>Malcolm Collins:</strong> Yeah, and I want to talk about real estate as an asset here more broadly, really quick. You know, for followers who have less right now, when we talk about this exogenous factor that causes people within the Chinese cultural system right now to overvalue real estate, this has bled over into a lot of markets that have a lot of Chinese immigrants or China has easy capital to when Chinese people come from, from, from China and [00:43:00] are, are trying to hide their money outside of China.</p><p>Or are trying to move their money outside of China. The first place they often invested is real estate because that's the asset that they're familiar with. And so this can lead to overinflated real estate markets within environments like San Francisco or like, a lot in Canada, you know, pretty much all of Canada is overinflated specifically because of this Chinese money.</p><p>If the Chinese bubble pops, this overinflation is going to decrease. Now, if you're talking about being a viewer of our channel one of the things you're most likely thinking of is these guys are pronatalists. They notice more than anyone, you know, the falling fertility rate issue, the falling population issue.</p><p>Why would real estate be a good store of value in a world with falling fertility rates? In fact, why is real estate going up still at all? Like on average, real estate seems to be going up. What the? Well, the answer is the core reason why real estate still goes up in the U. S. right now is twofold. One [00:44:00] is you have the atomization of the family unit.</p><p>And so this means that houses that previously, you know, you would have had a married couple living in with a bunch of kids. You know, now that people aren't getting married anymore at the same rate, they're needing to buy two the separate houses. And this is a, a, you know, and you, you see this over and over again.</p><p>So, so, and this is why one of the biggest for a long time growing sectors of the real estate market. And I actually expect that this is probably the sector that you're going to get into as multifamily housing units. Am I right in assuming that? Yeah. Yeah. Yeah. That's primarily what we're doing. Okay. So.</p><p>People who don't know what multifamily housing investment is. If you go to a city and you know, those giant units where you have like 50 people, like not 50 hundreds, hundreds of people, like, like just condos, I guess you'd call them right. Like that's multifamily housing.</p><p><strong>Chris Lehman:</strong> Yeah, I mean, I would say it's a bit broader than that, right?</p><p>Like kind of the archetypal multifamily housing is one of these multi hundred unit buildings, you know, whether it's condos or rentals, I think more of actually tend to be rentals. You know, you have kind of large multifamily on one side, which is traditionally what real estate [00:45:00] investors think about when you say multifamily.</p><p>What Groma actually focuses on is a different segment, which is small multifamily. And so this is 2 to 20 unit buildings that typically were built, you know, 100 ish years ago. Before real estate investment was institutionalized. And so, you, you, you have a lot of say, like triple deckers in Boston, you know, walkups in New York you know, similar archetypes and say like San Francisco, Philadelphia, et cetera.</p><p>And you know, those again can either be condos or rentals. But, but there's obviously a huge amount of that stock here.</p><p><strong>Malcolm Collins:</strong> Yeah. And, and so how long this is going to have an effect on the real estate market is for you to decide as an investor yourself. Me personally, like if you're talking about Simone and I, you might be like, Oh, he's really negative on real estate.</p><p>We have a well over 50 percent of our portfolio in real estate. And so, we won't forever, but we do for now. And, and another question is, is then why, why, if the number of people is declining and that's going to have an effect on real estate, why would you keep so much of your personal net worth in real estate?</p><p>And the answer then comes to, well, there aren't a lot of other f*****g options right now. If China collapses, yes, that's [00:46:00] going to have an effect on us real estate markets, but a much, much bigger effect that it's going to have is one going to be on the developing world. Cause if you look at like South America, you know, anywhere you're, you're, or Africa, anywhere you're carrying Investments that's in the developing world is going to be massively hit when China pops and China is going to pop before population pops before the things tied to population pop in the world.</p><p>So, so that's destroys a lot of developing country stocks, which a lot of people think are safe. They're like, I'll get my money outside the U. S. In fact, when China pops the most protected place in the world is going to be the U. S. And then the question is, is it U. S. companies or is it U. S. real estate?</p><p>Well, I think U. S. agricultural real estate is probably the best bet right now. If you were going to make an anti China bet. But then the other thing is that also the huge effect on any sort of a commodity, specifically commodities like. Minerals, mines the stuff that they are using to build these buildings, you know, whether it's copper or gold or anything like that, anything that's used in construction[00:47:00] is, is overinflated right now, I would argue and so then that means, okay, well, then where am I storing assets, right?</p><p>Like that doesn't leave a lot of other options. Okay. You can't really go outside the US. You could go to Europe. The problem is, is Europe's going to collapse so much faster than the US. Like they're an absolute s**t show right now. Both population rate wise, but also the way the government's reacting to all of these situations.</p><p>The, the, the Europe doesn't have. a real future as far as I see it. The one place I might invest in outside of this is Israel. Israel is obviously going to do well. They're doing well right now and they have a high population rate. Like if I was going to get some additional real estate myself, I'd probably get some real estate in Israel.</p><p>So yeah, those are my thoughts on real estate more broadly. I'm happy to have you provide any counter thoughts or arguments against that.</p><p><strong>Chris Lehman:</strong> Yeah, super interesting points. And I think I agree directionally with most of that. I think it's also important to clarify what the time scales are that we're talking about here.</p><p>You know, when you're talking about, say, the collapse of the Chinese asset bubble and whatever demand for raw materials or real estate that [00:48:00] probably happens over the next decade or two, probably shorter end of that. Whereas if you're talking about like, Okay. Total or even just U. S. Population growth. And when that stalls out, we're talking about the 20 eighties, I think, is where the projections currently are, right?</p><p>Both globally and for the U. S. Those are when population growth turns negative. So we've got several decades before that actually starts to obviously, you know,</p><p><strong>Malcolm Collins:</strong> just just to clarify for people, they're like, why would it be so long if fertility rates are so low in the U. S. And this is because high immigration and increasing rates of how long people are living.</p><p><strong>Chris Lehman:</strong> Right. Yeah, great points. So, you know, that's important to consider when you're thinking about what is the trajectory and projections forward of real estate value. I think what you said about kind of the retreat to to quality and the safest places is important to keep in mind. Right? You know, not only is you're talking about.</p><p>China having its own internal stability problems, but just in general, you know, as we've seen over the past few years in the world [00:49:00] is the US kind of steps back from its role is kind of maintainer of order from a security perspective in the world, you know, lots of places that are, you know, have tons of immediate neighbors that don't always get along.</p><p>Are going to see significant decreases in their stability. Whereas the U. S. Like, you know, yes, there's tensions on the southern border for sure. Northern border is pretty good. And then we've got these massive oceans that keep everyone else away. So we really have, you know, a huge amount of control over what happens in terms of our own physical security.</p><p>And the the natural resources here are phenomenal to write not only in terms of agricultural productivity, but the river systems you know, the well,</p><p><strong>Malcolm Collins:</strong> we have our own. So, so just, you know, to talk about the natural resources we have here, because I think this is often undersold for people, there is not a single other large major power in the power player in the world other than Russia that has its own oil and its own food.[00:50:00]</p><p>Everyone else needs either oil or food from somebody else to survive.</p><p><strong>Chris Lehman:</strong> Right. Yeah. Yeah. China. Massive importer. I think of both definitely at least of both. Yeah. Yeah. Yeah. And then, you know, after that, right, you know, is there another really me? I mean, India, I guess probably also importer of energy. And you know, obviously not quite Europe, big</p><p><strong>Malcolm Collins:</strong> importer of energy,</p><p><strong>Chris Lehman:</strong> right?</p><p>For sure. And then obviously, you know, there's the degree to which can Europe even get, right. Sufficient coordination to be considered a like security power in the world. But so, yeah, I mean, as other parts of the world become less stable, even if the native fertility rate of the U. S. is decreasing and is below replacement, you're still going to see significant demand for the U.</p><p>S. because it is stable because it can be self sufficient in so many ways. And also, you know, when s**t really hits the fan, the U. S. can choose to invest more in protecting at minimum its own trade routes, which. Which means that any of the assets that are tied to the US you know, geographically, whether it's our equities, whether it's our real [00:51:00] estate, whether it's the raw materials are going to be in demand.</p><p>And I think that holds for the foreseeable future. Now, you know, when, when you get into the far out future, right, once population growth actually is negative, you then have to ask the question, okay, population growth is negative. So that definitely is a downward impact on demand for real estate. But does that mean economic growth is negative?</p><p>And I think you see pretty different. Answers there, right? You know, you could conceivably see a scenario where we just don't know. And there's so many technological, I think, primarily question marks in terms of like, can decreasing network effects of humans be overcome by AI or, you know, other technologies that allow</p><p><strong>Malcolm Collins:</strong> multipliers.</p><p>Yeah, so AI would be the core way that you fix this. But then the problem is, is if AI is the core way you fix this, then the default asset moves from being real estate to shares of energy. That's, you know, AI food and housing or server space, which would be interesting. And</p><p><strong>Chris Lehman:</strong> and those were both both energy and processing power or server space, you [00:52:00] know, whatever, you know, tech adjacent input you're talking about here were things we considered when we were thinking about, you know, what is the ideal asset backing?</p><p>You know, we knew it had to be a core input to the economy and obviously different trajectories coming up over the future on those things. But, you know, even as demand for those things increases, we do think that it's Inputs or the, the cost of producing a lot of those things is probably going to decrease even faster, right?</p><p>You're, you're, you're going to see massive increases in. The efficiency of generating energy, and then it also transforming that energy into the actual, you know, flux that that machines use on. So, you know what? While I think those are really good basis for currency at some point in the future, just because the use value is going to be so high.</p><p>It doesn't necessarily mean that they are a good store of value given that the degree to which producing them becomes more efficient decreases their actual price on the market. Whereas with real [00:53:00] estate you know, large terraforming projects aside, it is a bit scarcer, right? In terms of the actual land underneath it.</p><p>Now, you obviously, you want to build up and there's, you know, lots of different levers affecting how. I have to</p><p><strong>Malcolm Collins:</strong> hop off in just a minute here, but yeah, it is, it has been great to have you on. And I hope that this talk has helped listeners who don't understand like what VCs are actually thinking or what's going on in the world of like people who are pricing assets or deploying capital how they think about things.</p><p>And and how they think about the future because I think this has been a good like educate to give like a broader picture on this. And I think it might be something that I might do, you know, if it does well, or if people like it recurringly just sort of analyze ideas in sort of a critical way that can help the average person understand what's actually going on with all this.</p><p><strong>Chris Lehman:</strong> Yeah, thanks, Malcolm. This has been really fun. And, and you know, obviously really appreciate the the, the context for that and help people understand. Yeah. Have a good one. All right, you too.</p> <br /><br />This is a public episode. 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