Matthew Le Merle, Co-founder and Managing Partner of Fifth Era and Keiretsu Capital – Interview Series

Matthew Le Merle is co-founder and Managing Partner of Fifth Era and Keiretsu Capital – the most active early stage venture investors backing almost 200 companies a year. He is Chairman of Securitize (Europe) and CAH, Vice Chairman SFOX and an advisor at Warburg Pincus.

He is also the Co-Author of Blockchain Competitive Advantage, a book that we highly recommend for both entrepreneurs and investors in the space that is available at Amazon, Apple, and Smashwords in hard and paperback, ebook and audible.

You have been an early stage technology investor in Silicon Valley for decades including at Keiretsu and Band of Angels. Is this where you were first introduced to blockchain, and what initially excited you about the technology?

While both Alison Davis (my wife and business partner) and I have been early stage investors in Silicon Valley since the late 1990's we had focused on Internet, digital content and Fintech investing. For me that included investing as Managing Partner at Keiretsu – the most active early stage investors in the US – and as a member of Band of Angels. We have made several dozen investments in that timeframe and have seen hundreds more made by the investors that we work most closely with.

However, it was Alison that first became excited by blockchain. She has been a public board company director for decades including currently at RBS, Fiserv, Collibra and Ooma. It was the former (RBS) where she chairs the Innovation and Technology committee of the board that led to her needing to understand Bitcoin in 2013. She went on her own voyage of discovery that eventually led to her joining Bart and Brad Stephens and Spencer Bogart at Blockchain Capital as their Advisory Board Chairman.

For my own part, I initially resisted the idea of blockchain. From the 1990's onwards I had worked with companies like Cisco, eBay, Google, Microsoft, PayPal and others driving the Internet forward and I was reticent to climb on a bandwagon with people who were saying that blockchain would be bigger than the Internet. In time I came to appreciate that as we move the world forwards towards a fully digital future, we will need enabling technologies like blockchain to complete the journey. We have to solve the issues that the Internet currently has including security, identity, concentration, and the lack of native digital monies and assets.

By 2016 I was fully onboard. Better late than never as they say.

Today in addition to being an active investor in the space, I am Chairman of Securitize in Europe and Vice Chairman of SFOX. I would say that being close to the leading global solution for digital securities and the leading crypto prime dealer has given me insights that are greatly informing our Blockchain Coinvestors investment thesis.

In your book you mention that investors often “miss the forest for the trees”, could you share what you mean by this?

I don’t remember exactly where in ‘Blockchain Competitive Advantage’ we say that. However, investors tend to get very focused on the investments that they have and the ones that fill their mindspace. For most investors that means fixed income, public investments and some large cap real estate. But without exception those are relatively low returning asset classes. Over the last 25 years their annual net IRR has been around 3%, 9 to 10% and 8% respectively. Meanwhile, the driving forces of our time are the digitalization of our world and everything within it, as well as the life sciences revolution that is changing the very essence of life (for better or worse). This is why over the same 25 years the annual net IRR for venture capital has been 24% rising to an impressive 32% in the early stage of venture capital in the US.

We see most investors around the world putting most of their money in easily available, low returning, and relatively efficient asset classes. That is ironic, since we were all taught that only in inefficient markets can we hope for superior returns.

The superior returns of the last twenty years, and we believe of the next, will be derived from technology enabled companies that are driving the digital future and are capitalizing on new disruptive technologies such as AI, big data, the Internet of things, blockchain and so on.

We can't understand why so many professional investors put most of their capital into low returning asset classes when they all intuitively know that the future will not be the same as the past.

You call this period of unprecedented innovation and disruption the Fifth Era. Could you elaborate on this?

Alison and I were very worried when we first heard the term the “Fourth Industrial Revolution” being used by many of the board directors and senior executives with whom we work and spend time. They seemed to think that the world's innovators and most innovative companies were merely evolving the Industrial world forwards. Moving incrementally forward along the path that the world began some two hundred years ago when it discovered mass production, new energy sources, and the corporate model of organization with its focus on economies of scale and scope. As we talked with these friends we realized that this mindset was leading them down mental paths that were not helpful.

This is not an evolution of the past, or a new phase of the industrial revolution. Rather we are moving into an entirely new era of human existence in which the very conceptual underpinnings of the Industrial Era are being challenged and, in many cases, undermined.

We believe that if you accept this notion that the future is going to be fundamentally different from the Industrial era that we are passing out of, then you naturally take on a mindset that allows you to better see the shape of what is coming – the ‘wood for the trees' if you will.

So, we named this new future the ‘Fifth Era' in our book “Corporate Innovation in the Fifth Era“.

How can investors best capitalize on this Fifth Era that we are entering?

That is at one and the same time both very easy and very hard.

It is easy because all you have to do is change your allocations from a dominance of fixed income, public equities and large cap real estate towards a great allocation to private investments and especially early stage technology company investments. Just like the best investors have done years ago. For example, among endowments, everyone has heard of how Harvard, Stanford and Yale allocated more to early stage private investments twenty years or so ago, and have become the highest performing university investors of our time.

But most endowments globally do little of this investing even though they have heard the story for years. Why?

Because it is also hard. Much harder than creating combinations and permutations of publicly traded stocks and ETF's. And much harder to access given that the big advisors, wealth managers, banks and so on only really have access to fixed income, public equities and large cap real estate. They make it easy to keep your capital in those asset classes. They tell a story that it is very hard to access the highest performing asset classes and that their performance is ‘fake' or ‘illusory'. So, it in practice does become hard to step out and become a different type of investor. But primarily because you believe it is going to be hard and so in many cases don't really try very hard to change how you invest – it is a mindset issue.

For those of us that have focused on creating the access for ourselves, we have done so. Whether angels, venture capitalists or investors in early stage venture funds, we have found a way to get capital into the hands of the most capable innovators and their companies.

But the easy path in investing is to focus on the access others will give to you, and that is always to the large, efficient asset classes which represent the past rather than the future.

In your book you detail current “barriers of adoption” for both DAPPs and blockchain projects. What do you feel are the current “barriers of adoption” for digital securities?

For the most part we believe that the world's capital will continue to flow through the hands of the largest institutions who manage the capital on behalf of others (pension funds, endowments, insurers etc) and will be invested into products created by the world's leading asset managers. And that these flows will continue to be highly regulated and will include traditional intermediaries, exchanges and so on.

While that may not be a popular view within the blockchain community, and we do agree that peer to peer, and direct access will become much more important in the future as well, we hold to the view that the bulk of the world's assets will pass through traditional players.

So, the mass of digital security solutions have to be delivered in the context of the transformation of existing investment ecosystems. That is a significant challenge, not only because we have to deploy new technology solutions in order to create digital securities, but we also have to solve the issues of security, identity and trust and so on. Furthermore, we need to do this with existing players and within the context of existing regulatory structures. This is a very complex task of education, development and harmonization on a global scale. It is this task that the team at Securitize has taken on and we are very excited to be helping them in this regard.

While in the long tail it may be easier to bring point solutions of digital securities to specific groups of investors through new digital channels, we don't think those represent the mass of adoption that will eventually come to the space. They are very important trailblazing evidence of what is possible, and we like to invest in those players too. At SFOX we are lucky to be working with the team that built the leading crypto prime dealer and it is amazing to see how they have not only combined the world's exchanges and OTC brokers to create unprecedented liquidity in Bitcoin and other traded cryptomonies, but to also deliver the lowest prices and best trading edge to their clients. Once again, we can't understand the inertia that leads to investors using solutions that are higher priced and less capable.

But the dog is the transformation of today's investment marketplaces, while the tail is the creation of new disruptive investment marketplaces.

You and Alison are the Managing Partners of Blockchain Coinvestors which invests through investment vehicles into well-known blockchain companies, with an emphasis on early stage equity investing. Could you tell us a bit more about the size of this fund and the companies that it will invest in?

By law I can't talk about the fund itself to an audience I don't know, but I can share our investment strategies.

Simply put, we believe that the best practices of early stage investing continue to be true and will be the drivers of value creation in blockchain investing too. These are simple to say, but hard to execute. Invest early in the best teams alongside the best investors focused on the space. Get the broadest and most diversified coverage you can without diverging from this core strategy. Do it on a global scale. Make sure that the combined portfolio of companies that you are invested in has access to the capabilities, relationships, and other advantages that mark out the winners from the also ran. Then look for follow on investing opportunities as the emerging unicorns begin to surface.

For Blockchain Coinvestors this means that we are investors in the top 10 to 15 blockchain venture investors around the world including 1confirmation, 1kx, Blockchain Capital, Blockchain Ventures, BluFolio, Castle Island, DCG, Fabric, Future/Perfect, Ideo, Pantera and others. We have a combined portfolio now approaching 100 blockchain companies and are investors through this strategy in 9 of the 15 blockchain unicorns.

The access has taken us six years to build and we are very excited to be able to deploy capital in this way. We are always interested in talking to investors who want to learn more.

When looking at investment opportunities you like to forecast the state of the industry in ten years. Could you describe the future that you envision for digital securities ten years from now?

It is inconceivable to us that in the future there will be ANY paper based securities. Despite the fact that today more than half of the world's assets are held on paper – most real estate, most funds, most private corporate investments, many fixed income investments and so on – that can't be the future.

So, we are absolutely confident in asserting that in the future ALL securities will be digital.

Of course, the question is what is the path to that digital future and what will be the timing by asset class and by geography.

In the next ten years we believe that the world's major financial centers will all have embraced digitalization across all asset classes and that the best issuers, investors, intermediaries and exchanges in those global financial centers will have made it a long way towards that future. The leading global financial centers have to be innovation leaders to remain in the lead and as we speak to the leadership in New York, London, Zurich, Tokyo, San Francisco, Chicago, Hong Kong and so on, we hear them saying exactly this back to us.

However, that does not mean that in ten years ALL securities will be digital. Just like you can still buy vinyl records, or classic cars, we are sure you will still be able to buy some paper from someone if you want to hold your capital in that format.

Though we are not sure why you would want to.

At Securities.io we often come across projects promising to tokenize everything from VC funds, to art and real estate. Which type of tokenization projects make the most sense to you, and have the most potential for real-world mass market adoption?

We think investors want quality assets that they know represent good investments from blue chip names that vouch for them, are prepared to ensure quality issuance, custody, trading and settlement etc. So, for us, quality matters in investments. So, it is less an issue of which asset class, and more an issue of whether the specific investment is a quality one.

The good news is that at Securitize and SFOX we are working with players that are keen to bring some of the world's most attractive asset classes to a native digital format, and you should expect to see these types of offering later this year and in 2021.

Do you have any final words for investors in the space?

The main thoughts we would like to leave your readers with are:

– Investing in the future has got to be better than investing in the past

– The highest returns come from early stage technology investing. This is a fact, not simply an assertion

– You can have access if you want it. But it won't come from traditional players who wish to keep your capital in easily accessible, efficient and low returning asset classes

– Finally, all the world's asset will be digital in a digital world, and blockchain will be an important part of making that happen

To learn more about how Matthew views investing opportunities in the blockchain space we recommend reading Blockchain Competitive Advantage.