I really like Bloomberg’s "Odd Lots” podcast. The hosts are quite good (Tracy and Joe) and they consistently bring on impressive guests (readers might remember the Reserve Asset 3.0 piece inspired by Zoltan Pozsar on an “Odd Lots” podcast).

Well, on this Monday's episode, “Odd Lots” had Sam Bankman-Fried (SBF). He is probably best known for his exceptional hair, but he also founded crypto exchange FTX. He ranks among crypto’s richest and, given he studied physics at MIT, probably one of its classically brightest (whatever that means). On the podcast, he compared crypto “yield farming” to a “box” that lets you take out more money than you put into it.

Magically.

That quote hit me like a ton of bricks, but then he tacked on a swipe at venture capital’s investment approach that irked me. His view on venture capital is shared by many, but that view has been muddied by the introduction of crypto. I’m not suggesting SBF is wrong necessarily. What I am suggesting is that crypto venture capital … is … just … not really … venture capital.

That (and maybe more …) below.

– George Kaloudis

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I’m a bitcoiner. According to the internet purist’s set of rules, that means that I need to shun altcoins and “crypto” altogether. But honestly, that’s boring.

I’m not boring, so I pay attention to the hellspawn landscape of “crypto this, NFT that and blockchain everything” that Bitcoin inspired. Part of that means that I listen whenever SBF speaks. I want to zoom in on two specific things he talked about in the podcast mentioned in the introduction: 1) The Box and 2) venture capital.

On the podcast, Matt Levine (every newsletter writer’s hero) asked SBF to give “an intuitive understanding of yield farming.”

Sam responded with:

Ok … a weirdly simple example using a somewhat cynical tone: The Box seems kind of meaningless, a technologically enabled piggy bank.

He went on:

Then the yield farming kicks in, and The Box starts giving out tokens as interest payments to people who have put tokens in The Box.

Uh … who turned the heat up in here? This is a scathing take on yield farming that you’d only expect from its harshest critics. That it came out of the mouth of one of crypto’s richest was surprising. SBF basically said that yield farming consisted of:

Step 1: Put money in The Box.

Step 2: Wait.

Step 3: ???

Step 4: Profit.

I have nothing more to add, because I think these quotes largely stand on their own. I wanted to write about these quotes to highlight that individuals should exercise caution when it comes to deciding on partaking in yield farming or not. Your yield might just be grounded in nothing except The Box. Which can be fine, as long as you understand that and are OK with it.

Read more: What Is Yield Farming? The Rocket Fuel of DeFi, Explained

After talking about yield farming on the episode, SBF answered a question about how he thought the “institutional or quasi-sort of venture capital money” found the next big thing in crypto. SBF offered to pull it back further and answer how he thought venture capitalists found the next “anything they’re going to invest in.”

He said:

Again. Cynical. But for all my personal cynicism, I don’t completely agree with SBF here. I think that even though he tried to opine on venture capital in general, he still offered up his crypto venture capital take. Because crypto venture capital and traditional venture capital are different.

Venture capital is a form of equity investing that targets startups and early-stage companies in emerging industries. Once a venture capital equity investment is made, so begins the five to 10 year process of business growth, development and execution. Only then do venture capitalists and their LPs make a return. Rinse and repeat. Venture capital funds have a long-term time horizon just as the private equity and private credit funds do.

Crypto venture capitalists, when they’re not investing in the equity of companies operating in the space (companies like Coinbase), are investing in tokens. And when they’re not getting in early on presales, they’re getting in later when their LPs ask if they’ve invested in certain projects (as SBF suggested).

This model is not really venture capital at all. If a token a venture capitalist buys after an LP asks then spikes in price, the venture capitalist can harvest returns by selling on the open market, maybe after years but sometimes after months.

This is one of the places where crypto token venture capital deviates from traditional venture capital. The lack of liquidity of traditional venture capital investment commitments is part of the reason investors expect “good” returns; they are taking a risk by tying their money up for at least five years, and investors feel they should be paid for that risk.

With token investments, crypto venture capitalists can get in and out of trades as easily as hedge funds do. That’s what I think SBF was describing, but that’s not venture capital.

And that’s just one of the differences. There is much more that can be written that deserves attention. For example, there probably is a level of FOMO' in traditional venture capital that is spurred on by the immense amount of capital that has been raised in recent years looking for investments. There’s also something to be said about the headline fundraising numbers advertised by token investing venture capitalists, but that’s for another time (and perhaps another author).