Transcript - Rennick Palley: Founder of Stratos Technologies on SPACs, DeFi Protocols, and More (from Outliers with Daniel Scrivner Ep. #20)

Please enjoy this transcript of part two of my conversation with Rennick Palley, Founder and Chief Investment Officer of Stratos Technologies. In this second-half of our interview, we zoom way out to discuss everything from the recent boom in SPACs, to the world of DeFi protocols, and how crypto gets incentive structures right. From Episode #20 of Outliers with Daniel Scrivner.
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February 23, 2021
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Rennick was previously Research Associate at Sanders Capital, a $40 billion global equity manager.
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Please enjoy this transcript of part two of my conversation with Rennick Palley, Founder and Chief Investment Officer of Stratos Technologies. In this second-half of our interview, we zoom way out to discuss everything from the recent boom in SPACs, to the world of DeFi protocols, and how crypto gets incentive structures right. From Episode #20 of Outliers with Daniel Scrivner. Transcripts for other episodes can be found here.

“If there's one innovation in crypto, it's incentive structures that actually drive people to do things that benefit the whole. That is so huge. But these automated market makers create liquidity for the long tail. And so if everything is suddenly liquid, what happens there? What are the emergent results?” – Rennick Palley 

Rennick Palley is the Founder and Chief Investment Officer of Stratos Technologies. Prior to founding Stratos, Rennick worked as a Research Associate at Sanders Capital, which manages over $40 billion in global equities. To date, Stratos Technologies has made 16 investments with an aggregate transaction value of over $250 million into companies like Rezi, Tala, Dave, Compound Finance, and Clearbanc.

In this second interview, Rennick and I zoom way out to discuss everything from the recent boom in SPACs to the world of DeFi protocols, and how crypto gets incentive structures right. For more, listen to the first part of this interview in Episode 19 of Outliers with Daniel Scrivner. In that episode we discuss the war of growth vs. value investing, the concept of reflexivity, and Stratos' approach to investing across the capital structure in early-stage technology companies.


EPISODE 20

Daniel Scrivner (00:01:35):

So we've talked about obviously the kind of arc of Stratos. We've talked about starting on the venture debt side, doing then venture debt and venture capital investing in companies, largely in the same portfolio of companies. I'm super curious to know, clearly things are evolving, where are you guys headed? And what are some of the things you're thinking about now?


Rennick Palley (00:01:54):

Very excited for what we're working on right now. There are a lot of exciting things happening. We are first and foremost, in the process of building the team. We have a lot of conversations ongoing with some really amazing people that we're very excited to bring on. That's the first thing that we're doing because a lot of what we do is fairly labor intensive and so having enough bandwidth to do everything right, is obviously critical. Team is everything.


Rennick Palley (00:2:24):

So the two areas that are somewhat new to us in that they're only a couple years old, one is later stage investing and the other is crypto. And so when I think about later stage investing, one of the tools that I think is very interesting about that are SPACs. I think SPACs represent a lot of opportunity for companies, but also investors. And I think that there's a lot of hype around that right now. In some ways I think that SPACs are the activist investing of the future. That will be the preferred vehicle because it gives you... At least the preferred vehicle for activist investing in tech.


Rennick Palley (00:3:06):

I think about it in the way of, how do you actually bring some capability to the business that they don't already have? And that's what every good venture investor does anyway. So there's nothing really new about that. It's just interesting to have the public platform to do that with.


Rennick Palley (00:03:22):
And I don't anticipate that being the core element of our strategy, but that's why I say that that's an interesting mechanism for value added investing as opposed to activist investing in the tech world. Because otherwise, if a company is big and successful enough, it just goes regular way IPO and the board never changes. And then you have these weird governance issues between the management and the shareholders, especially if the management is the controlling shareholder. And I guess so far that's worked. Now, I think that's probably less of a feature than some people might argue that it is.


Rennick Palley (00:03:58):

The way that we anticipate adding value through a SPAC is saying, "Well, we see an opportunity to reconstitute the balance sheet here and let's use the skills that we have, having done this for multiple private companies over our life, to help prepare the business to do that once they become public, but also drive down the cost of capital by being a public business." And so there's also a lot of FinTech businesses in particular that have a very high cost of capital because they're private. But if they went public, it would change that completely. And it would be a lot of value creation in and of itself. And so I think there's going to be a lot of that. It's already starting to happen. Now, will it stay as frothy as it is? I don't know.


Rennick Palley (00:04:45):

But one interesting point I think to make about the frothiness of that market is as an investor, if you study what it means to be an investor in a SPAC early on, you have a ton of optionality. That optionality enables people to get comfortable making a commitment to that SPAC with a much lower threshold of trust than would otherwise be required to commit, let's say to a closed down ten-year venture fund. Because if you're a SPAC investor and you don't approve the transaction, the De-SPACing, you can block it. But what's happening more commonly is people will approve the transaction, but ask for their money back.


Rennick Palley (00:05:23):

It's a really interesting thing. Now, that's kind of a hedge fundy strategy. "Why would you ask for your money back if you don't actually approve the transaction?" But it reduces the barrier to actually raising capital to do what end up being very value, creative deals. But then also it's something that the market clearly wants. The market wants access to a lot of these high growth tech companies. And it's been so long, they've been so starved from investing in these types of businesses. Especially the retail investor, who is the guy who we've seen with the whole Robinhood fiasco. It's the guy who gets left out. And so I think that's going to be a trend that continues. And from a GPs perspective, it's more interesting than a fund because you get to be more involved.


Daniel Scrivner (00:06:11):

Well, at the moment, if you look at my public equity portfolio, I have a lot of SPACs in that portfolio. And in my mind, I think one thing that hasn't been talked about that is pretty clear to me is for my retail investor, institutional investor... If you're basically a public market investor looking at SPACs, it's a really rare chance for you to almost make a LP fund commitment style investment, where you're saying, "Who is the manager? What is their track record? Do I have belief that they'll be able to go and find a really interesting company and be able to bring them to market?" There are, I think just really amazing opportunities. A good example that recently is the Oakmark SPAC that ended up being Hims and Hers, which has taken off. So I think that's interesting is it's the opportunity as a public market investor to make a manager bet as opposed to just a security bet.


Daniel Scrivner (00:06:56):

And then the other thing I would say just structurally is, I think why we're seeing frothy valuations, my belief is that it's because we're seeing a lot of companies come to market that the latest generation of investors want to own. And they're comfortable owning it high market caps because they've been private for so long. I think Airbnb is a great example of that. I think DoorDash is a pretty great example of that. Hims and Hers is a good example of that.


Daniel Scrivner (00:07:18):

And then just the last piece that I think is really interesting is just from a trend perspective, historically it's been true that most companies have gone public via an IPO. And you can almost think of that as one launch pad that a company can use to go from private to public. And what we've effectively done over the last I think, 12, 18 months is added to launch pads right alongside that. And that's doing a direct listing and that's going public via a SPAC. And I think directionally, I hope that those things don't go away. It doesn't seem like they will. I think it's just, it's a really interesting, really exciting time to be a public market investor because there's a lot of fascinating opportunities. And some of those may be overvalued or undervalued and everyone has a different point of view there, but it's a fascinating time. I guess, any thoughts on any of that?


Rennick Palley (00:07:58):

I completely agree. I think what you just said is true and that there's a whole generation of investors who want to able to participate in businesses that have the growth profile that we're used to seeing in the private markets. And the reason why they want that is because they have seen enough examples of businesses that have scaled continuously year after year in a way that defies that base rate transition matrix that has existed for every other business in the world until the last 15 or 20 years. In a way, they know what I'm saying. I'm just articulating it in a different way. They just know it intuitively that, "Hey, you can invest in some great businesses that are going to compound for a decade. And now is your opportunity to do it two, three, five years early." And how much is that worth? Well, if you look at some of the other businesses that are worth $10 billion or more by the time they go public, and you missed out on a two X or a three X by just having to wait for it to go public, then the SPAC in comparison to that is not so frothy at all.


Daniel Scrivner (00:09:11):

The kind of idea there I think is very true for sophisticated investors, meaning that sophisticated investors are looking... And I don't mean this in a negative way, but investors that have LPs or kind of shareholders to report back to, they need to be able to look at these and do that kind of bottoms up analysis on it.


Daniel Scrivner (00:09:26):

But I think the other thing we're seeing, which I'd love for you to maybe touch on... Any thoughts on the kind of retail investor side, because I think that's certainly adding to a lot of the frothiness. But my point of view is, yes, there's some really exciting businesses that are coming to market, but I think what's also happening is just a generational transition where when I talk to my brother, when I talk to people our age, especially people in their twenties that now have the ability to invest via something like Robinhood, they don't want to invest in Starbucks or Chevron or Microsoft or any of those. I think their point of view is, "Where are my companies? Where are the companies that I admire, that I want to use?" And I think that we're seeing a lot of those people vote almost from a heart, values perspective. Any thoughts on that? Do you see that? Do you agree, disagree?


Rennick Palley (00:10:09):

I certainly see the trend for people wanting to invest in companies that they know. And it's kind of like the Peter Lynch thing, "Invest in what you know." I think it's a little early to see how this all plays out in terms of whether that's actually a good investment decision or not for a lot of retail investment. But I certainly see that trend. And I think a lot of it has to do with there being zero fees and a huge amount of accessibility to public markets via Robinhood and other stock trading apps. And that didn't exist five years ago and there was a huge barrier to entry. And then the trading fees is just a terrible psychological barrier to wanting to do anything.


Rennick Palley (00:10:50):

And so when you can put a thousand dollars or $10,000 in your Robinhood app and trade, it becomes kind of like a hobby. And I think people also think about it as investing, but I think there's just as many people who think of it as a pastime. It's a great place to put your stimulus checks. I think it's encouraging to see people getting involved. It seems like for a while that public markets were really dying. There was not a lot of interesting stuff happening there and then in the last 18 months, things have totally turned around. Public markets seemed like basically just a liquidity pool for founders and early employees and venture investors, at least coming from the tech world perspective.


Daniel Scrivner (00:11:28):

I think that's a fascinating point of view. One of the things I wanted to touch on, we talked about it a little bit before this and I love... because it's something I don't hear people talk about enough and yet everyone that's an investor has to constantly grapple with themselves. And it's just this notion of, there's a lot of ways you can get into an investment, but every investment, the only way you end up making money is by selling it at some point in time. And just the kind of thought process around when to sell and how to think about selling. I'd love to get your take there. And I know it's obviously different on the private side versus public side, but I'd love to explore that with you.


Rennick Palley (00:11:59):

Let me say something else about SPACs really quickly because I think it's important. So there's another thing about SPACs that make them interesting, which is the story that you can tell about the business. And this is something that Tim Auth has been pounding the table on for a while, which is you can talk about future forecasts in a SPAC issuing document and you can't in a traditional IPO. And so for a company where all of their value is in the future, especially all their cashflow, that's super important. That's a huge difference. But I think that also leads to the point that the type of story that you can tell for a public company that's transitioned from private to public, that's one of the things that makes me most excited about SPACs. Because I see companies that are portfolio companies of ours or businesses that I know, or just interesting analogs where you think, "Okay, this is one story in the private market, but the same business, when it goes public, you can tell a really different story." It eliminates a barrier to that company succeeding on some of the execution items that it needs to get to where it ultimately wants to go, that just by removing that barrier helps get it there.

Rennick Palley (00:13:11):

And then the way that that story can be told and the way that an investor like myself, who's been on the public side and on the private side and knows, those two investors sets resonate with very different stories. And there are some stories that work really well in the private markets and not so much in the public and vice versa. And so finding businesses that have that, let's call it narrative arbitrage, between private and public is also interesting.


Rennick Palley (00:13:37):

But then there's also one other thing which is investors in the public markets having potentially infinite duration, which is as long duration as venture is it is not infinite. LPs want their money back. And so there becomes this thing where there are people who are willing to hold these things for a long time period and support the business and almost... I don't want to say forget about it, but say, "This is a holding. I believe in this company. I'm just going to let them do what they do." And oftentimes those end up being the best investments. That's very Charlie Munger-esque. I don't think he's ever put it in those words exactly, but I think that's one thing that is another advantage to the SPAC model.


Daniel Scrivner (00:14:18):

I was just going to say too, for one, a real life example of what you were just talking about, someone who I follow on Twitter and I'm totally blanking on his name, but he's the CEO of Okta, which is a security company. And he had a series of Tweets, this was a couple of months back, where he was watching... I think it might've actually been Tim Auth, on a show talking about this company they were about to bring public via SPAC and talking about all these future projections and what excites them about the business in the future. And his question, which I'd never really thought about it, was if I were to go on TV and talk this way about Okta, it would be illegal. What makes it so that someone who's launching a SPAC or taking a company public via a SPAC can do this? And I had not really understood what was informing that. So I think it's just really interesting to think about that example. And for anyone who's interested, you can go to that Okta CEO Twitter profile and see some of those Tweets, but to see that actually play out in the real world is really fascinating. It's a very different game. It's almost like different rules.


Rennick Palley (00:15:09):

Okta is an incredible business. The moat that they have is just wonderful. I really like that company. But I agree with that. The other thing is, from a regulatory perspective, why can't people speak about traditional IPOs in the same way that they can speak about SPACs? Well, I guess it's because the SEC assumes that the retail investor is not capable of making an intelligent investment decision based on future prospects. I suppose. And maybe that's based on data, I'm not really sure. But it's really interesting to think about what kind of hurdles and what regulation really does to markets and how much of it is good and how much of it is not good.


Rennick Palley (00:15:50):
It leads me to think, okay, well, let's look at the crypto markets as an alternative and say, well, what's happening there? Because one of the big things is regulatory arbitrage. And regulatory arbitrage is not a new thing, it exists in the fiat world. That's what banks do all day long, that's how they make all their money is regulatory arbitrage, for the most part.


Daniel Scrivner (00:16:11):

I think it would actually be really interesting to see that regulation rolled back on the IPO and public company side. And I think the reason there is, I don't know any investor period, whether public or private, that doesn't want to hear the management's views on the future and how they think this will play out. And yes, there certainly needs to be some sort of rules around how you can talk about that and the sorts of things you can say, or at the very least there needs to be some sort of disclosures that happen before or after you say that. But just knowing that it's not on equal footing, if you were to be someone who's running a SPAC and taking your company that way or someone who's going via IPO, it doesn't make a ton of sense to me, it seems very antiquated.


Rennick Palley (00:16:50):

It is. It requires considering the timeframe that that rule is made and the technology that existed at the time. Which was, "Okay, how did I go out and find out about a public company? I had to go to the library and find it or I had to send for it. I had to call the company secretary and ask them to send me their 10K in the mail."


Daniel Scrivner (00:17:10):

So the Warren Buffett, Charlie Munger, the initial process.


Rennick Palley (00:17:14):

I can't even imagine that. And pretty much there are very few people who still are active investors today, who can even remember that. In that time period. I completely understand why that rule would make sense. It's an opportunity for fraud, as Charlie would say, "It's a thieves' paradise." But it's different today. People have the ability to get the same information as every institutional investor say from some alternative data, like the stuff that Robinhood sells. But the same company produced information and people know how to use Google, they use it for everything. I mean, why can't they go and see what the company is saying


Rennick Palley (00:17:50):

And by the way, to write it in the 10K or S1, S4 MDMA is not nearly as accessible as a CEO just going on YouTube or something, or even TikTok, and I think that would probably benefit a lot of people, and let the people decide what they want to invest in. But unfortunately, regulation is the slowest moving of all the things. And you've got on the other hand technology, which is like this recursive thing where tech gets built on top of tech. And so it has an exponential function that doesn't really exist in regulation at all. So it's impossible for it to ever keep up. It's doomed for failure.


Daniel Scrivner (00:18:28):

Yeah, and just one other thing that's interesting is you take some of the recent examples where you're seeing large groups of investors that are all sharing their ideas, their philosophies on investing on Reddit or other platforms. And this happens every day, all across the internet on all sorts of websites where investors are sharing their beliefs, their ideas about how these investments will play out. It just seems a little silly that that's totally fine, we can have that ad infinitum, but we can't have the CEO of the company be able to share their somewhat more informed or grounded view on where things are going.


Rennick Palley (00:18:58):

It's a very well-put dichotomy for sure.


Daniel Scrivner (00:19:03):

So let's talk about some of the stuff that you're interested in looking at in the crypto space.


Rennick Palley (00:19:07):

I've been involved in the crypto space for four years now. Started out by the basics and trying to understand what Bitcoin is and why is it interesting. And then what is the theory, and then what are some of these other challenger blockchains, and then starting to see the protocols built on top of Ethereum. And that is where things start to get really interesting in my opinion, because I had this thesis in like 2017 when I started investing in the space and that's not early by any means, I'm not one of those guys saying I was buying Bitcoin at $2 in 2011 or whatever. I'm not trying to say I was early. I'm just saying, this is when I was thinking about this thing and had the view that, partially because of what I was doing in structured credit at the time that, "Hey, there are a lot of really interesting capabilities that Ethereum has that will make it better than the existing fiat financial infrastructure."


Rennick Palley (00:20:06):

And in order for that to become true, there are going to need to be some very foundational Lego building blocks, so to speak, that have to be created. And so the first protocol I invested in is a company called Compound Finance, which is a money market protocol. It has been a great investment, speaking of selling, unfortunately, because of the way that I invested in it, a lot of my tokens got sold when it listed. And so that was unfortunate, but a protocol just sits on top of Ethereum. It's like the application layer. So theory on this is kind of the infrastructure, it's the way that everything interacts together, the way that you actually get these applications to work. It's sort of, if you want to think about it like an operating system, but obviously it's a lot more complex than that, but it's a good analogy.


Rennick Palley (00:20:55):

And so the protocols are what enable you to do stuff. And so the compound finance protocols allows you to either lend or borrow a cryptocurrency or generally a ERC 20 token, and it creates a market there. So there's a lending interest rate that you can earn and there's a borrowing interest rate that you can pay to borrow and you have to collateralize yourself so there's a very limited risk of loss. And so that's why these rates start to converge on something that represents what the short end of the yield curve or like a money market fund in the fiat world would be. And so if you start to have this vision about what is going to be built there, that's one of the first things that has to happen. If you think about finance, basically all of finance is built on top of the yield curve, this idea that there's some term structure, and then there's some risks on top of that and so everything sort of gets built on the edifice of risk-free interest rate borrowing.


Rennick Palley (00:21:57):
And so that was the first thing, and it's just super interesting to see everything getting built on top of that. One of the things that I'm most excited about, and now it's being called decentralized finance. I think I invested in Compound before they called it decentralized finance, but it's the subsection of crypto. It's this thing called unit swap or an automated market maker, which if you had invested in that you would have done extraordinarily well in a short time period. What it does is something that's sounds so simple, but it's so profound, which is every asset can be liquid. Every asset can be tradable. It doesn't necessarily mean that it's tradable at a price you're going to like, but you can get liquidity for cost. And that does not exist really in the private markets.


Rennick Palley (00:22:46):

And when I say, could I go and I could sell my house today for a price? I probably couldn't trade it today, but I could probably get it done this week and I would hate the price. But that's not what I mean about automated market-makers in crypto, I mean, everything is liquid, you can sell it right now for a price that you may not like, which creates things, and you may actually like it and that's a function of how much liquidity there is in that particular thing and how many other people are holding it. And there's this whole other structure that exists to incentivize people to provide liquidity in these exotic left tail assets so that there is liquidity, which is whole other incredible step change in incentives. Incentive design is everything. Charlie Munger is one of my heroes in life and he says, "Show me the incentive and it'll show you the outcome."


Rennick Palley (00:23:34):

If there's one innovation in crypto, it's incentive structures that actually drive people to do things that benefit the whole. That is so huge. But these automated market makers create liquidity for the long tail. And so if everything is suddenly liquid, what happens there? What are the emergent results? And it's really interesting to me to start thinking about what all of those are. There is a protocol that I actually have helped create. I'm an investor and an advisor to them, they're called Goldfinch. And they are creating an emerging markets credit pool in the crypto world. And what's so interesting about that is it sits on top of these other building blocks that I'm just talking about. So what are they doing? They're essentially using liquidity that exists in the crypto markets of which there is a lot, especially there's a lot looking for yield. People who want to earn current "cashflow" but it's really crypto returns by staking their liquidity and going out and lending it to emerging markets borrowers.


Rennick Palley (00:24:41):

I have experienced lending to emerging markets borrowers out of our fund, and we don't do that anymore for the most part and the reason is it is so hard. Just the mechanics of getting money off shore and getting it back and paying taxes and doing all this stuff, it's not worth it. Not unless you're doing huge deals, and even then, it's just not worth it. What they're able to do in this protocol in Goldfinch is just... It's a literal 10X improvement of what exists in the fiat world. And I think there's some VC who says, "If you're really going to create something great, it has to be 10X better than the alternative." I think it's really hard to find things that are actually 10X better, but this is actually 10X better.


Rennick Palley (00:25:20):

You can send money across the world to a borrower in minutes. They have the money, they can use it they can send it back to you with really no headache. And then also the potential scale that is going to be created by that, by Goldfinch, and so I'm really interested in that and there's a whole other component to it about how people underwrite loans and bring loans.


Rennick Palley (00:25:41):

And the short answer is there's a brilliant incentive structure that's been created to incentivize people to perform these various tasks with the protocol so that it can operate in a decentralized way. So there's not going to be 10 credit analysts there sitting there doing deals, there's going to be people that are crowdsourced from the crypto community doing this. And with the right incentives, you're going to get people who are really good at it. That's hard for people to accept, I think, that like, "Wow, there's someone that I don't know that I don't trust that is going to go out and do this and they're going to do a good job."


Rennick Palley (00:26:14):

But if the incentive structure is right for that, it will happen. The last piece is okay, well, let's say I wanted to invest my Ether, that I have sitting around doing nothing and I want to start earning yield, how can I do that? Well, one way I can do that as I can trade that for the token that Goldfinch is going to launch and I could buy the token and then I'll start earning yield. I will essentially lock my value into their pool and they will use that as liquidity to go and make real world loans and I'll earn that. Now let's say I want my money back, let's say I want to go and start trading again or something. I can take that and I can go and trade it with someone else who wants it and I can do that via the automated market-maker protocols. I don't actually have to go and ask for my liquidity back from the Goldfinch pool itself.


Rennick Palley (00:27:03):

And that's created by the AMM, which means if now I know that I can go and lend money, but I have instantaneous liquidity. So what does that do for the cost of capital? It's significantly lower than it would be if I am raising money in the fiat world, and I'm saying, "Okay, you're going to have to lock your money up with me for five years. People want a much higher return for that." And so there's this arbitrage that the protocol is creating. And then just to go down that rabbit hole one step further, there's an alternative, which is I can take my Ether, I can go and I can borrow against it in this compound finance money market protocol, and I can use what I borrowed against it to go put that into the Goldfinch protocol and earn yield on that.


Rennick Palley (00:27:50):

So I actually can continue to get my exposure to Ether if I have the long-term view that it's going to continue to go up in value, and then I can borrow against it, pay two or 3% and then landed at 12. So I've got this crypto carry trade going on and all of this by the way has been created in a year. When I think about what's going to happen in the world and where one of the most interesting spaces is, it's crypto. Because this is an unstoppable force. Even if Bitcoin got hacked and it went to zero, it wouldn't matter anymore. What you're able to create, it has so much value, so early on in the life cycle of the project, I've never seen that happen before in the traditional venture world. And you need a lot less engineering resources. I'm shocked to see what the Goldfinch guys are able to do so quickly because of the infrastructure building off because they don't need to bother with a lot of other things, it's just all code. And obviously the Goldfinch guys are really, really good at what they do, I don't mean to underplay that.


Daniel Scrivner (00:28:50):

I love your take and it's so refreshing because there's just so many spaces today I think if you're a pretty broad investor or if you're just broadly curious, you certainly think about crypto. You're trying to form your own points of view about how you think that'll play out. If you think it's interesting for you, you're potentially doing the same thing for SPACs, you're potentially doing the same thing for new IPO's. And what I love about your perspective is I feel like in, I don't even know what the last 10 minutes you've made a super compelling bottoms up sell for why the crypto space is so interesting and why it's fundamentally different and why it's different from a liquidity standpoint, from an incentive standpoint, from a scale standpoint. And I feel like most of the arguments you hear today, or most of the kind of sales pitches you hear for crypto are, I just don't find them particularly compelling. I don't find them very bottoms up focused. I just love your perspective, it's so unique.


Rennick Palley (00:29:40):

Well, I appreciate that. I guess it's working out so far.


Daniel Scrivner (00:29:43):

Yeah, so far so good, those were great investments.


Rennick Palley (00:29:47):

What we're doing now in the crypto space is, first and foremost, we are going to do what we need to do to try and ensure that the Goldfinch protocol is a success, which I feel very confident it will be, it already is. But then also using that as our prototype for how we execute the same cross capital structure Stratos strategy in crypto. And interestingly, it translates perfectly in that there are a lot of projects that raise venture capital to get started, right? The engineers need to get paid, they need to be able to pay their cost of living and put the company together and start writing code so that they can go and launch a token. That early stage of the business of crypto and creating these application layer protocols is very similar to traditional seed stage Series A venture.


Rennick Palley (00:30:40):

And some of the big names are involved, there are some well-known funds that are involved. But what all the protocols need and Goldfinch guys helped me recognize this firsthand, is also liquidity. If they're going to go out and they're going to try and become liquid early on, or they are going to have some insurance contracts or they're going to go lending, or they're going to be market-making or whatever, they require some liquidity. And typically these protocols don't use equity for that. They sometimes use some equity but oftentimes, they need a lot more capital than what their equity would enable them to get. And so there's an opportunity to come in and be the liquidity provider, as well as the equity investor and say, "I'm going to help create this outcome for you, but also for myself as an owner of the protocol"


Daniel Scrivner (00:31:29):

You're going to help prop up a functional market. I think to draw a little bit of a parallel, I would imagine working with someone like you to get that liquidity spun out is much, much, much better than how I've seen it happen otherwise is a protocol literally just launches and it becomes the forces of the market that try to put together that liquidity and it's typically a very bumpy ride.


Rennick Palley (00:31:49):

We're looking at that. It's something I'm very excited about because I just see so much value being created. And I guess you could say I'm a believer, but I don't really like that term because belief is something that comes from faith. It's not really faith that I have, it's just this fundamental view that this is better and it works.


Daniel Scrivner (00:32:10):

Yeah, the fundamentals, as you described them, all check out and it makes a lot of sense. I'm curious in your mind is crypto, if we think about, I guess Stratos, and maybe there's a bucket that's public, maybe there's a bucket that's private. Is crypto sub bucket of one of those? Is it its own separate thing? I guess. How do you think about it structurally?


Rennick Palley (00:32:31):

It's best in its own bucket. The ultimate instance of Stratos is as a holding company that just does these things if and when we get there, I don't know. But I think there's also something to be learned about the incentive structure of the crypto markets and thinking about how we do engage in crypto ourselves, which is perhaps the best model is to allow that market bootstrapping capability to be driven by a decentralized protocol itself. Maybe people in the crypto markets can choose which projects they want to have that protocol invest in and thereby bootstrap the liquidity and then when it issues its governance token, that protocol itself is sort of like a holding company of governance tokens and the collective can decide what to do with it.


Rennick Palley (00:33:21):

That's a thought. Does that work? It's hard to make the incentives work correctly and it's not immediately actionable. I myself, although I started my life as an engineer, I'm not capable of building that myself nor do I have the time. But it would be an interesting thing to consider but I think today it's just a traditional venture fund model that does this albeit with a much shorter liquidity timeframe, which I think is another huge benefit of crypto and all the other factors that we discussed about it.


Daniel Scrivner (00:33:49):

This has been a fascinating conversation and we've covered a huge range of topics that I think people are really going to be interested in hearing your thoughts on. So thank you so much for your time, Rennick, it's been amazing conversation.


Rennick Palley (00:34:01):

Thank you Daniel, for your time. Again, I'm really grateful to be hosted here by you. I love talking about all this stuff, so would love to do it again. If anyone is interested in any of the stuff that we're talking about here and would like to consider joining the team, please reach out, we'd love to chat with you.


Daniel Scrivner (00:34:19):

How can people find you? Where can they find you? Where can they find strategy?


Rennick Palley (00:34:23):

Our website is www.stratoslp.com. And my email is Rennick R-E-N-N-I-C-K @stratoslp.com.


Daniel Scrivner (00:34:37):

I just have to ask you the closing question that we ask all guests which is, if you're open to sharing a person or experience that you're eternally grateful for, it's had a big impact on the way you approach life, the way you think about the world, and if you'd share that with us.


Rennick Palley (00:34:50):

Oh man, that's a hard one to answer because I feel like I'm so lucky to be able to just have a conversation like this as part of my workday is so cool. One of the things that just occurs to me is just the fact that I was hired by Lou Sanders to go work for him after grad school. I didn't really have anything that would have distinguished me from a lot of other well-qualified candidates. And he took a chance on me and I certainly would not be where I am right now if it wasn't for that. So I feel eternally grateful for that, I think about that often. I could say the same thing for my parents and my family, and a lot of other people who've made an impact on my life.


Daniel Scrivner (00:35:36):

The one thing we can take away from that is just the importance of making bets on people where you see a ton of potential, but maybe you don't see a lot of other factors that would confirm that. And just the impact you can have on someone's life by making a vet on them.


Rennick Palley (00:35:48):

That's what investing comes down to in a lot of cases, I haven't talked about it a lot, but we're always making a bet on the founder and the team. That's a big component of how we make decisions. And it's something that drives the reflexivity that we've been talking about as well. So I feel fortunate to have been on the receiving end of a bet like that at one point in my life and all of our investors and especially the guys who came in early they are making bets on us as well and so I'm really grateful for that too, and hope to do well for them over the long-term as a result.


Daniel Scrivner (00:36:21):

It's going to work out just fine based on this conversation, so thank you so much, Rennick.


Rennick Palley (00:36:26):

Thank you.

On Outliers, Daniel Scrivner explores the tactics, routines, and habits of world-class performers working at the edge—in business, investing, entertainment, and more. In each episode, he decodes what they've mastered and what they've learned along the way. Start learning from the world’s best today. Explore all episodes of Outliers, be the first to hear about new episodes, and subscribe on your favorite podcast platform.

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