#51 Sam Lessin: A VC’s Take on Why Decentralization Is Inevitable

Like, my job at the end of the day is to find highly unpopular ideas and/or people that actually have something awesome and give them unbelievably expensive money to try their thing out.

No system is perfect, right? Like centralized things can be very efficient. They can be very optimized. Like there's all sorts of things that are good about them. They're very fragile. They're very brittle. They can veer off course, right? There are things like that. Decentralized things are usually far more resilient.

Sure.

We are kindred spirits. I believe in all this stuff. This is great. I love your diagram.

Anarchy, it's anarchy. Priceline, originalpricine.com, and creators. I love it.

So it's funny you ask that question. I'm not even exactly sure how to answer it. Here's what I can tell you. What I can tell you is that we do not believe in specialists. We're not specialists. We're generalists. And like, you know, that obviously goes in and out of fashion as time goes on. Right now, I'd say it's probably out of fashion to be a generalist, but I really believe in generalists and connecting ideas across domains. I also believe almost all the most interesting investments we do, they don't neatly fit into a story that already exists. Like there's part of the magic of really great companies is they're category creators. They're new ideas. There are things that people are not cool. So I believe in being a generalist.

You know, we've done a lot in crypto. A lot of people over the years have always said, 'Start a crypto fund.' I'm like, 'No, like crypto is a tool. We really want to heavily invest in it when it makes sense and how it makes sense, but I don't want to be forced to deploy only into crypto or only into this narrow thing. Like trust me to find interesting stuff, right?' Second, I'd say is we're very cheap. So this is an interesting one especially now, but like we do really care about the price we pay, and there's an obvious reason and a non-obvious reason for it. The obvious reason is it's just math, right, which is like we want to buy things cheaply so that when they're sold after dilution we make a lot of money.

But there's actually a deeper point if you have pricing discipline from my perspective, is that it forces you into new and interesting ideas and spaces. Now, it's actually not being cheap and running a seed fund is not the best way to make money in the world. The best way to make money in the world is momentum playing, right? You kind of, you know, you take the thing, you plow lots of money in fees. But I'll be honest, like it kind of feeds to the third thing is like we kind of believe this job should be really fun. And I just don't think it's that fun to like be the high bid and plow lots of money. What I take ego from, what I care about is finding entrepreneurs, finding ideas that other people don't see, right, or don't get, and being right, and then having the beauty, I mean you're an angel investor and in seed stuff, we really focus on seed, is look to me, the egotistical part is there's nothing better than being the only one bidding because it means and then it working.

The other part is I love that our job, we're allowed to be wrong all the time, right? Like I like that freedom because it means that you can be really, really right. And I think for me, the later stage firms, other types of investing where like you have to be right because you're moving so much money you can't lose, I actually much prefer to be totally comfortable being wrong all the time in service of being really, really right every once in a while.

When people come to me and ask about becoming venture capitalists or investors, I'm always like, if you can't write checks, write essays, write on Twitter. And you want those intellectual timestamps, it's the only way to know if you're any good is be able to look back on it later. Humans are very good at justifying later what they did or didn't think a long time ago. So I think intellectual timestamps are important.

You're totally right. I've found in the universe over and over and over again that the more you give, the more you get. Ideas are not in and of themselves precious. And I can't tell you the number of companies that I have been pitched, I've invested in where I put out an idea that I think is kind of interesting. It's half-baked. It's at least well articulated enough as a position to elicit a response and it finds its way to the ecosystem to someone who knows way more and says, 'Sam, that's not a great idea, but here's a better one.' Right? And so, you're right. I do. It's not so, it's not like a strategy, you know, people like I'm going to like it's, but it is like kind of like I just think a way of being to some degree which is like if you just take the approach of like life is long, you know, we live in a world of happy abundance, you know, especially in Silicon Valley, we're all so lucky.

Be honest, put yourself out there. It's okay if you're wrong and the universe will provide back to you more learnings, more insight, more opportunity. I've just always found that to be true. So that's how we operate. It's obviously fun. I obviously am a fast writer. If you read my stuff, you obviously know I don't spell check anything or read it twice. But, you know, I think again it kind of goes to this also like it's okay to be wrong. Like, and it's funny, I do think that I have a real comfort with that that I find a lot of especially younger people don't have is like building that comfort with being wrong and it's okay. I honestly think of it as a competitive advantage.

I think it's especially high performing folks. Like so if you think about it, like this is, I'll tell you, like you know, again, so you know, I had plenty of achievements and whatever in my life, but I'm also incredibly dyslexic, right? And so I actually think from a very early age I got used to just like not getting straight A's, you know, like I got used to like working hard and failing at things. And I, you know, all benefits are strengths and all strengths are weaknesses or whatever the line is, like it cuts both ways. But I just think look, if that's my unique makeup and my contribution in the world is like I'm very open, I have to be, and I take pride in being very deeply right and contrary and occasionally, but I'm totally fine. I'm not the straight A student who's terrified of failure. I don't know, that seems valuable so I should double down on that.

Look, you know, again, this is like very yin-yang like nature of life, but like everything begets its opposite in some way, shape or form, right? And ironically there's all these things we think do one thing and end up doing the other. Like the internet was supposed to be the ultimate decentralizing concept, but it actually turned out to be the ultimate centralizing concept, right? Like, you know, crypto is really interesting decentralized. It plays out in all sorts of interesting ways. AI is like, so there's like all these big narratives. And look, no system is perfect, right? Like centralized things can be very efficient. They can be very optimized. Like there's all sorts of things that are good about them. They're very fragile. They're very brittle. They can veer off course, right? There are things like that. Decentralized things are usually far more resilient. They have other properties. They're more expensive. They're different. And so, like for me, it's just I'd say that centralization and decentralization, bundling, unbundling, whatever you want to call it, is just like the cycle of life and technology. And candidly, the only thing I ever worry about on like a hundred-year basis is that some of these technologies are so deeply centralizing they break the system and you don't get the opposite again, right? And so I think that's like the interesting moment we're at is like, you know, there's such benefits that there never were before to centralization.

So I'll give an example, like, you know, from we were talking about this earlier and it actually touches on a few of the things you just mentioned. Years ago I put out a tweet being like, why is there no NetJets for farms, right? NetJets is a private aviation platform. You don't have to own the planes but you can fly in them on demand and they're yours and it's a private network. It's great. It's really expensive. Like the food system is totally, right? Totally. And like it's a great example of a thing that effectively has become so centralized and brittle. It has all these bad consequences, but there's no way out, right? It's like it's like over. So my kind of tweet was why don't, like I want to build my own private farm network, right, and pay way too much money and own the end assets and keep all the plastic out. Like I don't know why I can't spend three times as much on food. Great founders messaged me back who I think you've had on, right? Not released yet, but soon.

Where they're like, 'Well, Sam, that's kind of stupid.' By the way, I disagree that that's stupid, but that's another topic for another day. But they're like, 'Here's a better idea. Like, we're going to do decentralized soil-based warehouse farms in local communities and cut all the logistics cost out.' I'm like, 'That's a pretty good idea, right?' And that is a kind of example of like when things get overly centralized, you want people like that to respond and decentralize them. Now, and it's very hard to do, but like that's kind of what I would say from a centralization-decentralization perspective.

Yeah. And look, I do think this is the thing that I really care about. I care a lot about storytelling. And it's funny, I think if you had asked me five years ago, I cared as much about storytelling, but I was a little more nervous about talking about it because the narrative is supposed to be hardcore technology. But you look at the most powerful companies in the world, they're all great stories, right? And I think when you think about as a seed investor, what you're really investing in, you're investing in a person, you're investing in ideally some angle, and you're investing in a story. And I think for me, here's the problem with small stories. People don't want to work on them, right? And so it's this weird thing where it's like if you want to work on some totally irrelevant SaaS blah blah blah blah blah blah blah, it's like you have so many problems, right? One problem is how big can it be, it's too competitive, software's commoditized, but there's another problem which is like no one wants to work on that, right? And so the nice part about big important stories is not only the markets are big, but you can get great people to work on them with you.

I mean, probably the Odyssey, right?

Interesting. Say more.

But just to push you...

The minority of the world is Christian. Like...

And I don't...

They know who Santa Claus is. I agree that Santa Claus is probably, you know, even beats Elon Musk and a few others from brain recognition probably. Do you think Santa Claus beats Donald Trump in terms of global name recognition?

Yeah, you're probably right.

I think the food system is there honestly. I mean we mentioned this earlier, but to me like I do think it's like that's a place where you have local minima, right, that's like not so good, right, for the world, and I do think it's over-centralized to the point of brittleness and needs to be revamped. Look, the federal government, like I think there's a story here, right, that the US government is tending towards this direction. It's a really big mess. Now, you can have all sorts of politics about what that means and states, right? Like we can go very deep on that, but like I think that's a big place there's a real challenge. The defense industry is a good example, right? I think if you get into that like super over-centralized with the primes and, you know, that's a real problem as well as the appropriations process is like there's all sorts of things. So I actually think if you look across the ecosystem there's places of over-centralization everywhere.

The problem is, the challenge is that if you remember decentralization is always expensive, right? And so the question is where can you bear the cost, right, where is it worth it, right, to like actually do the pain of decentralizing systems, right? And here's an example I used to, I'll make fun of him, I think he won't mind, years and years and years ago I was at a conference, this is in the early days of Ethereum, with Mike Novogratz, who I quite like, who's a well-known crypto guy among other things, huge character, and he's on stage with me and he's like a big Ethereum guy and he's like, 'The future is decentralized Uber.' And I'm like, 'No it's not.' Like it's like there's no way that like that's going to, like when you have an app, right, that can be centrally managed and, you know, things like that, and like you're not going to pay the decentralization tax, right, in a lot of ways as an example of a thing it's not worth decentralizing.

But it's difficult, right, because I think the problem also with decentralization is a lot of times it's right but expensive and the benefits are slow, right? So like decentralized might be way more secure or resilient but you're not paying for that day-to-day. That's like what you pay in the odd years, right? It's what you pay in the cataclysm. And so it's really hard to value. So I think you have to be careful about over-applying the centralization-decentralization to everything, right? And like where it fits and where it doesn't, but it is a fun narrative and there are places it makes a lot of sense.

Well, I don't think, I don't, I think it's just a return on scale and efficiency. Like, you know, I mean, I spent a bunch of my career in really formative years, you know, as VP Product at Facebook, and like here's the reality, it's like these platforms are better the more people are on them, right? It's like there's a return on scale to them, right? And then by the way, you need to attract the best talent. If you want the best talent, you got to pay them a lot, right? If there's a return on talent, then it's going to be like there's all these forces that just like force a ton of centralization, right? And you know what the next shoe to drop will be there. We'll see, like, but that's a great, I mean, the internet is a good example of, you know, content really is deeply centralized and, you know, we'll see with LLMs. I mean, we'll see what happens, right? Like, you know, I do not believe that we'll end up with like one god LLM to rule them all. I think it'll be a little more fragmented than that, but you're also not going to have, and like it's not clear to me that there's any more centralization of that as well.

Yeah, I mean, I think it's a great abstract conversation. I think like, you know, the problem with a lot of these abstract conversations, they're quite old, you know, and they're fun, right? But they're not new. And so they're great beer dinner time conversation. The question is, well, what impact do you want to have in the world and what do you actually want to do and like where are you going to spend time, right? And so, look, I'm a huge fan of navel-gazing. I love a good beer and yelling, but it's also like at a certain point you're like, ah, you know, like sure, you just play the hand you're dealt and do cool stuff.

I think it's largely been the case forever. I mean, like look, there are certain things that are just true about technology is fundamentally leverage. It's just leverage. That's all it is, right? You think about pure leverage, the rich get richer, right? You need fewer people to do things. One person is more effective than, you know what I mean? Like you get all this like power that just means that for the single person who's willing to work unbelievably hard and do a thing, they will outrun everyone else faster, right? The individual actor all of a sudden doesn't need to convince a hundred bajillion people to come with him, right? They can just do a thing. And like that's amazing. Like that's an incredible property, but it does mean that like it tends towards inequality and centralization and winning and losing, right?

And you know, I think I'll give you a funny fact that hilariously I saw, I think in some like clickbait thing on Facebook recently, which was like someone was pointing out the fact that a lot of workers' rights like in modern work, you know what it came from? It came from like the potato famine and like the black plague where you wipe out all the workers and all of a sudden there aren't enough workers so they have more leverage, right? Like this is not rocket science, right? And they like start saying, well, like post-black death there aren't so many of us to till the fields, maybe we should like get more of the pie, right? And so on the flip side, it's like well if technology means there's like infinitely more leverage in the system, then like that's what happened. Now what do you do with that?

I mean, I think the narrative I would like, that's the very American narrative. It's like the American West narrative and, you know, come to America, go west, blah blah blah, is a system where you're kind of like, look, we love competition, we believe in competition, we believe in hard work, we believe you should do everything you can to win and winning and competing, that's all great stuff, right? The thing I think we do have to be conscious of though, right, which is a different moment than we were historically, is one, there is no like terra nova to send young men and women out into. It's like if you just work hard you're going to do well, you might not be Rockefeller but you're going to do really well. Like there isn't that like inherent, like the internet was that even for my generation, like the internet was such an explosion of new, right, that there was effectively digital terra nova we did really well on as a generation, right? Now you're like, okay, that's what people are trying to create in crypto, whatever, people are desperate for that, but it doesn't inherently exist.

Two is again the leverage in the system is just like untold compared to what it ever is before, right? And so it's like, you know, you just end up, it's kind of wild. We'll see what happens with next year with a lot of these kind of IPOs people are like yelling about and floating prices on and, you know, the market resolving that to a narrative versus real cash flow, whatever. We can have a huge argument about that. But the upshot is like inequality has every reason to and will just continue to get more extreme. And the problem is it's like super demotivating and demoralizing to a huge number of people. And when that narrative of play your hardest, the chips fall, and like, but you can work really hard and do fine, like that starts to fall apart. That's just socially very dangerous.

Yeah. And I think what it really comes down to is, look, capitalism, people think about capitalism as serving the market, right? Like that's kind of what we're taught. We think like, oh, there's consumers. But here's the thing is you're not really serving the market. You're serving pools of dollars, right? So if actually only 5% of the people have all the disposable income, right? And by the way, they're the easiest customers to address because they have the money. Like if this is like go to the sporting event or like don't eat, you're clearly going to like eat and not go to the sporting event. If you're like, I have excess money, it's fine. So it ends up with this thing where like prices just follow that, right? Like capitalism is really good at serving the people with the money. And so if the money gets centralized, then like you all of a sudden like start decoupling from that. I don't know what you do with that fact, right? Because I'm certainly not one.

I certainly don't believe in, I mean, I believe in competition. I believe in winning. I think honestly a lot of the tax regimes we set up which whack people for doing well, especially on W-2 income, are like really bad and create perverse incentives. But there is some reality here that like in terms of like why are these things so expensive and like why can most people not afford them? It's very simple. It's just because all the dollars that potentially the service could serve are in the hands of 5% of people or less.

Yeah.

100%.

Yeah. The Munger quote, right?

It's a really, so here's the challenge. It's a great talk track, right? Or the community-driven bottoms up, you know, it's a great talk track and there are places it's worked, but I will say a few things. One is the incentives around it are always very, very complicated. So I'll give you an example. You know we do a lot of creator investing where we'll invest directly in someone who's like the best woodworker in the world, has a huge woodworking, like Jonathan Katz-Moses or people you know things like that. Whenever we do this, everyone's first instinct if they're hearing about this idea is like, this is great. You should raise money from the fans. Let's deal the fans in, right? Like I totally understand why people think that, right? It makes sense. You're like, okay, like I love this guy. He needs capital, raise capital to do some cool project. I would love to be in a small way involved in that. It'd make me feel good and loyal and I can profit with him when the album works or whatever it's going to be.

Here's the problem. Talk about incentives. It doesn't work, right? It doesn't work for a few reasons. One, if you're a creator, the upside of having your fans co-invest with you is a little bit. The downside...

If things go wrong, are awful, right? So it's you don't want your fan like you know if you all of a sudden you know screw up or something doesn't go well and all of a sudden you've lost your fans money, it's a huge it's like you spent all this time building trust and capital with them like losing the money is a disaster, right? And so like you have to really understand the incentives on that side, right? Um and two, you know, look, there's plenty of cheaper capital out there, right? Especially now looking for homes, right? And so it's like it's just more expensive in a lot of ways to do it that way. And so there's like I think it all comes down to incentives. You I do think I do think that there's something very powerful about capital light models where capital is scarce. So let me unpack that for a second. Okay, if you're working on a project, right, that you can get really cheap capital, everyone agrees it's a good idea, you know, Apollo can do the financial model on it, etc. You're not going to beat those guys at the cost of capital, right? And so even if you like the idea of crowdsourcing something, you're like, I need to raise $100 million or $10 million or a million dollars for XYZ project, it's way easier to just go get it from one source. Now, if there are ideas that some culture community loves, right? And the traditional people who have money to support these things can't do it or they they don't understand it, it doesn't make sense to them, etc. That's where all of a sudden crowdsourcing and like decentralized finance start to make a lot of sense, right? And you you see that in the crypto world in a lot of ways like the illegal opportunities and things like that. But um but I don't know, it's not a straightforward thing because like what you love to say is it's easy to like there's lots of models for finance and time and you want like a decentralized fin blah blah blah blah but honestly I got to go back to what I said before which is think about if you're selling an investment opportunity or any sort of capital formation to a set of people, it's going to be easiest to sell it to people that have all the money, right? And by definition that is not decentralized, that's like JP Morgan.

I mean, I I look, I love that stuff and like I'll give you, you know, like there's a company called Team Shares that we were the first investors in that have done really well. They've acquired a 100 small businesses. is they have a whole cool ESOP program to help owners of businesses who want to retire to Florida sell them and like deal the employees in. I love it. Like I think there's a lot there. But it is also interesting that you know there's I mean this relates a little bit to this even conversation where like if you're an employee, do you really want to own the company or you just want more cash? Right? And like the reality is is like a lot of times they rationally would just much prefer the cash. And I I actually think this is a thing in like even in in like Silicon Valley right where like if you think about you know at the highest of the high end of the market where you have someone making a few hundred thousand bucks maybe they have a few million bucks in RSUs or implied value in the company. You know the reason that was that the reason comp was structured that way historically for people was startups literally just couldn't afford the cash to pay people well. So they're like, "Ah, we can't really pay you in money, so we'll give you a little bit of money and then we'll give you a lot of notional value in the company." The problem is you end up paying your employees like almost random, which is kind of funny. Like you kind of look back like take like a take like a um you know, if SpaceX IPOs at a $1.5 trillion, whatever crazy number Elon came up with, there's going to be like an untold number of janitors making millions of dollars randomly, right? There's some other company where there's the opposite, right? It was a high-flying thing. The janitor had some, you know, whatever low-level person like makes nothing, right? It's like it's kind of asking people to gamble with their paycheck when they can't afford to gamble with their paycheck, right? Which again, you understand why that happens when I don't have another currency to pay you in. But in an era where there's plenty of money to go around for these types of things, like it's kind of insane, right? I think the same thing does recurse to the small business where it's like I think for a lot of employees in the incentive structure if you're like do you want some equity in our pizzeria or do you just want more money like they'd actually want the money right understandably and rightly the majority of people do actually I I have some interesting interesting examples of even some portfolio companies where they would you know be granting granting RSUs or even options sometimes and a lot of a lot of the employees like would just like let they wouldn't even like they wouldn't even purchase them. They would just like let them go. They wanted my my favorite is right when you give people equity that you value very highly or like some investor values very highly but the employee truly doesn't value. Like they're doing their comp calculation and like they understand it's random. It's just random. Like that's wild because I just gave you a bunch of things that this guy over here would pay me millions of dollars for. So I kind of would rather give you just a little more cash and like give the shares to them. Like there's all these like comp structure problems that all come back to this thing which is like again it's not fair and it's not good necessarily but if you start to realize that capitalism serves dollars it doesn't serve people right and when dollars pull up incentives shift right like that's just what it is and by the way I don't have any value judgment on this I think it is what it is you said technology doesn't it's how you apply it I actually don't quite agree with that I think there is fundamental physics to a lot of technology right which means means that like because this is now possible it's like a new human superpower XYZ is almost inevitable to happen right if that makes sense.

Now that doesn't mean that I don't believe in working on cool ways to apply it or understand its implications but there is a physics to technology is the way I would put it.

No, so I started I I went to after school I worked in New York for two years at Bay & me.

I I learned that the emperor had what I like to say, which is mostly true, is I learned the emperor has no clothes. And then I left and started a a file sharing platform in Brooklyn. Built that for a while. Um, you know, and then I came out to the valley when Mark acquired that company largely because he called me one day and was like, "Sam, I like you. I think you're smart. You're doing cool stuff. I want you to work on profiles at Facebook. And by the way, the startup you're working on is kind of stupid." And I was like, "You're probably right."