Why the Best Investors are Builders with Avichal Garg and Ken Deeter of Electric Capital

Thanks for having us.

Short answer is yes. We've sort of long thought that. I think there's the way that it's going to happen and there's the way that crypto people wish it were going to happen, which are kind of different. And I think the way the crypto people wish it were to happen is that every agent has its own wallet and is sovereign and is holding tokens or something. I think in practice, in the near term, I think at some point that does happen, you get sovereign agents, but I think in the near term you are more likely to have essentially command line tools and SDKs, and they could be wallets, but kind of backing that is Stripe and Ramp and some of these sort of incumbents that understand what's happening, and then behind that is actually where the money movements are happening with stables. So whether that's on ETH or Solana, the stable ecosystem really sort of is how that money movement ultimately happens. But kind of that intermediate layer of who has the wallet and the wallet infrastructure and the payment gateways and all that kind of stuff probably looks a little bit more legacy for a little bit. But I do think that there is this emerging category of stuff which we think of, we sort of talked about this internally as user-owned software. Like what does it mean to own your own agent? You kind of see this with OpenClaw for anybody who's played around with that. It's sort of this idea that there's a piece of code that is not sitting on some remote server, that's mine and I control it. It somehow feels different, qualitatively it feels different to have your own code running locally. And so I think that will be a segment and I think that's a very interesting and underexplored segment. And I think that sort of sovereign agent universe could be potentially very interesting. It sort of mirrors, and I think there are a lot of threads we could pull on here, but I think it mirrors what's happening in crypto more broadly. In crypto, you have the institutionalization of crypto, which is like stablecoins and layer 1s and tokenization and Apollo is going to come in and BlackRock's going to come in and build funds and tokenized private credit and move it on chain and all this stuff. I think it's great that's going to happen. It's going to make traditional financial markets very, very efficient and 24/7 and more auditable and more secure, which is great. At the same time, I think what you have and what has always made crypto so interesting from the early days is kind of this non-sovereign store of value third space which is not the US space and is not the Chinese space. It's this US dollar denominated thing that no country controls and no country can kick you out of and no regime can kick you out of. And that as an internet-native financial space I think continues to be very interesting and has a lot of growth potential. And I think that will have its own agent ecosystem. Like I think agents are really first-order citizens on the internet and they're first-order citizens in that financial market where in a lot of ways they're second-order citizens in the traditional fintech and financial markets. And so that is going to happen as well. But I think that will take a little bit longer to play out whereas I think the fintech stuff and local agent stuff for using Stripe and using Ramp is very immediate, you can see that happening over the next 12 months.

Well, okay, so we should talk about that and then I think I'm sure Ken has very specific thoughts. He's been building a lot of our infrastructure internally around how we're identifying the firm, but I think it's because most business today is conducted either between people or people and businesses or businesses and other businesses. And as legal containers, that is an entity that if you just look at the GDP of the world, if you look at the economy, all of the economy of the world today happens between humans and other humans and businesses and other businesses and businesses and humans. And so you have this legacy infrastructure and it makes sense that you would just make that more efficient and agents can plug into that legacy infrastructure. And then this new sovereign agent universe is really an agent-to-agent universe, right? And that as a model for a market or as an economy, I think one day could be bigger than the people-to-people and the business-to-business economy, but that's starting from zero today. Because what we've done is we've invented a new type of entity, right? So for most of human history all you have is people, right? Or maybe the notion of a family or a tribe, right? But you really had sort of individuals and you could sort of say that's the person I'm doing business with or that's the counterparty of the transaction. And then with the joint stock corporation in like 1648, we kind of invented with the Dutch East India Company a new entity for the first time which was you could put in capital and other people could go take risk with that capital and then you could share the rewards. And around 1850, the US and the UK kind of figured out, well, this is a new thing. You should be able to go to the government and instead of going to the king to get a charter, you should be able to do business, right? And it opens up a whole set of questions like, well, what is the liability, right? Like, if I have a contract dispute, how do we sort that out? What's the case law on that? Or if this entity is implicated in some crime, let's say some extreme situation like somebody gets killed, who's liable at the end of the day? Is it the company is somehow liable? We could take the assets of the company, is it the people behind it? Is it the directors of the corporation? And so we have to sort all that stuff out from 1850 to 2000. It took 150 years to sort all this stuff out and it gets into really gnarly stuff if you think about it, right? Like do corporations have free speech rights? And we've kind of gone back and forth on that over the last 150 years. Like what are they allowed to say and what are they not allowed to say and where can they say and what are the bounds on that? And those bounds are different than what humans as entities can say, right? And we haven't sorted any of those things out for agents yet, right? Like does an agent have free speech rights if it's sovereign? I don't know. It's an interesting question. So until we sort all that stuff out, I think most of the economy is going to be in this people-to-people, business-to-business world and that'll take a decade, I think.

Yeah, I think it's much more of a legal and regulatory question than any kind of technology question.

Yeah, I mean look, the parallel for me is like these DeFi smart contracts, right? Like we're finally getting to a point where maybe the SEC is coming out and saying, okay, these kinds of things are okay and these kinds of things aren't okay. And I think just yesterday they were talking about how are the frontends implicated in this and what are the rules around that, right? Like it took us all this time to figure that out because smart contracts, especially the sort of the admin, like new thing in the world, it doesn't fit cleanly into a human-to-human kind of business or legal rule set, right? And so I think we're just, you know, we're five years behind on the agent side, right? Like what does it mean for this thing that can sort of walk like a duck and talk like a duck but isn't actually a duck, how do we treat it legally? And that's a, you know, I think the pattern that I generally see with these things is that it just takes a while for us to get a sense of how this thing behaves and what the risks around it are. And until you get to that point, until you sort of have a broader understanding of how to think about the thing, it's sort of like a very gray area for a very long time. And a lot of people are trying a lot of different things. And I think we're sort of in probably the early stages of that state now. I would say the agents probably really haven't gotten to enough capability to really be plausible as kind of financial actors until very recently.

Sure. I think we've seen enough, like, we've seen enough things like some of this auto research stuff that's coming, like if you give an agent system a pretty clear goal, it's pretty creative about how it gets there these days and so we're starting to see some of this behavior. I don't think anyone's really tried to apply to, like, tried to turn $1,000 into a million dollars kind of situation. But that's like imminent, right?

Totally.

Yeah. And then if you did that with a sovereign agent running on a blockchain with a bunch of distributed GPUs, what is that, you know, is everyone liable? So there's a lot of these legal questions that we haven't really contemplated and unfortunately at the beginning also a lot of these things are just purely theoretical and they actually, a lot of these things become, we realize that they're impractical for other reasons that we didn't think of at the beginning and so it's not worth all the machinery of producing laws and regulations to account for cases that are theoretically possible but will never actually happen, right? And so I think DeFi is the same way, right? We've seen all the ways in which these things break and don't break and how people get rugged and don't get rugged and that's really informed a lot of the way that we think about this stuff.

I was going to say something else though. You're asking about why do agents need these tools? Like agents actually want good tools as well. That's sort of one of the things that I've realized. They still look different from the APIs and things we have today. But agents can sort of suffer brain damage in the same way that humans can. They have to use bad tools.

Yeah. I mean look, you can probably ask them to go under the hood and be like oh go figure out some arcane API and go do these things manually. But the more of that manual work that they have to do, the more tokens they're spending to do this, right? And there is sort of an efficiency frontier. So a lot of building an agent system these days is okay, like what are the actual good tools that this thing needs that you can give it to make it really effective at what you're trying to get it to do.

I would add, like I've been hacking on this on the side just on another computer and it's fascinating. I would add a couple things. So one absolutely understanding these things and understanding where the frontier is because it moves so quickly that actually getting your hands dirty changes how you think about it. So like I was playing with the Gemma 4 models which are all local and you kind of get a sense for oh actually this is pretty good. Or you start to get a sense for oh wait on this MacBook M2 with 24 gigs of RAM it just barely doesn't work. And then you intuitively have a sense for where it starts to break. So I think there's actually a lot of value in playing with it because a lot of these founders, the current gen founders, if you look like Patrick Collison, you look at Zuck, you look at Tobi, you look at whoever, everybody's quite young and they all started as product people, they often started as people who had their hands dirty in the product and then over the last decade sort of drifted from that because really everybody was in like a scale game and this resets everything. So I think it's sort of people recalibrating. To Ken's second point, I think is like we don't yet know what the structure of the organization is going to be. And we don't really know if the people who have been successful previously are going to continue to be successful or if it's an entirely different type of person that's going to be successful now, right? And the only way to know that is to sort of play with it and then all of a sudden you build an intuition for like, oh, the critical skill is actually different. Like I can see why this person would be really, really good and this person is no longer good. And now as you retool the organization that's a really, really, really valuable signal. The other thing I think that is going underappreciated with the CEOs building this stuff is there is a long history of people wanting to build tools for themselves because everybody's workflows are weird and unique and different or they have little issues that they need to scratch. But the fixed cost of producing software was so high that it didn't make sense to do that. Like you're going to hire, remember there's a time maybe like 2010ish or something where like super rich people were hiring people to build personal apps for them on their phone because they just had weird, you know, so some billionaire would hire somebody and pay them half a million dollars to build a phone app. Well you can just do that with Claude Code now, right? You can just have somebody spin up an app for you that taps into your workflows and so you've taken the fixed cost to close to zero to doing that and it doesn't need to be production grade, it's just like let me spin up a thing that does an XYZ little thing that I do all the time, have a thing that's like checking land prices in a very weird way that I like to do on the side and it just saves me two hours a week. And I see a lot of that, especially from the CEOs, because a lot of CEOs have weird sort of trade-offs that they made in life to be able to run the business the way that they do. And now you can just spin up software. It's actually faster than trying to convince somebody else to do it for you or waiting for the market to do it. It's just faster and cheaper to just do it yourself.

Yeah.

That's a great analogy. Yeah.

No, I think it's just a really weird and fascinating time. And this goes back to like a lot of folks have said this over the years, especially over the last 12, 18 months, but it does feel like one of those new, like DeFi is one of those organelles basically, kind of back to this idea of how do you actually move money around was this baked-in primitive in your finance work. There's actually, I'm thinking of, I won't mention who, but it's one of our portfolio companies and I was talking to the founder recently and they have essentially built agents internally that do compliance and finance for them. And so they are fast scaling towards like a billion dollars in revenue and their entire business is like three or four finance people. It's like really wild. And so these publicly traded fintechs are talking to the CEO because they're just like, wait a second. How is it possible? Like we have 10x the people that you do at this scale. Like what is going on? And it's just because they have a bunch of agents and they just automated everything. It's pretty remarkable.

I think they're, yeah, I 100% agree with that. I think there are actually three effects that happen simultaneously. So one is the big companies become much more efficient. And so you've seen this over the history of technology is like revenue per employee goes up or net profit per employee goes up. And I think this just accelerates that even more. So if you're a big company and you know how to use this stuff, each person can do that much more so you can be that much more efficient as a business. And for people who are scale-minded or want to grow their businesses or efficiency-minded, I think you get more big companies with fewer people. The second effect I think is that you get many more companies because the fixed cost of producing software goes down to such a degree that entire markets where it didn't make sense, like you could only build a $10 million revenue business, but the cost of running the business from the fixed cost perspective would have been $10 million. Nobody wants to run that business. Now, if you can run that business for a million dollars a year, actually a lot of people would want to run that business. And so all of a sudden you're going to get software and you're going to get products created for much smaller markets that are not necessarily venture scale but that enterprising people all over the world can just go do, which I think is great because you've got like there are a million products that should exist, like every niche little thing. Like imagine, you know, how many little small businesses have problems that they're just doing manual labor against, like moving data around and trying to service all of that. So now is a huge market in aggregate but a lot of those are small businesses. The third I think is that you get an entirely new category of software, which is not going to be, hey, one, like I think that like one or two people doing a billion dollar business is interesting. It makes for good press headlines. It's kind of a trope. I think the really interesting thing is many of the people that are able to create or want to create a billion dollar company don't want to stop there, right? And so like what does that organization of the future look like? This is where companies like Hyperliquid are so interesting. Like you can build a scaled business with like 20 people. But if you're ambitious, you probably don't stop there. And so I think what you just get is like massive innovation. So it's not just that big companies will hire fewer people. I think what will happen is some enterprising people will create entirely new small businesses that serve small markets. And then the really interesting thing from a VC perspective is what are all of the businesses that you can now create because the cost of running the business went, you know, like so much of the cost in a startup or a company is the communication overhead and now that you can have a tenth as many people you can be that much more efficient and pursue really really big markets actually.

And so this spillover I think is going to be you're going to get a lot more Hyperliquid types of businesses, a lot more types of businesses where the number of people in the business is small but the business outcome is still huge but those founders are really ambitious so they don't stop there. And so what you'll get is like actually entirely new categories of big businesses that just look different from the legacy guys. And then I think there's sort of a little bit of a spillover effect that will happen here too, which is, you know, most humans don't want to just sit around and do nothing. And so as all of this labor supply gets unlocked, I think a lot of the doomers are like, oh no, we're going to be unemployed. And it's just like that never happens. Like people are enterprising, they're hardworking, they're smart. And so I think what you'll get is a spillover into all of these other areas that have been really underinvested in for the last 30 years. So like now all of a sudden, you know, like space or aero, we're also investors in Boom Supersonic, and Boom has actually evolved to become a data center engine business because their core supersonic engine it turns out is a great fit for data centers. And so like their go to market is going to be to build data center engines which will finance the supersonic plane.

Yeah. Yeah. That's right. Yeah. It was just, this is a little bit of a detour but it turns out it's like a funny twist in entrepreneurship. They built their supersonic test demonstrator, flew supersonic. It was the fastest non-military jet ever built. Proved out a bunch of cool technology like boomless supersonic where the supersonic wave bounces off the atmosphere goes back into space so you don't hear the boom on the ground, like really cool tech. As they were running all these models and they did this test they realized that the supersonic engine that they were building has a really specific set of heat characteristics and so it doesn't degrade at high temperatures because it's designed to run at a higher ambient air temperature. But like the GE Vernova engines are, you know, sort of degrade after about 80 degrees Fahrenheit ambient air temperature because they're not really designed for high temperature environments. And so the performance starts to fall off pretty dramatically whereas the Boom jets don't. And it turns out all these data centers are being built in like West Texas where it's always over 80 degrees Fahrenheit, right? So the Boom engine...

No, no, it's because the data centers can't get enough power off the grid, right? And so what you're doing is you're burning natural gas to power the data center because you can't plug into the grid and have reliable energy. And so there's this whole market, like one of the big bottlenecks right now on the data center side is the energy side of it. And how do you get enough engines and so like GE Vernova is now like a $40, $50, $60 billion company. It's like a very large company and they're just backordered for three years. Like you just can't get data engines.

But going up the stack here a little bit, you know, I think the thing is a business like a Boom or in nuclear businesses or, you know, space businesses. From a cost of capital perspective, it was really hard for the capital markets to finance those things like when you could invest in SaaS and it was so capital efficient and then you could IPO a business with fewer employees for like $10 billion. Meanwhile, here's this really heavy capex thing. Like why would you put money towards that? And you're buried in the capital stack. The first $10 million is buried in the capital stack. Now all of a sudden the AI agent stuff I think has this sort of spillover effect where all of those things start to look really compelling because they actually have a moat, right? Like atoms are a moat all of a sudden. And so all of a sudden I think not only will the dollars shift over to other interesting areas as a second order effect. And by the way regulatory is a moat as well which is why I think like DeFi and fintech and crypto starts to look even more interesting as well. But the people will move over, right? Because if you can't be in these hyper commoditized businesses that don't need as many people because they're pure software. Where do you go? I think you start moving into these other areas that have real moats and atoms and regulations are real moats. And so I think you'll actually see talent start to move over into some of these other areas which I think is really net good too. Yeah. So, you know, you will get fewer employees in big companies, but there's these amazing three spillovers of more innovative businesses, like smaller businesses targeting niche markets, more entrepreneurs building big businesses with fewer people that are entirely new, people and talent moving over to atoms, into regulatory businesses. Like all of these spillovers, I think, are actually extremely net positive.

Yeah, I think at least for us and our style of doing business, yeah. I think we go in the like let's go find the 25 person company worth $25 billion and that's just sort of what we're wired for having worked at these big outcomes and having started companies and so we kind of have that muscle but I think you're 100% correct that there is absolutely now this as a second order effect of what you just talked about there's a new type of capital market need and the current markets may not provide for that need and so somebody could step in there like family offices could step in there. It might be that, you know, we passed with the Jobs Act and like the crowdfunding stuff that happened like 10 or 15 years ago all of a sudden that might actually be viable because a lot of the things that people were financing off that, the biggest, interestingly enough, I don't know if people know this, one of the biggest outcomes of all time from a crowdfunding campaign was Coinbase because nobody wanted to invest in Bitcoin companies back in 2012, 2013 and so they had to do a crowdfunding campaign and I think it was something like if you put in $1,000 into Coinbase on their crowdfunding campaign you made a million dollars at the IPO.

Yeah. Yeah. Exactly. Yeah. Yeah. So, Coinbase, interestingly enough, a crypto company. Yeah. It's one of the biggest outcomes of all time from a crowdfunding campaign. So, props to Brian. But, you know, historically the challenge with the crowdfunding platforms was that you were investing in like beverage companies and like board game companies and like restaurants and the failure rate is just super high and they're actually capital intensive and they're not great margins usually and so they were just not great investments. But you're absolutely right that now all of a sudden if you could invest in like a software business that one person starts and runs with a bunch of agents and makes $10 million a year for some niche and it has like 30% net margins and spins cash. All of a sudden the crowdfunding platforms might be really well positioned which might mean that like the average retail investor could start dropping a thousand or a couple thousand dollars into these things and actually have, you know, pretty great returns. So it's probably not a VC game but I think you're right that there is some sort of capital market thing there that potentially ties back to crowdfunding or ties back to DeFi. Like that might be a great thing for the global capital markets and stablecoins. Like you can imagine that that's actually a platform that's a very sort of crypto, user-owned, community-owned, like the ethos and the vibe of that feels very crypto to me. Yeah. That you could finance those things and ultimately maybe even some percentage of those backers are agents themselves, right? So it's just agents betting on other agents to do stuff.

Maybe I can take a stab at this. I think there's a couple categories of tokens. So to answer your question very directly, I think people are too bearish on tokens now. So there was a time maybe last time we talked I was like guys like not everything needs to be a token. Right. Now I'm like hey guys like actually some things deserve to be tokens. Yeah. And I think there's three categories basically. I think there are the store value tokens and I think currently probably it's a relatively small basket of things. Bitcoin obviously I think you could make a case that potentially ETH, we think is likely in that store value category. We published a paper on this maybe two years, three years ago, something like that on why we think that's the case. And ETH is roughly where Bitcoin was in our opinion something like 2020, 2021. You know, it's roughly 10 years after launch and Wall Street is just starting to get its head around it. You might be able to make the case that like a Monero or a Zcash is sort of like in that category. It's just been around forever. It's Lindy, like it's, you know, people understand supply mechanics and it's private. So, it sort of sits adjacent to these guys. But that category of stuff I think is relatively small. The second category I think is infrastructure and I think I would put like Solana and Near, Monad into kind of this category whereas I think it's hard given the way those things were created and launched to put them in the same camp as a Bitcoin or an Ethereum sort of these immaculate conception kinds of things. You know, ultimately VC backed but that doesn't mean they're not valuable. I mean if you look at Amazon, Amazon is a $2.7 trillion company. And, you know, Databricks is 150, 200 billion, hundreds of billions of dollars kind of company and so infrastructure can be tremendously valuable, right? Like most of Amazon's market cap is from AWS, it's not from the retail business, the retail business doesn't make any money. And so I think infrastructure that powers global finance is tremendously valuable or infrastructure if you look at something like Near that powers the agentic economy and where agents can be first order citizens, tremendously valuable. And so, you know, I think there's that category of infrastructure. You need the infrastructure providers to have a stake in it. You need the developers on top of it to have a stake in it. Like as an ecosystem, I think it makes a lot of sense for the token to be able to redistribute that value strategically. And then the third category is essentially, it's like the closest analog we have is that it looks kind of like equity, but it's equity into a token network. So there's no common enterprise. So, it's not really equity as the way the SEC would describe it, but it is a thing that needs to live and it needs to live autonomously and it should take fees to sustain itself and it should take those fees and pay people that are developing the network and advancing it and so on. And so this is things like a Morpho, Pendle, you know, things that are actually useful and exist on chain. And I think the thing that people don't fully appreciate about those latter two categories, the infrastructure camp and the DeFi tokens that take fees...

And Ken please chime in on this because I'm sure there are lots of examples you can think of but I think what people don't fully appreciate is that with the stablecoins ecosystem emerging that it is of course the fintechs are going to benefit from the stablecoins. But like who holds all these stablecoins? Ultimately, it's actually a lot of people in markets that don't have access to good financial products and the reason they want Tether or the reason that they want USDC or Sky or whatever is that they don't want to be in their local fiat currency because they're getting inflated away. So if you're in Nigeria, if you're in India, if you're in Vietnam, you're used to 10 or 15 or 20% inflation relative to the dollar. And the dollar is also getting inflated away because of all the money printing, right? So first order of business is just like get out and get to dollars. And so this is the best mechanism ever invented to get access to dollars. And most of the world actually does want dollars. And then all of a sudden you're sitting on some dollars and you think to yourself, oh, wouldn't it be great if I could get some yield in dollars so I'm not getting inflated away? And if the base rate is like 3 or 4% in treasuries, okay, let me at least try to get some of that. Let me get two and a half percent. And then you say, wait a second, shouldn't I be able to like make money, too? And you want to put money towards things that take fees and dollars. You want to put money towards things that generate return and grow in dollar terms but you can't really access US equities, right? Like most of the world, if you've ever seen that diagram it's like they draw a circle around like kind of India, Southeast Asia, China and they're like, you know, three-fourths of the world lives in this circle, like that entire circle does not have access to US equities. Yeah. Right. And so what happens when you give that three-fourths of the world access to dollar producing assets? I think what they do is they say I want dollar producing assets and all of that capital moves over in the lowest friction ways. And so the way that will ultimately manifest is that these things will have a bid as people figure out that these things are the easiest way for most of the world to access a dollar producing asset. And the multiples that people will be willing to pay will be much higher than you've traditionally seen on the stock market, right? Because like what is a PE multiple at the end of the day? You can transform that into some sort of expected return, right? There's some IRR there and some return profile you're underwriting. And this is where Howard Marks will tell you like when the stock market is at a 25 PE, your expected return is 0%, right? But you can sort of convert a PE into a return profile. And what we saw in '21 with all the money printing was if you give people 0% interest and they're worried about inflation, they're going to bid up the PE ratios like crazy on all these stocks. And so what happens when you have billions or trillions of dollars of capital coming in from people who are not in a zero percent interest regime? They're in a negative 10% interest regime, right? Like they're losing 10% a year. And so what is their willingness to bid up and what does that PE need to look like for these people? And I suspect that actually people are going to be willing to pay very very high effectively PEs on this cash flow because their alternatives are so terrible and they don't have access to like, you can't get a Schwab account, right? So structurally I think people are undervaluing this idea of infrastructure tokens and DeFi tokens as cash flow boosting entities because most of the world does not have access to good dollar cash flow instruments.

Yeah. All of them. It's a one of one in my view.

By the way, my argument is also extremely bullish for tokenized equities for exactly that reason.

Yeah, thanks for having us. Thanks for the time.