Question: What do Jane Fonda’s activist lawyer, a celebrated science teacher and former nun, and a future music mogul have in common? Answer: They were not the characters in an Afterschool Special, but the people that helped my grandpa get me out of Central Juvenile Hall, aka “the Murder Factory”, which was no small feat. I will forever remember the boys I left behind and be thankful for those who went to bat for me. The future music mogul was none other than Zach Katz, my best friend when I was a kid, the kind of guy who stood by you no matter what.
While my daughters grew up hearing stories about Zach, it took my youngest and the magic of social media to bring me and Zach back together. So why do I tell you this, other than rehashing my youth? As it turns out, I had a conversation with Zach about blockchain and I’d like to give a summary for our next installment about DARQness. To explain it, I need to give a bit more background as to what Zach’s been doing since he helped me get out of Central.
Zach Katz, Music Mogul, and Spaceman
Zach went on to college and law school. Right out of law school Zach started representing music talent and through this work, met Dr. Dre and began a business collaboration. This accelerated Zach’s already rapid ascent up the ladder of the music industry until becoming one of a handful of the most impactful people in the business. It was from the vantage point of the top that Zach saw the winds of change, namely technology. In response, last year he and partners Scooter Braun and Shara Senderoff launched Raised in Space, a new kind of VC business focusing on technology that they believe will transform the music business. In his new business, Zach and his associates partnered with Ripple, a Silicon Valley company looking to fund disruptive businesses around the world using blockchain. It was from this perspective that I asked Zach what he thought about “crypto and blockchain.” What follows are excerpts of over an hour where I was writing as fast as I could.
James: Zach, could you tell me about blockchain and crypto from your perspective in the music industry?
Zach: The first thing we have to do is separate blockchain and crypto. While blockchain has been around for a while, the first time the world really took notice of it was in 2015-2017, when blockchain was heard in connection with ICOs, or Initial Coin Offerings, basically offering cryptocurrencies. Many of these companies would raise as much as $100 million on the promise that they would build something, and often they wouldn’t build it, or what they did build wasn’t a viable business to begin with. There were a lot of questionable actors in those ICOs. The promise of the disruption of those new businesses was great but most of the people were not credible and the bubble finally burst in early 2018. Music was one of the verticals explored in that bubble. So, let’s start by separating crypto and blockchain.
James: OK, so let’s talk blockchain.
Zach: Every year there are one or two buzzwords that people use to get a higher valuation of their business, and blockchain has definitely been one of those buzzwords. People need to understand “blockchain” is not a business or an economy in itself, but instead, at its heart it is a powerful framework that allows for the modernization of commercial assets at their most fundamental form, allowing for transparency and verifiability, creating a ledger that can be seen by all stakeholders. In short, it is a modernized framework for ownership and transactions.
James: What do you mean by “modernization”?
Zach: The music industry and several other industries depend on difficult to understand relationships and contracts. Blockchain can modernize this and bring it into the light allowing for better ways to monitor and divide ownership around value creation or help create entirely new value chains. A lot of people just think of things, like monitoring the value and monetization of a copyright, but there are also things that social media facilitates that in effect breakdown the wall between artists and their fans. For example, fans could become promoters and influencers, buying into income streams of their favorite artists. Blockchain can facilitate these new commercial paradigms.
James: When does this new world come?
Zach: There are a lot of things that have to happen for that to occur at mainstream scale. Blockchain transactions have to get a lot faster and people are working on that. Plus, there has to be a reason for the business disruption. It has to be time. In the music industry, blockchain is 2 to 3 years away from being applied in a real meaningful way that will modernize business. Figuratively speaking, the music industry is not ready to buy a new house, so it doesn’t matter how good the plumbing (infrastructure) is now, but when it does buy a new house, in say 2023, it will likely buy the house with the new plumbing.
James: Can you explain more about how you think blockchain will be applied?
Zach: To make it simpler, it’s like if I invite you to dinner and then say, “I will be serving you dinner on a plate.” It’s assumed that we’re eating off a plate, what you will want to know is, what’s on the plate? What we’re actually eating for dinner? Blockchain will never be the main course. Blockchain is the plate and that plate is absolutely essential to your dining experience but without a tasty meal it doesn’t get to show its value. In the future, in businesses dealing with digital assets like music, it will be implicit, expected, and likely a given that blockchain is employed. What I want to know is do you have a tangible, executable, and scalable business that blockchain can help deliver? Do you have your undeniable main course? In our partnership with Ripple, we agreed that we wouldn’t look for blockchain businesses, but businesses of the future that authentically use blockchain, the technology of the future.
James: Could you speak a little bit about Ripple?
Zach: Ripple is in the core business of transferring money from country to country, in many ways modernizing what has been the age-old SWIFT system. They are a perfect example of powering a truly valuable crypto product on the framework of blockchain. If someone is in Japan, they can transfer their yen into XRP, Ripple’s currency, and then instantaneously transfer that XRP to Spain, where its immediately converted into Euro. That transaction takes seconds via Ripple’s ledger and XRP, where the traditional way via SWIFT takes days and is more expensive. We’ve partnered with Ripple to facilitate bringing to market businesses of the future in the music industry, with an emphasis on blockchain and crypto as the time for these becomes ripe.
Postscript
For the last decade, I have been an ardent supporter of the change that blockchain can bring to finance and in particular to the investment world. I have waited for those truly disruptive business models to emerge. Because of my somewhat unique background of having a cross-disciplinary Ph.D. (I had computer science, accounting, and finance PhDs on my dissertation committee), I was asked repeatedly to speak at “Crypto Conferences” during the 2015-2017 Crypto Bubble. I was offered money and even more crypto coins to do so. I never accepted one of those invitations because I didn’t see the substance to the underlying businesses being promoted. It’s like Zach said about the serving plate, I wanted to know if the meal being served was good, if there was a compelling underlying business. Despite how excited I was at the beginning of each conversation with founders, I left each time sad and dejected asking (to paraphrase the old lady in the Wendy’s ad) “Where’s the beef” in those hotdogs.
Now, this leaves the question of where are we now? In each Tech Bubble, from the 1950s-1960s “Tronics” Bubble to the 1990s-2000 Dot-Com Bubble, we found that in the initial run somewhere between 98-99% of private and public companies touting the new technologies went bankrupt. Does that mean that there were bad actors? Inevitably there were, like Zach said with the Crypto Bubble of 2015-2017, but there were also legitimate actors and legitimate technologies. A small few will survive as companies, but even more of an impact is felt by those that continue on via the technology that they pioneered, the torch often being carried by others with perhaps even more legitimate business plans.
In my valuation class, I teach students that the real money for any portfolio is made on the extremes, not the middle, by those that push the boundaries. Even Warren Buffett knows this, as when I asked him years ago who influenced him the most other than Ben Graham, he said Philip Fisher. For those of you who don’t know, Philip Fisher was a practitioner who taught for years at Stanford that made tons of money investing in early technology companies and staying invested in them, companies like Texas Instruments during the 1950-60s Tronics Bubble. And for those of you that don’t know, even Ben Graham only achieved investing legend status from his investment in GEICO, a company not incidentally found also in Buffett’s portfolio.
Finally, remember, some of the biggest enduring names in new technology waves were launched in downturns, after general or industry-specific Bubbles burst. These venerable companies include Disney, HP, and Google. In many ways, the history of the United States and Silicon Valley is about continuing and then launching further in the face of Bubbles Bursting. The Madness of the Crowds will continue but so will the innovation. I look forward to the next wave of blockchain embedded companies that will change the world and the next Disney (props to Zach), HP, and Google that will emerge.