Preston Byrne – TALKS WITH PETRI
Preston Byrne talks about how disruption hits education and service careers, the future of decentralised finance, and why you should avoid VC funding.
Preston has had a few careers – a lawyer in England, a founder of a blockchain software startup, then a lawyer in America, and throughout, a marmot habitat conservation proponent on Twitter. Presently he’s a partner in the New York office of Anderson Kill, where he advises early-stage companies and venture funds, particularly businesses involved in crypto, on corporate and technology law.
(NOTE: The text may contain errors, misconceptions and even comical unintended contexts. Please use it only as a reference to the actual audio conversation from where it has been transcribed.)
Petri: Hey Preston! How are your favourite rodents?
Preston: Marmots! Marmots are doing well. I don’t currently have any marmots because I’ve just moved. But fortunately, some of my Bitcoin friends have marmots in their yard. So Marmot coin printing facilities have moved from my house over theirs.
Petri: Can you elaborate a bit the joke, there’s probably someone in the audience who is not exactly so familiar with the rodents and what they have to do with Bitcoin and in your backyard?
Preston: For those of you who haven’t come across me on the internet before, my name is Preston. I’m a lawyer. And back in the day, I did some really early-stage enterprise blockchain stuff. And when I was doing that, I decided it was hilarious, and also it was kind of like a stress reaction of a sort to basically shit post marmots on Twitter as much as possible. And marmots are these really adorable, fuzzy rodents. Groundhogs for those of you who are from the US East Coast, those are marmots. And so we posted pictures of marmots everywhere because back in the day blockchain stuff was really weird. So we decided maybe to be approachable. And for a little bit of fun, we would post pictures of marmots everywhere because I liked the animals and they were fun.
I’ve been talking about marmots ever since, and I think the rest of this podcast will probably be interspersed with marmots throughout. Maybe you can count and see how many times I mention marmots in this podcast, which is otherwise going to be about Bitcoin and legal issues pertaining thereto.
Petri: Are you offering any perks who exactly can count the amount of words we are saying?
Preston: Is there a prize?
Petri: Exactly. Pay attention, please.
Preston: There is no prize except your attentiveness will be a reward all on its own.
Petri: And there’s actually a hidden joke there, but in order to get that one audience needs to listen and probably Preston as well the previous episode with Lars Tvede. We were talking about how some people are luckier than the other ones. It’s quite simple, but in order to be lucky in this episode, you need to just stay awake!
Preston: What should we talk about today?
Petri: One of the things I’ve been thinking is that education is going to be looking a bit different in the future. And you were stating that in 50 years, there will be no schools and universities. Can you elaborate?
Preston: It will be really interesting to see what happens to schools and universities. At the moment, there are these massive institutions, although they’re not institutions in the sense of like patterns of behaviour. They’re institutions in the sense of large buildings and funds and members of staff that are just kind of lumbering around without purpose.
And I questioned whether they’re actually fit for purpose any more and COVID has really laid bare the lie that schools and universities have been doing a good job preparing people for the rest of the world. Google just announced an internal company credential for various jobs within the company: IT-support or project management or web development. And those certificates Google said we regard someone for internal hiring purposes with one of these certificates as being equivalent to someone who comes out of a university with a BA. And so the certificate costs $300 and it’s administered over six months.
Whereas the BA costs $150 000 and it’s administered over four years. We can all be realistic about what we were.. I mean, I knew what I was doing in college. I was doing a lot of carousing and drinking and partying. And I was now and again writing some papers, but it wasn’t this like hyper-condensed, hyper-focused effort. And I bet if you did hyper-focus it like, let’s say you’re doing language instruction in a foreign country where you’re doing seven hours or eight hours a day, day after day. If you did something like that, you could probably cram most of the university into about six or eight months. The tech companies have figured out that the skills they’re looking for aren’t really coming from traditional educational providers anymore.
What we’re seeing is this move back to vocational education and programming which is interesting to see it. It’s fascinating to see it. I very strongly suspect that schools won’t exist in 50 years. Hopefully, they won’t exist in 10 or at least most of them won’t except for a couple of handful of really elite institutions that focus very much in-depth on certain soft sciences like politics or economics or things like that is not vocational training as such. It’s just critical thinking training or an academic track.
Petri: What will be the thing replacing all these? Learning doesn’t go away. It’s becoming, or it’s already for some people lifelong learning. Are we letting youngsters go easier in the first 12-20 years, what are they going to do?
Preston: I’m a lawyer. One thing that we have to deal with as attorneys is that lifelong learning is very much part of the job. There’s an expression. They say you never know as much laws when you first get out of law school. Because then, of course, it all gets replaced with practical knowledge rather than theoretical knowledge.
But the legal profession is a constant exercise in learning new things. You can, if you really, really want to, you can get hyper-specialist and do one particular discipline, but even then you’re still learning about new types of property that’s being securitised, for example. I used to be a debt finance lawyer. And so when I was a very young my path, it was supposed to be, you work in this law firm, you do a hundred different debt finance deals. And then when you’re done, some people start coming back to you and they make you a partner.
That was the path that I was supposed to take. Or at least at the beginning of my career, it looked like it was going to take, and I wound up going very much off pieced and decided to do something completely different. But for lawyers, though we’ve been very accustomed to the fact it’s something new comes in the door and you have to go and apply your skills to going and figuring out new information and learning new facts and maybe learning new law and things like that.
And the law, of course, is always changing. You have to keep on top of it. I think for a lot of people in the other middle-class workers this may not necessarily have been the case. So people who work at big corporations, people who work at banks, for them lifelong learning outside of their discipline is not something which they were normally expected to do.
But I think going forward, it’s something they are going to be expected to do. It’s doable, it’s achievable. It just means that you have to read a lot more than most people are accustomed to be doing.
Petri: I have a perfect question for you. I don’t know whether you are really the perfect lawyer to answer that one, but you’re the only one I have 🙂 Can we change education from the legal perspective? Usually, governments like very much to have the education in their grip. What can be done? What are the limits and the parameters we can do? And what would it really take to change the system completely?
Preston: A lot of education actually comes from weirdly from government hiring policy. In the US for example, they have a law degree called the Juris Doctor and the Juris Doctor only exists because back in the day, the federal government would have pay scales and they would pay people based on what degree they had that would determine where you step in government service.
The lawyers got really bent out of shape that people with PhDs, who did them in four or five years postgrad were getting paid at a different scale than they were because they only had bachelor’s degrees. Because they went and got their BA and then the law schools were awarding an LLB, like a baccalaureate.
So as a consequence, they said that listen guys, we actually think this should be a doctoral degree because we spent three years postgrad. Now, mind you, they didn’t do any research. It was three years taught postgraduate, but they said, listen, we expect to be treated like doctors, doctors of philosophy.
The government’s hiring policy dictated what the universities had to produce in order to create the bureaucrats that then went into the system. I think that’s really the limits of the government’s control. And also for example, then in the UK, I think is another example of where this plies. They have a multi-tiered immigration system.
When I was applying for a visa in the UK, they increased the requirements from holding a BA to holding an MA. And I went to one of four ancient universities in Scotland that awards an MA as the undergraduate degree. When I was looking at the immigration application, I said, well, it says master of arts in the front, I might as well just say masters because that’s what it is.
So you applied with the master’s degree and they said, yes, we agree with you. This is a master’s. It’s not a bachelor’s, even though it’s the undergraduate degrees. By the way, it also happens that the six top universities in the country: Oxford, Cambridge, St. Andrews, Edinburgh, Dundee and Glasgow. At least the top two in England, the top four in Scotland all happened to award MAs to all of their undergrad graduates.
It was this kind of quirk, which they surely were aware of that by saying, listen, we’re going to say that you need to have an MA. Well, that will exclude a BA who went to Warrick University, but it will not exclude a BA that matriculates into an MA who went to Oxford University. So government policy can have an impact as to what universities do in terms of what little bit of paper that they produce.
There are other requirements, too. In the US you’re not allowed to…ABA accreditation is something which applies to a lot of law schools and ABA accreditation is not given to a correspondence program. You can’t do a law degree by mail. You have to actually go and attend at a law school.
That’s something where we’ve seen certain requirements from the ABA accreditation standpoint, which then gets passed on into the state bars accrediting requirements themselves. Because they say, listen, we will only accept an ABA-accredited law degree for the purposes of qualifying for the law exam.
We’re seeing there another sort of interaction between government and schools in terms of dictating how the education has to be administered and then that determines what education is qualifying. Those are all still there. And I think those will start to break down eventually because this COVID thing really has shown people how useless physical attendance is and how much cost is involved in doing it.
I can’t see the usual model surviving. If there are reputable institutions and they start offering knockdown priced bachelor’s degrees that can be administered remotely.
Petri: Sounds to me that there’s a lot of protectionism involved and also a bit of hardcoding, borrowing from the tech world, that you just hardcore what’s in your mind, or was actually the purpose here in the short term right in the moment when you’re writing the law and then all the next generations are suffering from the consequences.
Preston: I don’t think most of the educational norms are really hard coded into the law. There’s no law, which says in order to get a job, you must have a bachelor’s. There are certain requirements which are set down at least for lawyers, those requirements set down by bar admissions committees, but the rules of the court, they’re not necessarily rules of statute.
It’s not really a law as…it is a law. It’s a rule of a legal nature, but it’s a rule of legal nature, which can be very easily changed. At least in the perspective of admitting new lawyers. I think for the rest of the economy though it’s all entirely informal. And so really the changes could happen very, very quickly once you get big corporations, which are doing most of the hiring, to change their expectations. If you’re more likely to get a job at Google having obtained Google qualifications than having gone and done a CS degree at Stanford.
It’s not going to take long for people to figure out that if they want a hundred thousand dollars a year job straight out of high school they should go take the Google course and then start working at Google. And that I think is going to be really compelling for people at this point. Because that’s what you’re looking at. You’re looking at someone who’s 18 years old, just finished high school. They have two options.
Either go get a bachelor’s at some university. It may not be a good one or go and take this qualification and start earning $80 000 a year working customer support at Google. That’s a pretty compelling proposition and that’s really going to start to draw talented candidates away from the colleges and into professional training environments where they just do it at the corporation.
Petri: Obviously they are better markets for some student education than others. if you’re studying ancient history or something, properly, you are not exactly as in high demand like someone who is coding or doing things which are in short supply at the moment.
That’s probably the quickest way to indeed change the system that people are doing things which are bringing them jobs and making them money. And the educational system needs to adapt to that. And, starting from the easier ones in high demand and then rippling down to the rest of the economy.
Preston: It’s not so much adaptation. The guys out in California who are pushing these changes know what they’re doing. It’s disruption. The educational system is not adapting. I don’t think universities can adapt because imagine you tell some university, which is geared towards making money through a variety of means.
It makes money through endowments, which are provided by alumni. It makes money by providing campus services, which administers profits: cafeterias, dormitories, that sort of thing. It makes money by tuition. It makes money from federal grants. When you suddenly say to them, okay, well, we’re going to take the student out of that, right? So they’re not really going to have any particular loyalty to their alma mater because they never attended in person.
It was just a course that they did by mail. There was no sort of sense of comradery that they had as being part of the community. Furthermore, they’re not going to be consuming cafeteria food. Additionally, they’re not going to be consuming any of your residential services. And finally, they’re just doing this as a formality so that they can just get a qualification, get out, and they’re not really looking at any other value-added. They don’t care about your campus. They don’t care about your library. Everything’s online. They just sit at home and do this at home. And by the end of it, you give them a piece of paper and they’re on their way. You can’t adapt to that. That destroys the old model. The only way a university that’s geared towards administering old-style education can pivot its business to this new style is essentially by rearchitecting its entire business and throwing out everything that was there before or offering what was there before as some kind of premium service, like Hogwarts, where you just go and you show up, a boarding school where you just show up. And then it’s a very small elite who are consuming that kind of community stuff, which is how college was 50-60 years ago.
These are these small exclusive experiences and everyone else went off to vocational training. What happened in the eighties and nineties is that they said, well, everyone must go to college. And now what we’re finding is that it’s sending everybody to college maybe it wasn’t a smart idea because most people had no business being there and didn’t really need that experience for what they were actually going to be doing in the professional sphere. They were just chasing credentials for the sake of chasing credentials in a job market that didn’t need them. I don’t see them adapting to this. We’re starting to see it in New England.
I think Hampshire college is shutting down. There are a couple of others that are on the brinks. These very, very small colleges, a couple of hundred students each, or a couple thousand are shutting down right, left and centre up in New England or they are in very dire financial straits. And so the next tier will be those highly expensive private schools that cost a ton of money and don’t really deliver anything altogether different from a state school, which does the same thing for half the cost. I think those are next. And so it’ll be interesting to see when and how they wind up folding.
Petri: What are the opportunities now in this decade? What do you see?
Preston: There are a lot. One of the big ones is AI. That will speed. And we’ve been seeing this for a long time, at least in the legal community is that there’s this weird… the law has long relied on this weird pipeline where you have a…
Petri: Wait, should I do a Turing test? Are you actually Preston?
Preston: Yeah, does it talk about marmots before talking about anything else?
Petri: Actually, in fact, it hasn’t. I might be talking to Siri.
Preston: Anyway, back on track. The law has had this weird progression. You’re supposed to, and I remember being told this when I was a very, very junior lawyer by my parents who were also both lawyers and by other lawyers. It’s a progression. You get on a treadmill at the beginning of your career and you just stay on it and you just proceed forward.
Or like it’s not even a treadmill. It’s more like a travelator. You hop on and you wait, and as the passenger time elapses, you gradually advance and then you get more responsibility and then you have a busier practice, blah, blah, blah. This was to get on as a trainee or a first-year associate you’re hanging out there for a decade.
And then you either go in-house, go in counsel, or become a partner. Those are your three options. If you go in-house, if you decide you don’t want to work that hard, you go in counsel. If you’re not able to make partner or you don’t want to make a partner for whatever reason because of the targets. And then you make a partner that’s if you’re really if you’re good at hustling for business, essentially. That’s the path that you’re supposed to take and then you’re hanging out as a junior partner for 10 years, a senior partner for 10 or 15. And then at that point, you’re out of life. You’re 60 years old and, or in your mid-fifties, and you start making decisions about what you want to do for your retirement. That pathway is dependent on junior lawyers doing a lot of menial work.
When you go to law school and your head is full of ideals and all the rest of it. You don’t think that you’re going to be sitting there and checking to make sure commas are in the right place. And so when you first encounter it it’s something which comes as a little bit of a shock to the system.
You say, well, I’ve got all this education, I know all these rules. And yet here I am in a messing around with this document and make sure everything’s in the right place. That turns out to be super important because you have to learn where everything is. So that later on, you can identify where there are mistakes and what needs to be done.
But AI has the potential to very much eliminate …I was always a bit sceptical that it could do this, but then when I saw GPT-3 recently, I realised that the bottom end of the market that initial production of documentation by juniors based a certain set of very limited parameters, that is going to be automated almost completely.
We’re going to have computer programs that can take public company documents and public company filings. They can probably take inputs right from the company’s own servers. Then they can produce a document which is more accurate than a team of lawyers could produce. The lawyers will then review that document before it gets published and then the document will go out and get published.
But the actual process of producing it, which used to be quite a labour-intensive will not be so labour-intensive anymore. And so that will eliminate the need for junior lawyers, which will make the profession more top-heavy because there’s not as many fees coming in from the junior lawyers doing all that work.
There are some changes coming to this profession.
Petri: So you’re saying good news, we are going to get rid of all the layers in two generations?
Preston: I think you’ll probably get rid of some junior public company lawyers. Public company compliance will become a lot easier and a lot cheaper than it currently is. So M&A lawyers I think are in some serious trouble and debt finance lawyers are also probably in serious trouble.
What won’t be in serious trouble are things like crisis management or general counsel work for small, early-stage companies where it’s not so much about producing large numbers of documents. It’s about understanding what the client’s commercial objectives are and trying to guide them through a potentially thorny thicket of difficult choices in times like COVID or if there’s some disaster or if there’s some criminal issue or if there’s whatever. Fill in the blank, whatever crisis might arise. That’s still going to be there: lawyer as counsellor.
Petri: Creative things, the more challenging, harder things.
Preston: And it used to be like that. This hyperspecialisation that we see in the profession now where humans are basically operating as document preparing computers that really didn’t start until the sixties and seventies. And then it accelerated in the eighties. And in the nineties a big law profession in order to get ahead, you had to be hyper-focused on a very narrow type of transaction or deal or area of law, unless you were like some corporate M&A quarterback. The way that you got ahead was you were the guy who does X. I don’t think the guy…
Petri: Why did this happen? What’s the background for that? Was it the computers? What about driving this type of thing? Obviously, business has been done for many hundreds of years, thousands of years, what changed?
[You can stop counting now. The total amount of marmot mentions in this episode is 22.]
Preston: Computers increase the complexity of transactions particularly in the eighties. That’s what created securitisations. Whether it was the ability to model and create instruments on the back of very complicated cash flows backed by enormously huge pools of assets: 30 000-40 000 mortgages at a time. That was part of it, for sure. The other part was that the market dynamics for law practice is that lawyers compete either on skill or price. Skill, pricing, personal service are the three levers and the sliding levers that you can adjust with a given lawyer.
You can have a really friendly affable guy who pays no attention to your matter but is very good at something. And maybe you go to him or you can have a guy who’s not so good technically, but he’s really good with client service. And he’s good at putting you in touch with the right people, but he’s not the guy who’s going to be crunching away on the documents.
We have an expression in the profession that there are three types of lawyers: minders, finders, and grinders. So your minders are the white hair who sit around and make sure that everything’s okay kind of run the office and that sort of thing. Your finders are hungry young guys and gals who go out and bring in new clients and new business.
And the grinders are ones who are really technically quite good lawyers, but they just don’t have any appetite for doing things like business development or podcasts or anything else. I’m a very bad grinder. I freely admit that.
Petri: But you’re a grinder ?
Preston: I like to think of myself as a finder. I’m not afraid to get my hands dirty and do the work because that’s our bread and butter. But if I’ve got a large and complicated M&A transaction, I know who I’m going to send it to. And it’s going to be one of my law partners. It’s not going to be me. I will do things like licensing agreements and stuff like that.
So not M&A documents and sale and purchase agreements and things like that. For any attorney, there’s a universe of possibilities. The market has incentivised up until very recently focusing very narrowly on something because if you’re competing on skill and price, the objective is to say I am the best at this.
This person is the best at whatever that is, fill in the blank. Or they’re very good at it, or they’re very well known for it. And then the question is how much does it cost to get that service? And so if I want to get a slightly less expensive service, maybe I then go to the next guy and say, well, I don’t want to pay $2 000 an hour or 80 000-100 000 for a seed round. I want to pay 50. I want to pay 20. How do my preferences adjust?
Because if you go to Cravath, Swaine & Moore, they’ll take anybody if you can pay their fees, which not everybody can. Same thing with Sullivan & Cromwell or another firm like that. They have very good lawyers, but they’re also very expensive.
The question is where do you fit into the market? And as an early-stage lawyer, you don’t go and say, well, I do early-stage counsel for Sullivan & Cromwell for companies that have no money and were started last week. You don’t go into big law to go represent those kinds of companies. That’s where we might see some change in the future is that the “I’m the best” becomes less relevant if you know that the documents are very good automatically.
Then the question is how do you differentiate as a law firm? That’s one question. If everybody else is running the same software as you. Law firms have different precedent banks and template banks. In London, for example, Clifford Chance is widely regarded as having the best precedents in town.
And so whenever someone gets a hold of a Clifford chance document, you can be sure they’re going to save it down to their machine and keep hold onto it in perpetuity. Because it’s a really good precedent in case they get a similar deal coming across the desk. So that’s something where precedents or things people held on to.
Sophisticated clients will sometimes come in and be like why am I paying for this at this firm rather than this firm? Because you’re all using Clifford Chance’s documents anyway. This is something you would hear on a regular basis is that whatever Clifford Chance does then becomes a market for the rest of the City.
And so in the future, I don’t think they’re going to have that debt monopoly anymore. It’s much more likely than something like Google will be deploying an AI, which then can create market documents that are based on various inputs from across its business units .They’ll have some very good intelligence about what’s market for a range of different types of documentation.
That’s the first problem. And then the second problem. So you have the firms, how did the firms stay competitive? And the second one is how did the individual lawyers stay competitive? Because remember within a law firm, it’s not like a company where you have a direct report. And so I don’t report to anybody as a partner in a law firm except to the managing partner and the executive committee.
And they pretty much leave you alone as long as you’re doing your work. That’s how every law firm works. Associates report to partners, partners report to their executive committees and their managing partners. So that’s the structure. Each individual partner I should say is like a standalone business unit.
You’ve got your own P&L. You’ve got your own clients that you’re bringing in. You have your own billable hours that you’ve done per year. And so you can track whether you individually are profitable vis-a-vis the rest of the firm. And your job is to feed yourself, to feed your law partners and to feed your associates so that the whole firm is profitable.
What happens if all of a sudden this model where we’ve had these hyper-specialised lawyers that only do one set of documents if we suddenly have the AIs that can replace them? That suddenly changes the incentive for the individual members of the profession in ways that we may not expect to understand. Will people go to people who are essentially document production computers if the document production piece is now well and truly handled by a machine? And then what kind of person? And I think lawyers will still exist, but the question is what kind of person will people be going to when they need a lawyer? What kind of advice will they be giving out?
What kind of person is going to be better at this than other types of people? It’s going to be really interesting to see how the profession changes.
Petri: Have you already seen some kind of AI services which are providing basic law things? I know that there are already something that you can claim if your flight is delayed, some parking tickets and these are already in place, but a bit more complex situations?
Preston: That app is called DoNotPay. It’s by a guy named Josh Browder. I’m not comfortable with that because it calls itself a robot lawyer, but it’s not. It’s basically a form-filling service. Filling forms is one thing. At least in the US, you’re allowed to provide forms for people to fill out in forms libraries. I think Cooley has one on its website. It has some startup financing documents. And so you can click and parameterise a bunch of different things and generate like a convertible note and various other things. There are law firms who have done the form filling thing, and there’s no AI involved there.
There’s just basically a series of questions and those questions say, all right, well then, and a decision tree, and then it produces the document based on following that algorithm. But that’s not an AI. There’s no neural network. There’s no creativity. It’s just saying, listen here are all of the potential options, and we’re going to help you fill in this particular document based on those options.
So I’m very sceptical. Whenever someone says AI, I usually go, yeah. Yeah. Whatever. Especially in law, because AI in law doesn’t exist yet, but it will in very, very short order.
Petri: You touched a point that you were becoming, or you already were a, let’s say a City lawyer, securitisation and finance, fancy stuff, but then something happened. What happened?
Preston: I got bored. I then helped to build a prototype with two other guys on a fork of the Ethereum proof of concept pre-testnet called Eris in early ’14. And it was designed to be an automated decision-making platform. We called it DAO. I think it was the first of its kind.
And it was basically adding permissioning into a genesis block of an Ethereum fork. So that could determine things like who can add a block, who can post transactions to the chain who can add smart contracts to the chain. And at the time we called it a permissioned blockchain and we were widely ridiculed for creating this thing.
That was the genesis for a lot of, at least the intellectual genesis and not the direct genesis for a lot of projects that followed about distributed ledger tech and distributed crypto ledgers that were serving purposes other than a cryptocurrency. That was really the first of its kind and what happened was we built that prototype. And then a very nice fellow named Sean Park who’s the chairman of Anthemis group, which is a London-based FinTech VC firm, found it. He gave us a call. He invited the team out to his place in Maribel, in the French Alps, where he was holding a conference with his entire venture fund advisory firm.
And we went out there and they made the decision to invest in us. After the three months of diligence, we closed a million pounds of investment or thereabouts. Then we’re off to the races and ran a company for a while, selling stuff to banks.
Petri: What happened, obviously, you’re not doing that anymore?
Preston: They decided in 2017, listen, this ICO stuff is all the rage. And so we’re going to do one of those. So I resigned. I said, OK, that that’s not my street, so I’m going to pursue some other interests. And I went back to law school in the States. At the time I was admitted in England and went back to law school in the States requalified here in the US and then became admitted here in the US and then opened my own law firm which I ran for about 18 months before joining my current firm, which is Anderson Kill.
Petri: What have you learned? You’re also advising tech companies who are in the leading edge of different services. You’ve seen a lot of different situations, I could imagine. Not all of them too much fun and glorious, but maybe something to be aware of if you’re a startup founder. I know many cases where not so nice stuff has happened, mostly human factors, but these are the things people don’t usually talk about but it happens quite often. Is there something we could learn from your experience of working with different companies in different continents and in different situations?
Preston: I think you can probably tell whether a startup is going to succeed or fail, more or less immediately after they incorporate by reviewing their business plan. It’s what I have seen in the startup land. There are a lot of companies that either have a lot of steps to get through to get towards monetisation or they just don’t have a concrete plan to get to monetisation and profitability.
This is particularly true in advanced technology areas. You see a lot of companies that are coming in and saying, listen, we have this great fantastical thing. And in order for it to work, we need to build for a year and a half and do this and then sell it to that and then get this particular thing.
You can tell when it’s a little too early for someone to be doing something. I’ve come across a lot of early-stage entrepreneurs who walk into my office in a figurative sense because of COVID. They’re not literally walking into my office.
Petri: They are zooming in your office.
Preston: They are zooming in the office. And, you’re like great, this is interesting what you built, but what’s your plan? Where’s this going? And then some of them kind of shrugged and said, well, I don’t know. I’m not sure when we don’t have a concrete plan. And those projects usually fail pretty quickly.
Of course, it is possible certainly that you could have a loss-making project which goes for years and years and years and years, and eventually becomes Amazon like Amazon itself or like Google itself. But with those companies, you can tell with those the user metrics are going up and it’s just a question of tweaking the model a bit. Whereas with some companies it’s just really apparent that the founders don’t have any clue as to how they’re going to make money.
If you don’t know, if you literally have no concept of how you’re going to make money it’s not a good idea to go and start a startup. That’s the first thing. And the second thing is venture funding is possibly the worst thing you can ever take for your business.
You are far better off running lean, lean lean with some very good engineers. I’ve seen companies build some amazing things with a staff of two or three really good, competent, dedicated people. With two or three of them you can accomplish virtually anything.
And then I’ve seen other companies that are competing with them with 30 or 40 people and they’re accomplishing far less. You can see when there’s magic happening. It’s really obvious where the magic is happening. And when there isn’t magic happening, it’s also really obvious if you choose not to delude yourself about what you’re looking at.
In either case, good legal advice can help both of those companies get themselves on the right path. Particularly if they’re in a tricky area, you’ve got to get those I’s dotted and those T’s crossed before you can actually proceed any further.
But you have to be realistic with your clients. You’ve gotta be helpful as you can. And that means as a lawyer not just sitting there and saying, okay, well, I’m gonna walk into your office and we’re going to do this, and you’re going to write the contract and you’re going to send me a bill. But if the client wants me to do that, fine.
What I usually find is that they prefer a looser dialogue where we talk about their business, what they want to achieve, how they want to achieve it. I can say, listen, I’ve been here, I’ve done that. I’ve got the t-shirt. And here’s where I think you’re going wrong. Take my advice. If you don’t, it’s up to you. And some people like it and some people don’t and if they like it they keep getting it.
It’s fun being a startup lawyer who has actually run a startup because you get to see new people who are going through the same things and all the lessons that you had from your experience you can then pass them on to somebody else and also learn from watching them do what you no longer wish to do, which is run a startup.
Now is your chance to give some wisdom, maybe top five the things that do not do, and please do these things to make your life easier when they knock on your door.
Top five: the number one is don’t sell securities or be a money transmitter. Don’t say I’m running a hosted Bitcoin wallet solution in the US that sends funds to Iran. If you do that, you’re not going to have a good time.
Two is hire very sparingly. Employees are some of the most difficult things you can obtain and you should hire really as few of them as you possibly can for as long as you possibly can. They’re expensive. They complain a lot. They’re difficult. They take time off. Employees are not fun to have. My least favourite thing about running another company was having employees.
The third thing after don’t break the law, don’t hire anybody: don’t take venture money if you can possibly avoid it. If you can figure out how to make money…if this thing that you are building is worth building chances are pretty good that you’ll be able to make money just by hooking it into Stripe, pushing go, and then watching money printing.
And if that’s the case, then you might have some argument that you should start hiring aggressively to go scale-out and things like that. Failing that if you’re saying, we’ve got to do all of this building before we have a widget that’s useful. You either don’t know the area that you’re in well enough to be playing around in it.
There’s a law-based startup in California. They attempted to computerise the law. And they did that by basically having a captive law firm, which was then subsidised by venture money and a couple of software tools that the law firm used. It’s a weird approach, but basically the founder, in my opinion, didn’t really understand the businesses that he was getting into.
And so it was this giant sinkhole for venture money. He didn’t understand the economics of the business he was going into. I think it’s really rather than the top five, I would say that’s the top three. And those are the things that you encounter the most.
So it’s people either they don’t understand the regulatory space. That’s the biggest one. And then you have to take some very aggressive corrections. Thing two is that they overhire too early and they burn. They basically ruined their runway because they’ve hired too many people. Employees really should be the last, the absolute, last thing that you bring on and that if you can possibly avoid it. And then the third thing is, Oh, gosh, where were we Petri? I’m getting lost.
Petri: Maybe I can help you out here and smoothly shift the topic. If I’m thinking of having my headquarters in the US, I’m having European operations at the moment, is it a good idea?
Can I get into the country? Can I get money? Is the US already sort of past it peak and I should maybe look somewhere else or stay in Europe if I’m in Europe or wherever I am, and just build my company from here?
Preston: The US is easily the best environment to raise venture capital. And that has been the case for a very, very long time. So, if you’re looking for VC money after COVID is over America, it still is number one. It’s a pretty easy place to live. The taxes are fairly easy. You can go find places like Utah or Wyoming where the government pretty much leave you alone.
The only issue with the the US right now is that our cities are falling apart. Particularly, the big cities that were run by Democrats. That’s and COVID is a thing. I think that those two things are probably connected because a lot of the people who live and work in the cities who are lower-income work in service industries that no longer require their services.
I suspect that when COVID and the city situation in our cities will also likely end. Query whether in the US there has been a sense of a loss of trust between varying communities. I think that the suburbs and the rural areas really have acquired an enormous amount of distrust for urban elites, and they regard the urban elites as having screwed all this up for them by enacting certain policies or not being aggressive enough with policing or things like that. And so that may change the dynamic in America a bit, but I think America still is the best place in the world to do business or to build a business.
The other thing is we have to now start understanding what the world is going to look like after this is done. We’re starting to see the Internet cleave off into individual national networks. TikTok just got banned in India. It just got banned in the US. It’s likely that we’re going to see expanding app bans. WeChat is currently proposed to be banned in the United States. It’s a very popular Chinese messaging app and payments app.
What we’re seeing is the Internet is starting to split up into different universes. You’re going to have to decide which universe you want to be in. The US will probably continue to have sway over at least the Western hemisphere and Europe, and probably Africa also.
That’s probably the biggest market and it’s probably the same within that market. It’s probably the safest large power to build a business in as compared to Europe, for example, which is not. It’s a bunch of different States. It’s a different regulatory environment. And the US has a big, enormous home market where you can build these things with 350 million users.
The US is still a good place to do business. The immigration thing, obviously, that’s going to be an issue wherever you try to build your business. Whether that’s a problem is going to depend on where the founders need to be and where the employees need to be. But to the extent that you can do things in the US, why not?
Petri: Could I do it just from Estonia, Germany or Greece or wherever I happen to be and have incorporated my company? Could I run my US business without a US entity from elsewhere? Is that actually even possible or is that too many risks involved to do that?
Preston: You can service American customers from overseas without having a US entity or without having US employees. But it just is going to be a little more complex from the tax perspective.
If you expect that you’re going to have a predominantly American business, things just get much more straightforward if you are running that business inside of the United States. It’s just a question of ease of use.
Petri: Okay, sounds good. I have been off from the blockchain and the Bitcoin and that world for a while. It’s been many years I was involved pretty much the same time you were founding your company also. Talking with Tim Swanson and Smart contracts 2.0 and stuff like that. What’s exciting now?
You’ve been in the pulse all the time, is something really coming now out of the woodworks in a sense we start to see some serious traction and regular people are starting to use things?
Preston: There are three things. One of them is called Layer 2. Layer 2 is a series of technologies that utilise the underlying Layer 1 chains. And, conduct secure transactions off-chain, which then eventually settled back onto the chain. And the reason that’s important is because if you were expecting that the entire world’s transactions will be run on something like Bitcoin, you’re going to be disappointed because there’s no way that Bitcoin could actually hold onto that much data.
There needs to be a solution, a credible solution, a secure solution, which allows people to move Bitcoin around without actually leaving data trails on the Bitcoin chain itself. We’re seeing a number of different solutions that are aiming at that, both in the Bitcoin universe and the Ethereum universe.
And those are generally referred to as “Layer 2”. That’s thing one. Thing two is scalability more generally. As part of this problem that these chains have been too bloated, people are trying to figure out other ways that you can either share the load and re-decentralise the chain so that you don’t have a handful of large nodes, which are responsible for running full nodes with the chains.
There are a range of different technologies in discussion. Sharding is one. Sharding is something which exists in other settings. It doesn’t currently exist in a blockchain setting because blockchains are sequential. And so what you need to do in order to verify the most recent transactions, you need to be able to eventually verify that all the transactions exist in order.
I’m going back to the beginning of the chain. No one’s really figured out a good solution to that but I imagine humans are clever and so maybe we will. That’s the second thing. The third is DeFi, or decentralised finance, but most of which is totally harebrained and based on alchemical black magic that is not going to work in any market that moves down.
One of the most popular DeFi solutions is something called MakerDAO. It creates a stablecoin, which is designed to hold its value against the US dollar. When there was a very adverse correction in the Bitcoin and Ether markets at the beginning of COVID-19 MakerDAO broke.
It seems to perform as advertised. A lot of people lost a lot of money. And the reason for that is because these systems were great when the price in the underlying collateral that backs them is going up, but they don’t work so great if the price of the underlying collateral that backs them is going down.
There are circumstances under which virtually every DeFi system that has been described, can and will break. It simply relies on one of these cryptocurrency platforms being abandoned or its use diminishing to a very small fraction of what it currently is.
It assumes that people will continue buying the underlying shitcoin and if that’s the case, but then everything’s going to work fine. I don’t think that’s a safe assumption to make. it’s not. We make certain assumptions in the way we run our societies. For example, we make assumptions that the dollar is going to be used in legal tender for the payment of all debts, public, and private and taxes.
That is something which allows you to build a financial system on the back of that because you know, you ultimately have that demand for US dollars, which sits behind it. I’m not sure that that is necessarily true with crypto and indeed there are widespread suspicions that crypto may be more manipulated than is currently being led on and through things like other stablecoin projects, which may or may not be printing vast quantities of fake dollars and pumping those dollars into the market. Allegedly.
That’s the kind of stuff where people in DeFi say, well, we replicated it. It’s kind of a cargo cult version of regular finance. It looks similar. It performs the same way. We can go spend it and do whatever we’re going to do. But here are our assumptions. And when you look at the assumptions, I think it’s fairly straightforward to say these assumptions are flawed.
I adopted a very critical approach towards the DeFi space, although it has hints of what the future could be. And those hints are automated financial contracts, which can be integrated with Bitcoin, which can be integrated with Layer 2 solutions, and which ideally could be integrated with, just generally digital money in the future.
That again is going to eat into the market share of large banks and other financial institutions and likely eviscerate them given enough time and remove a lot of the junior talent at those institutions. Much like AI is going to remove a lot of junior talent in the legal profession. Those are the three things.
Petri: When do you predict that we will start to see those kinds of shifts you described, maybe in the latter part of this decade, after five years or so?
Preston: Five years should be enough.
Petri: What is your favourite word?
Preston: Oh, gee, favourite word? Marmot, probably my favourite word. I like Marmot. It’s a good word.
Petri: What is your least favourite word?
Petri: What turns you on creatively, spiritually or emotionally?
Preston: Marmots. I like Marmots. They’re my muse. They really inspire me to do great things.
Petri: I hope someone is actually having a clicker because he knows hitting hard to count all these.
What turns you off?
Preston: Shitty people. People who are either selfish or short-sighted, who are unable to respect difference in other people and do think that their opinions are more important than the opinions of others and who don’t recognise that they are but a mote of dust on an obscure rock floating around on the rim of a very large galaxy, which is a very unremarkable galactic cluster and a very unremarkable corner of the universe.
People who have an overinflated sense of self-importance.
Petri: What is your favourite curse word?
Preston: I’m not going to say it. I suppose the curse word that I’m allowed to say will be shitcoin and that is a Bitcoin or a curse word, I think which is a fair one. So let’s put that one on the record is my favourite.
Petri: Now, I’m curious why you censored the one you are not supposed to say, and it’s not a rodent or is it?
Preston: My mother would be disappointed.
Petri: What sound or noise do you love?
Preston: There are a couple of different like spacecraft engines from science fiction. I like the TIE fighter. That’s a particularly like favourite sound and also the Millennium Falcon’s engine. That’s another favourite sound. Those two sounds from Star Wars are actually some of my favourites and also actually the Thunderbolts. Let me make sure I get it right.
I think it’s called Thunderbolt T 1000. It’s a siren that they used during the Cold War. It’s a two-tone nuclear warning siren. And I really liked the sound of that particular siren.
Petri: What sound or noise do you hate?
Preston: People talking loudly on the phone.
Petri: What profession other than your own would you like to attempt?
Preston: In an ideal world, I would like to be a psychiatrist. But I think that there’s too much school involved. I’ve been to too much school and I’m not going back.
Petri: But the good news is there are no schools in the future. So maybe we’ll just wait for a few years.
Preston: I think for medicine and law, unfortunately, I think a lot of school is going to remain for a very long time. I don’t think you can get school out for those two things, but yeah, I’m not going to go do that because that would require much more school.
Petri: What profession would you not like to do?
Preston: Doctor. I would not want to be a doctor of internal medicine or a surgeon or anything like that, it’s too messy and awful.
Petri: If you could be a co-founder of any startup in any era, which one would you choose?
Preston: Google and I’d be retired on a beach somewhere. Never work again. That would be it.
Petri: You would have been the third wheel of Google.
Preston: If I could have been like really early at Google, like one of the early employees, like that would have been fine. I would’ve been gone and surfed for something for another 10-20 years, however long I had left on the planet. Go big or go home.
Petri: The first in-house lawyer in Google!
Preston: Maybe, who knows?
Petri: Any final words for the audience?
Preston: I hope you’ve enjoyed this conversation we’ve had. I hope you look up the Marmot Recovery Foundation, which is a great charity, marmots.org, and they do some really important work. I’m not kidding. They do some very important work to save the very endangered and very adorable Vancouver Island Marmot from extinction.
I hope you enjoyed this conversation. I get to see a lot of weird tech up close and personal with the people who build that weird tech. Even though we’re in a very dark time, I’m very optimistic that we’re going to have some very interesting times ahead with the kinds of people with the businesses that they’re building.
COVID is going to end and when it ends it’s going to be a really interesting time to be an American.
Petri: Thank you. Preston. Always fun to talk about marmots!