Video Transcript: Fred Wilson on Tech Tonic Interface

April 18, 2013

Below is an unedited transcript of the video interview I conducted with Fred Wilson of Union Square Ventures:

PAUL SMALERA, Technology Editor Reuters.com: Today I had a great chat with Fred Wilson of Union Square Ventures. Check it out.

Let’s start with Bitcoin. It’s captured the imagination of tech blogs, there’s been a big price spike, dozens of posts all over the internet. And your own blog is full of savvy readers; I was reading through the comments on it. One of them said, ‘I haven’t even followed Bitcoin because I don’t really understand it quite frankly.’ Can we start there? Can you just tell us from your point of view what Bitcoin is?

FRED WILSON, Union Square Ventures: Bitcoin is a digital currency.  It’s a currency like the dollar or the euro or the yen. But it’s different in a couple of important ways. One is that it’s not based on faith in a commodity like gold or in a government like the US government. It’s based on faith in a mathematic formula. What underlies Bitcoin is math really and there’s a finite amount of Bitcoin that could be created; 21 million Bitcoin in total. We haven’t created all the Bitcoin yet because Bitcoin gets mined like gold would get mined.

Mined in like a computer has to crunch through a program?

To make it simple, computers are searching for matches of block chains and it takes a lot of processing power to do it and when you get a match you own that Bitcoin. People mine Bitcoins and they either keep them, own Bitcoin, or they sell them, exchange them for dollars or yen or they conduct transactions with them.

This is the cash of the internet because you really do own that piece of code, that Bitcoin? And you put it in your Bitcoin wallet. Why does any of that matter? What’s important about this?

The cash analogy is really important. Cash is very valuable because if I give you cash, you have it and you don’t really care who I am because the cash has value so you don’t need to worry about my creditworthiness. As long as I’m giving you the $10 it’s yours and I can’t get it back, there’s no chargeback on it or anything. There are a lot of transactions where cash is really the most efficient way to do them but there is no cash on the internet. There’s no way to actually put cash on a wire so Bitcoin is cash on a wire. So every transaction that you would want to do electronically but ideally you’d want to use cash, Bitcoin is the ideal currency to do that transaction with.

Why does that part matter on the internet? Why does it matter that I can do it with cash and it doesn’t trace back to me?

There are all sorts of reasons. If you’re a criminal and you want to engage in some sort of illegal activity it would be a very effective way to do it. In fact, a lot of the early uses for Bitcoin are for illegal activities on the internet.

It’s one of the Silk Road website. You can buy any drug in the world pretty much and have it mailed to your door.

People need to because those transactions anonymously because they’re engaging in illegal behavior so that’s not a good thing. But like many…

Those of us who don’t want illegal drugs, what are we going to use it for?

Lots of transactions that people want to do anonymously or cross border. For example, there are a lot of parts of the world where you have to conduct transactions in the local currency but people don’t want to actually own the local currency because they don’t trust it: Bitcoin’s very good for that kind of thing. It’s a good way to move money internationally, there are no fees for moving Bitcoin. I take dollars, convert them to Bitcoin, I send the Bitcoin to you, you take the Bitcoin, convert them into yen and nobody’s taking any fees on that transaction other than potentially the transaction from dollar to Bitcoin and Bitcoin to yen.

It’s something that could really start to disrupt governments, monetary systems, central banking. Is it at that scale yet though?

No, the total value of all the Bitcoin in the world right now is about $2 billion which is a pittance. That’s a lot of money, right? We would all be very happy just to take $2 billion and go home. The problem is if I gave you $2 billion of Bitcoin it would take you a very, very long time to convert that into…

Right.  There’s a whole process, third parties and…

What’s interesting to me about Bitcoin really is it reminds me of a lot of other things. It reminds me of peer to peer architectures. It reminds me of protocol like HTTP, SMTP and RSS. These things that are of the internet and are fundamental to the architecture of the internet have turned out to be very, very important and Bitcoin shares a lot of those characteristics. In the venture capital business we’re in the business of pattern recognition so when I see something emerge that reminds me of all those other things it just tells me that there’s something here that’s important and that this could be a very  big deal. I’m not saying it will be but it could be.

Is it, to borrow a phrase from another company, that you and Union Square Ventures have invested in, is it plumbing of the internet? Is it something that’s already become that fundamental?

Yes. Absolutely. I think there’s a chance that it will be. There are a lot of people who will put restrictions on it; as you said central banks aren’t going to like it and governments aren’t going to like it.

Can they regulate it?

They can regulate the interface between their currency and Bitcoin. FinCEN which is the regulatory body in the US has already put guidelines saying that anybody who’s operating certain kinds of Bitcoin businesses needs to get licensed as a money transfer agent and so we’re already seeing it start to get regulated. I don’t think regulation is a bad thing; I think in many ways it might be a good thing because it might allow people to have more confidence and have more legitimate uses of Bitcoin emerge as opposed to just illegitimate uses of it.

Maybe even reduce the illegitimate uses if there are only certain things. You’re making me think of the online poker world that disappeared a few years ago when credit card companies stopped allowing transactions for those.

There are lots of gambling sites. You asked me who uses Bitcoin: there are a lot of gambling sites where people are using Bitcoin to buy chips or whatever because, again, they want to bypass laws.

From where you’re coming from as a venture capitalist, you presumably don’t want to sell illegal drugs but I’m guessing you wouldn’t want to run a gambling site, what are the opportunities to participate in something like this?

Trading exchanges. Think about NASDAQ. Should there be a NASDAQ of Bitcoin? Should there be hedge funds of Bitcoin? Should people short sell Bitcoin? Should people be able to market make in Bitcoin? The whole ‘Bitcoin as an investment asset’ I think is quite interesting. I also think allowing more merchants to accept Bitcoin and instantly convert it into whatever local currency they want so they’re just allowing people to pay them the way they want to pay them but not have to accept the risk of holding Bitcoin. I think there are a lot of interesting opportunities there. I do think more and more people will accept Bitcoin. There are all sorts of geeky type of activities but Word Press accepts Bitcoin, Reddit accepts Bitcoin, 4chan accepts Bitcoin.

There’s a bar in New York City that apparently accepts Bitcoin.

Probably filled with geeks.

Something you said a few minutes ago: it’s money on a wire, it’s $10. If you give it to me I keep it and I hold onto it. That’s assuming you don’t just rip the $10 right back out of my hands. Talking about security

Security is going to be critical in Bitcoin for this very reason.  If I can get your cash it’s my cash and if I can get your Bitcoin it’s my Bitcoin. So using the latest and greatest computer security technologies to create wallets that people can…think of wallets as banks, effectively. I’m choosing to store my Bitcoin at XYZ wallet because I think they have the very best security and they’ll keep hackers out of stealing my Bitcoin. People also take their Bitcoin and do something what’s called ‘cold storage’. So they take a USB flash drive and stick it in their computer, get the Bitcoin and then disconnect it from their computer and the internet and stick it in a safe in their house or something. The same thing they would do with cash.

That seems excessive.

I’m not sure it is excessive.

It seems like something that shouldn’t be necessary given the fancy computers sitting on the desk and the thumb drives…

Hackers are pretty good at cracking into system. If they know you’ve got $1 billion of Bitcoin they’d probably want to figure out how to get it.

Fair point. I wanted to shift gears a little bit and talk about something else and almost intersects with Bitcoin a little bit which is regulation. You have something called ‘activist in residence’ that’s actually dealing with the problem of regulation 2.0. Not the problem but the opportunity. What is an activist-in-residence, first of all?

We have found that we can use the internet to advocate for things that we’re interested in seeing happen in the policy and regulatory environment and using all the people who are out on the internet who have an interest in these policies and activating them and making their voices heard either in local government or federal government is something we’ve done a bit of and we want to do more of and so having somebody who can help us do those sorts of thing is quite useful.

Does he lobby?

No, we don’t do any lobbying but I’ll give you an example. The FCC is thinking about what to do with a lot of the white space they’re going to get back from the television broadcasters. We would prefer, we being Union Square Ventures, but I also think ‘we’, people who care about the internet, would prefer that it doesn’t all get auctioned off to the wireless carriers with the highest price. We’d prefer to see that white space be deregulated…

Allow anyone to jump into it?

Right. The way that Bluetooth spectrum and wifi spectrum is so anybody can operate in the wifi spectrum.

And those were deregulated at one point. That’s why those technologies exist today.

Exactly. But they don’t have a lot of good spectrum for wifi and Bluetooth; the TV spectrum is quite good. TV signals can go through lots of things, the frequency bands are quite good so it would be wonderful if that spectrum were treated the way that wifi is: instead of being auctioned off to the highest bidder just given to society to innovate in and create new wireless communication technologies, one of which is called ‘super wifi’. At South by Southwest we and a few other like minded people funded We Heart Wifi; we took wifi access points and connected them to the internet via super wifi which is operating in this unregulated spectrum and made wifi portable because wireless access points would get moved around. They weren’t hardwired to the internet, they were wirelessly wired to the internet. We made a bunch of these wireless access points available for free during South by Southwest and got a lot of attention around that. It’s a hack, it’s a stunt but these kinds of things make a difference.

Who’s on the other side of this wifi spectrum? Who’s on the other side of this equation when you say you want them to be open and there are big companies that want them to be auctioned? Where is the balance going to lay down and how does your activist-in-residence move the needle towards what you’d want to see?

We want to educate our elected officials. This is a federal issue so we would like to educate our the senators and representatives about the power of unregulated spectrum and one of the best ways to do that is to get their constituents hyped up about it and the best constituents to get hyped up about it are people who are in the technology industry and they’re all at South by Southwest. That’s why we did what we did.  But you’re probably not going to get them to go all the way and not auction off any of the spectrum. But if we can get them to make a meaningful piece of the spectrum available for super wifi and other forms of unregulated wireless communication that would be a good thing so that’s what we’re hoping for.

Let’s broaden out a little bit back to regulation 2.0. Right now regulation, to almost anyone, it sounds like a horrible thing…what is 2.0? What are you trying to change there?

The current regulatory paradigm is if you want to do anything you must go to the regulators and get permission to do it and only after they give you permission can you do it. We would like to change the paradigm to be you can do it without getting anybody’s permission as long as you do the following things and then let the market adopt it. Once the market has adopted it for a while then regulate it once we have some idea of what the good and bad aspects of this thing are. I think the big quid pro quo for doing that is data sharing and transparency.

What’s that?

A good example is Airbnb. Airbnb is illegal in New York State but there’s going to be a billion dollars of Airbnb renting this year in New York City. People are doing it and they’re breaking the law.

And the law isn’t stopping them. The New York Times ran a story maybe one person will get busted for running a hotel room.

One of the problems is the way Airbnb is architected. You can’t go into Airbnb and do a search on your block and see all the apartments. What I would do if I were a regulator is I’d say, ‘We’ll let you do it but you have to make the whole thing transparent. You have to make it possible to see everything that’s going on. Don’t hide anything. Make the entire thing transparent not just to regulators but to the citizens…’

Addresses? Names?

I don’t know about the guests but the hosts, for sure. Who the hosts are, where they’re operating and under what name are they operating in. That should be out in the open so that if people are doing bad things and they’re in your building and the bylaws in your building say you can’t do it you can say, ‘Stop doing it.’ But that’s not what we do. We have this stupid system where it’s illegal but it’s happening and Airbnb is incented to make it as hard to understand as possible. We should change the paradigm and in return for giving people permission to innovate they should be required to be as transparent as necessary and be transparent and share the data about what’s going on.

Another example of this is Umber and Lift and the rideshare companies. How does this model for Airbnb apply?

One of the regulatory concerns about these ridesharing things is are people going to discriminate? A licensed taxicab in New York City is not allowed to discriminate about where they take their passengers. It happens all the time, by the way. They drive around with an off duty sign. But that’s illegal.

I’ve told them that; they still keep driving.

They don’t really care. But if Lift and Halo and Umber and all these various taxi cab, black car, ridesharing applications were in order to operate, were required to publish their data in real time to not just to the government but also to the public about how many drivers are on the road at any one time, where the rides are, what neighborhoods are people being picked up in, what neighborhoods are people being dropped off in, then we would have really good data about whether these services actually reduce the discrimination problem or increase the discrimination problem and then we could regulate based on that. But today it’s in theory. ‘We shouldn’t allow this because they might discriminate.’

Everything that you’ve said that the tech companies need to do a, I think makes perfect sense to me. And b, I can see how they could probably light up something tomorrow to provide that data. I think the other half of the equation: how does the government move at the speed that technology is changing our world?

They won’t. I think what we’re betting on is these services are going to get into the market one way or another and the citizens of the United States and the world are going to adopt them. We’re betting on that the services and the citizens of the world are going to adopt them and they’re going to become so important to the way people live their lives or earn money that people are going to demand that these services exist. It’s a lot like gay marriage. I think the reason that society, certainly in this country, is changing their tune on gay marriage is that we all know people who are gay. We love people who are gay and we can’t imagine discriminating against them. Even the Republican Party which has been opposed to this, more and more senators and representatives are coming out and saying, ‘My child is gay and I’ve changed my mind on this.’ Society will change and government will change as the world changes. As these services become an important part of our lives people are going to demand that they be legal.

We’re in New York City, you’re based in New York City and New York is about to have a mayoral race. I think Mayor Bloomberg is probably someone who, correct me if I’m wrong, is considered a friend to the tech industry and has really helped develop it over his three terms. Do any of the candidates out there now strike you as someone who’s going to carry his torch? Does that worry you?

I think it depends on who we get as the next mayor. I think there are some candidates who are probably more willing to follow Bloomberg’s policies and…

Anyone in particular?

I think anybody who runs on the Republican side would be in that camp. I think of the Democratic candidates probably Chris Quinn is the most inclined to follow his policies because she’s, to some level, been an implementer of his policies in her role as speaker of the city council and she’s been supportive and would like to position herself as the logical successor to Bloomberg. I think it would be politically sensible for her to take that approach and I think she is taking that approach.

Let’s try to square the tech timeline and the political timeline. Say this happens and Chris Quinn becomes the next mayor of New York what would you hope to see in regulation 2.0 change in the city over the course of say, one of her terms?

All you want is city hall to tell these regulators to just back off, let these companies come into the market and see what happens. I’m not advocating that in any place where people’s lives are at risk. I’m not saying we should do that for the fire department, I’m not saying you should do that for the police department. When we’re talking about health and safety issues I’m not advocating for more of a free for all situation. What I’m talking about is a lot of these industries where innovation can lead to better services at lower costs. Going back to Airbnb, one of the interesting things is the billion dollars that is going to get spent by guests in New York City this year renting places on Airbnb is going to go into the local economy because all of those hosts are real people. They get that money and they spend it here in New York because they live in New York whereas if it goes to the hotel industry a lot of the shareholders and operators of hotels in New York aren’t even here in New York.

It’s going up the chain to multi-national corporations.

Or international corporations. It actually has more of an impact to the city economy when someone stays in someone’s apartment in Bushwick than it does when somebody stays in one of these hotels here in Times Square.

I want to change topics again. I think I wooed you here with a conversation about the future but I feel we’re really hitting three topics about regulation but I’m going to go for it because I think it’s another important one. Recently the valley or many of the tech companies there were supporting the STEM act. I believe there’s a White House petition and the White House’s response is, ‘We can’t support this right now because it’s not comprehensive reform.’ The STEM act would have allowed PhD’s and other highly qualified engineers and tech types to stay in the country to have long term visas. What’s so important about comprehensive reform?

First of all, I think we’ll get comprehensive reform this year. I’ve been advocating for STEM visas and start up visas for at least five years both publicly on my blog and privately meeting with lots of elected officials advocating for this. I always hear the same thing which is, we cannot do immigration reform piecemeal. We have to do it in a comprehensive way. The reason is stakeholders on both sides of the issue have so much investment in comprehensive reform that even though they would both agree that a STEM visa or a start up visa makes all the sense in the world they won’t do it because it will take the pressure off. Everybody in Silicon Valley will say, ‘We got what we needed. We no longer care about immigration reform.’ All that pressure to get comprehensive immigration reform…they want to direct all the people who want piecemeal pieces of immigration reform to be vested in comprehensive immigration reform. That’s why what’s going on is going on. But I think we’re going to get it this year because I think the politics have changed.

How so?

On the Republican side the demographics of who went to the polls, who voted for them versus who voted for the Democrats in the election last November was stark. They are not where they need to be with the Hispanic population. Their leading candidate for four years from now, Rubio, this is his signature issue. They need to give Rubio a win and they need to give themselves a win with the chances of getting back pieces of that Hispanic population. On the Democratic side they believe that they got those votes from the Hispanic population and they’re now expected to deliver it. So I think the politics on both sides is such that we’re going to get it probably the first half of this year.

You’re predicting bipartisanship in Washington DC?

People can be bipartisan when it’s in both of their partisan interests to see something happen.

Interesting. We will somehow convince them that it is in their partisan interests as a country. I have one more question for you and it was more about you and about how you run your business. People who read your blog, which again, our audience is filled with they know your wife well. She has her own blog…

It’s like who satoshi who invented Bitcoin a character in a sci fi novel. We’re all characters…Joanne Wilson is a real person. The Gotham Gal is a fictitious representation of her.

You guys are invested in some other things both separately and together. Food blogs and a couple restaurants. How is investing in a restaurant different than investing in a start up? Can you compare the two?

I think investing in a restaurant is much more of a lifestyle type of decision. We’ve invested in half a dozen restaurants, maybe more. Maybe close to a dozen restaurants and on the portfolio of investments we’ve made we will get our money back. But that’s not why we’re investing in the restaurant. We’re investing in the restaurant because we believe in the chef or we believe in the operator or they’re opening in our neighborhood and we want them to open in our neighborhood and we will be great customers. It’s a lifestyle investment. The founders of Kickstarter always say Kickstarter is so people can help make the things they want to see in the world exist. It’s an example of that. It would be irrational of us to do it if we knew we were going to lose money but if we do it across a diversified portfolio of investments and we’ve gotten our money back on a few already, and we’re close to getting our money back on a few others, so I have a fairly high degree of confidence that on the bucket of them we’ll get our money back but the financial returns are not going to be the same as the venture business. There are other kinds of returns, karmic returns or whatever you want to call them, that are quite substantial.

Do you help a restaurant founder in the same way you help a start up tech company founder?

And Joanne is better at this than I am. A restaurant we’re investors in got a bad review and she called up the operator of the restaurant and said, ‘I just want you to know I agree with the review. I know you get defensive about these things sometimes you’re so protective of your team and your restaurant. I just want you to know this review is actually accurate and you would be well served to pay attention to this negative review.’ Joanne’s very good at that.

How did he or she take it?

I’d say about the way everybody takes that type of criticism. Well enough, I guess. But it’s very important and it’s hard to do and it is our job as active investors to tell entrepreneurs the truth. You have to do it in a way that is helpful without seeming overly critical. It’s great having kids. Having kids have made me a much better investor because I’ve learned from my kids how to be constructively critical. They need to know that you love them and that no matter what they do you’re going to be there for them and that you support them but by the way, they’re screwing up in math and they’ve got to fix that. When there’s no question about all those things that I started with they’re more open to hear that criticism. But if you’re just beating them up all the time and they’re not getting that reassurance it’s not productive. It’s the same thing with entrepreneurs; they need to know that you’re there for them and you’re giving them this feedback because you want them to be successful not because you want to throw them out of their company.

Audience member: Question on regulation. You said towards the beginning of the conversation that bringing regulation to Bitcoin might increase the confidence in Bitcoin. We did have enough regulation in the credit default swaps and all those things but does that really bring confidence? Do we use Airbnb because there’s a regulation or because we like the product?

I do think regulation could help Airbnb as well. If someone lists an apartment at 4 Times Square you should be able to type in ‘4 Times Square’ and see all the people who are listing an apartment. If that was the law that would cause people who are hosting illegally to stop doing that. I think regulation can be good if it’s sensible regulation and I’m hoping whatever regulation we get in Bitcoin will be sensible regulation. It might not be a bad thing for people who are processing millions of dollars of Bitcoin to dollar transactions every day to have some capital requirements. If they have no capital requirements they could go out of business at a moment’s notice and your transaction might not clear and you might lose money so that’s not a good thing, I do think sensible regulation is a good thing. What’s not good is when people use regulation to keep competition out of the market. The hotels don’t want Airbnb to be made legal. They want Airbnb to be made illegal. Period. Full stop. They’re pushing for the kind of regulation which I think is bad which is incumbents using regulations to keep competitors out of the market.

Audience member 2: It was really great to learn about the super wifi, the regulatory effort. One thing I’ve noticed as a person living in New York City is the rich and the poor gap is very distinctive in that people who have access to high speed internet and Smartphones you can access Bitcoin, you can learn about Airbnb and those who do not have access to high speed internet and Smartphones, computers in their hands essentially, are left out of these opportunities for growth. I was wondering on that note if the super wifi and the regulatory effort that you’re spearheading whether you’re addressing that issue?

Not directly. It would be easier for libraries and schools and other sorts of facilities that are operated by the government or even non-profits to provision high speed wireless internet and not necessarily make it available to people in their homes but maybe make it available in places of public gathering and such. If you didn’t have enough money to afford internet in your home you could go to the local library or the local school and get access to it. The point you raise is a really important problem. I am wary of saying that high bandwidth internet should just be free for everybody because there needs to be some business model because it costs a lot of  money to operate internet services so people need to have a way to make money at it. If we made the technologies available the way I was advocating with the unregulated spectrum you would see the cost of provisioning wireless bandwidth come down to the point where governments and other institutions could start to make stuff available.

Can you talk about how the relationship between technology companies and regulation will change as technology companies becomes the biggest and most powerful companies in the country and maybe their interests start to diverge from the average internet user?

It’s already happening. There are issues where big companies like Google and Microsoft and Facebook are not necessarily aligned with the average internet user. Data privacy would be one I would point to. A lot of those companies, their whole business model revolves around having access to our data and be able to do all sorts of stuff with it. They wouldn’t want to see a policy regime which gave us a lot more control over what they could do with our data but we might want that. I think there are plenty of examples of that. I think that’s the role of government; figure out how to be on the side of what’s good for society as opposed to what’s good for big business.

Audience member 3: Relative to the future of enterprise data and enterprise networks do you think the companies that are willing to be a little more flexible with their data will widen the competitive advantage with companies that require everything to be behind the firewall?

I think it’s already the case. I know lots of small businesses, for example, that rely on Google Mail and Google calendar and Google Drive and have been able to grow to 100, 200, 500 employees without any in house IT organization of  any size or scale. So they have cost efficiencies by doing that whereas these bigger companies who grew up in a different era and have their own IT organizations and run their own systems definitely have a much higher cost of operation. I do think these larger companies are going to look at these more nimble, younger companies with envy and try to figure out how to adopt more and more of these technologies. But there are some areas where I think it will take longer. Anything in banking and finance and some of the other industries where data security is really important will take longer. Other industries where that’s less of an issue, retailing for example, might move more quickly. That’s where the trend is for cost reasons and completive reasons and that’s where the world will move over time.

Thank you to the studio audience for being here.  And thank you to the audience at home.

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