Capital Raising for Web3

Kevin Whitmore: All right, I think we get started. Morena kia koutou katoa. My name is Kevin Whitmore. We are privileged today to have Aaron McDonald joining us. We're going to have a chat about capital raising for Web3 and token based businesses and learn a little bit about the Centrality and Futureverse journey.

But just a little bit of housekeeping before we start. So, if you've got any questions feel free to stick them in the chat, and we will discuss those during the session. We are recording this session so just be aware of that. And right at the end, we're going to pop up a little survey, and that helps us orient future discussions and content that we can produce so please do that as well. Otherwise we will jump into some discussion.

So Aaron, welcome.

Aaron McDonald: Hey, how's it going?

Kevin Whitmore: Good, good. I will just stop sharing my screen so we can see everybody. And whereabouts are we finding you today?

Aaron McDonald: Well, I'm actually, just got back to New Zealand. I've been, sorry, I've got a little bit of a lurgy going on. I, I've just been up in the Middle East and Europe. So it's been a couple of weeks away, but come back to some, what looks like some better weather than when I left.

Kevin Whitmore: Very good. So you're uh, what takes you overseas at the moment? Is that mostly new business stuff or existing customers or what's sort of the go at the moment?

Aaron McDonald: Yeah, mix of, mix of things. We, I was speaking at the Apex Developer Summit up in Amsterdam. So on the way up there, I spent some time in Dubai.

Speaking with existing partners and new partners sometime in, in France, in Paris, particularly speaking with partners and then at the end of it took a few days off to spend with my family.

Kevin Whitmore: Very good. Good stuff.

So maybe just for those that aren't familiar with you and your background, maybe we start with a little bit about you and just your, your history. And then we roll into the Centrality stuff from there before we get to Futureverse, if that works.

Aaron McDonald: Yeah. Cool. So my background, I've been in technology for more than 20 years now, I think coming up to 25 years this year. I started at the bottom literally digging trenches for cables and installing telephone lines and stuff Cat5 cabling and eventually like worked my way into more technical roles. I, I kind of ended my techno technology career as a OSS/BS S and network architect a senior, senior network engineer on the telecommunication side of things and then kind of jumped into more of the business stuff. So got into initially technical sales, then product development, product management, product marketing, and then to kind of more kind of business portfolio management.

And then from there. Jumped into corporate venture spent a bit of time in corporate venture, and then went out into startup world. So I've been out in startup land now for eight years and actually more than that. Must be ten years. And then in that, in that journey jumped into the VC space probably seven years ago now.

So started investing and incubating and accelerating tech companies with a focus in Web3 and FinTech and then kind of grew the business out of there, I guess.

Kevin Whitmore: Right. Very good. So when did Centrality start? Was that sort of the start of your startup career or was there something before that?

Aaron McDonald: No, no, no. I'd, I'd done a couple of things before Centrality and then Centrality kicked off in 2016. So as a, as a company being working on the idea since late late 2015 and and then 2016 really kind of got into it, founded the company and started, you know, building out the ecosystem from, from there.

Kevin Whitmore: Very good. So maybe, maybe, maybe take us through the Centrality part, because that was a wild time. I remember reading about it in the papers and obviously it made a big splash in terms of the amount of capital raised but also, you know, all the projects that were going on at that time as well. So maybe, maybe take us back to, to that date.

Aaron McDonald: Yeah, I think so Centrality started as a as a incubator and we had this thesis around what we call Connected Venture, which was essentially we felt that if you looked at the majority of the way VCs were structured, they would have a like portfolio focused thesis and then they would make investments in individual companies inside of that thesis and our view was that you could get a, you could get a better result across your portfolio and have a more, a higher chance of more of them succeeding if you invested in companies that could help each other grow.

And so what we did is we stepped back and looked at what was the, it was a user experience journey in the day in the life of a consumer and map that out and said, okay, well, if consumers touching all these different things, what are the things that are in common in that journey that could be shared services that those different companies could work together around.

And then what are the applications that sit on top of it? And then we started to kind of place some bets in like three areas around that. Whether it was like infrastructure or core services or applications, the the thesis at the time was that you could have this core set of services from a platform and then these different applications could plug into it and that would do a few things for them. That would mean that their cost to develop would be lower because they wouldn't like be each developing those same systems over and over again. And that they could get to market faster because they could get over that chicken and egg effect.

So if you're getting customers acquired in this kind of commonplace, then there are ready customers for you to like link into for your business. And if you're solving a problem for one of the other companies in our portfolio, then you've got some product market fit already. So you know, there's a, there's a bit of the due diligence that makes sense.

If one of our portfolio companies would use your service, then others will probably use it too. And so we started to like build out in there and as that thesis developed we got into a a little bit of a conundrum, I guess, which was if your core platform services are doing things like identity management, for example then who owns the customer?

And at the same time we were looking at this kind of evolving pattern and this is pre Cambridge Analytica, but we could see that personal data and privacy were going to be like big issues in the future. And so we came up with the idea that if you flipped the conversation from which business owns the customer to customers own customers and that privacy centric approach to building out communities and and use cases would eventually become something that people were interested in. Then it became a much easier conversation because then you could concentrate on delivering the value to those customers and keeping them happy and transform that more into a community based sales approach as opposed to a user based sales approach.

And so that led us into like, how do you deliver those outcomes. And that got us into web three, which was, you know, you can't deliver those outcomes in a meaningful way to an ecosystem of companies, unless you have community owned infrastructure to support that experience. And so we kind of started from there to build out the web three parts of the centrality ecosystem to support that thesis.

Kevin Whitmore: Right. And so what led you to the ICO, or the, sorry, the, the CENNZnet raise in terms of how did, how did that evolve? Was that...

Aaron McDonald: Yes. So Centrality is funded by our own founders money and a small group of you know, private angels in New Zealand. And all of the ecosystem we'd built out of that is funded by that. CENNZnet as the kind of core platform infrastructure was the entity that went out and did that token raise, that TGE and so there's a little bit of confusion in the marketplace that that was a Centrality cap raise, it wasn't, it was a cap, it was a token sale for the CENNZnet Foundation based in Singapore. And all of the funding that Centrality used to build out its ecosystem either came from its own direct investors through traditional means or through revenue that it generated over the years from selling its products and services.

So so that entity went out to do that in order to bootstrap the platform ecosystem. that underlying kind of community owned infrastructure that could be connected to power these different applications that we're building on top of it.

Kevin Whitmore: Sure, yeah, that makes sense. And why Singapore for, for CENNZnet? Was that sort of more of a legal decision?

Aaron McDonald: It wasn't so much a legal decision as it was, there was a little bit of lack of clarity in New Zealand at the time around tax on this stuff. And from a, like, a regulatory point of view, it, we went and had, you know, really good conversations with the FMA and and it would, I think it would have been totally fine to structure it from New Zealand from that perspective, but there was just still early days for IRD and even though they were engaging with the industry in a really collaborative way, there wasn't really clear guidance at that point in time.

And so Singapore was one of the jurisdictions that had provided clear guidance, both on the regulatory front and on the, on the tax front and a lot of infrastructure for, you know, the financial side of Web3 was being built up in Singapore.

So it made sense to kind of... Go with that as a jurisdiction.

Kevin Whitmore: Sure. Do you think that's changed at all? Or do you still see kind of differences in terms of jurisdictional kind of progress and differences that way?

Aaron McDonald: There's definitely, there's definitely been a lot of change since then. I mean, we've got more clarity in New Zealand.

There's actually, I think, a pretty good regime here. We have, you know. Relatively good guidance from the FMA. New Zealand has modern financial markets regulation that is technology agnostic. And so it's clear where the lines are on different things. What's a financial product and what's not. And if it's not a financial product, what are your obligations in terms of consumer protection and all those kinds of things?

And so, and then there's the Valuated Service Provider regime now, which sits on top of that, which DIA manages, which has another level of you know, compliance and monitoring around it, which is, I think, reasonable for where the industry's at and appropriate you know, to provide some boundaries, but allow innovation to occur.

So all of that stuff is good. There is now guidance out from IRD, although I think that needs some more work. It tends, it's tended to be a bit less technology agnostic compared to the guidance from the FMA. And like, you know and the kind of distinction there, I think, is that the FMA's legislation, existing legislation and guidance basically says if your, if your thing does these things, then it is this thing.

Whereas the IRD guidance tends to be a little bit blunter, which is if it's a, if it's a token, then it's treated this way. And so if you look at the way products are built out there in, you know, the general landscape. You know, take something like an NFT, well, the NFT is just a data standard. It's not a product.

And what you can do is build products on top of that data standard in the same way that you can build products on top of a PDF. You don't provide tax guidance or, or regulatory guidance for PDFs. You say, if your contract is an investment contract of this nature. Then this is the way it's treated.

Irrespective of whether a PDF is used to sign that contract. And so so guidance, good guidance and good regulations follows that process. It says, well, if it does these things. And it acts this way, and it's sold this way, or it's used this way, or it's traded this way, then it is this thing, as opposed to saying, if it uses this technology, then it is this thing.

And so there's just probably a little bit more work on the tax side to come into line with that, because your NFT could be the mortgage deed to your house. It could be a piece of art. It could be a digital collectible like they're selling in Roblox and trading in Roblox. And so the legislation should be agnostic to the technology. It should be based on what the thing does.

Kevin Whitmore: Yep. That makes sense. So CENNZnet...

Aaron McDonald: And then outside of New Zealand, I guess Singapore continues to be a leader in terms of a jurisdiction that provides good clarity and good rails for innovation. Dubai is emerging as a power, like a power player in this particular space.

The UAE is putting a lot of weight behind growing Web3 capability and even exporting regulation now. So they've come up with the invested in some really great knowledge creation in that, in that domain, which they're now taking in and implementing there, but also working with other regulators around the world.

Obviously, the US is a mess. And that's kind of having a big impact on their industry over there. Australia was heading in a really good direction, but has kind of gotten themselves in a bit of a muddle since then. They were probably one of the more organized and progressive regulators there for a while, and, and things just fallen off the bandwagon. I think possibly political changes influenced that.

Kevin Whitmore: We've been hearing good things about Hong Kong as well in terms of their....

Aaron McDonald: Yeah. Hong Kong, Hong Kong's definitely changing. I think as a result of the fact that they've seen a lot of business move from Hong Kong to Singapore and that's not just on the web three front that's across the board in financial services.

And so they're trying to be innovative across the board. You know, web three is an area of that. So is you know, the IPO scene, they're trying to like introduce new options in that, in that process and that side of things, I think. You know, I spent a bit of time up there. I spoke recently at the Morgan Stanley China summit and met with the regulators and exchanges and stuff like that up there, both on the kind of traditional side and the web three side.

And so there seems to be a good licensing regime emerging out of, out of of Hong Kong now. And I think in all of these jurisdictions, you know, the most important thing for innovators is to have guidance, good guide, you know, good guidance and and and a regulator that's a prepared to sit down and have a conversation and work out where the gray areas are and how they can evolve regulation to support emerging innovation.

Kevin Whitmore: What do you think, so if we look at UAE, Hong Kong, Singapore, what do you think New Zealand could do a little bit differently? We talked a little bit about regulation, but more broadly to kind of attract Web3 business, make it more attractive to be based in New Zealand.

Aaron McDonald: Yeah, I mean, the, the, the, the really interesting thing is that we've, so there are, I think, ten, sorry, nine, tech unicorns in New Zealand.

I think that's the number. I might be wrong here or there. There are three, at least three, web three tech unicorns that have come out in New Zealand. Only one of them is actually structured and headquartered here and that's us. So 30 percent of our unicorn activity has gone offshore. And I think a big part of that is not the financials financial regulation or even probably the tax. It's banking.

So there's been a lack of clear support for web three, the web three industry from the banking sector. I think that's been, that needs to be one thing that changes. And I think there are some changes happening. I know I've recently heard of the sandbox with BNZ. And so that seems to be something that's like becoming better.

I think also just communicating to the rest of the world, like, that there is this clarity here and there is a regime in place and the Valuated Service Provider Program is a is a sensible approach to, to regulating this and that and that the regulator is approachable and open to conversations. I mean, just reinforcing those points will get people to come and have a look in and test things out here

Kevin Whitmore: So we talked about CENNZnet, Centrality, TGEs what, what sort of, what was the progression from then into, into FutureVerse or the, the current times.

Aaron McDonald: Yeah. I mean, and kind of just touching on that point, it was like a really interesting time back then, 2017, because, or 2016, when we started that process, because there was so much stuff happening and it was really unclear what, where the lines would fall on on how this stuff would move forward.

And we, we've always taken the approach of getting really good legal advice in our jurisdictions that we operate in whether that's kind of structurally as an organization or structurally as a as an offering. Erring on the side of caution when it comes to things like compliance with KYC, AML, or investor compliance. If you look at the TGE for CENNZnet, I think it was one of the very first TGEs to have on chain smart contract driven KYC solution.

We had to build a KYC solution specifically to do this because there wasn't anything available in the industry. It was sold only to qualified investors where we'd done, you know, financial due diligence and wholesale investor checks and stuff like that. So it was a, it was a time where there wasn't really good, like, clarity there on what you should and shouldn't do, and at the same time, I think, just keep, you know, keep erring on the side of caution.

Because if you're out there doing something like this, you want to make sure that you're doing it the right way, because eventually, there will be that clarity, and you want to make sure that you're on, you know, the side of the good side of things, rather than the bad, the cowboy side of things.

Kevin Whitmore: Yeah, for sure. And maybe just before we do jump into the Futureverse part. Yeah. Maybe explain or in terms of the capital raise process, what, what sort of your, your process was at that stage and maybe how it was differed to, to, to your current process.

Aaron McDonald: Yeah. I think back then the idea was basically that you, you wanted as many community members as possible to be part of the, building out of infrastructure and those networks. And so, and it still is like a big part of what, like makes web three interesting is the idea of you know, community driven infrastructure. And so the incentive mechanisms for getting people to participate that are heavily driven around these tokenized economies where where essentially your community members are buying credits to use within the system.

And they use, they, you buy, they use, they buy that to participate in running the infrastructure of the system. And so that continues to be a core driver for how this technology is rolled out. I think the difference now is that the, you know, the models that work for that initial bootstrapping period and creating long term value have changed over time.

Regular regulatory guidance has changed over time. And so now there are there are a number of different approaches that kind of you know, one and done ICO approach doesn't really happen anymore. At least, you know, it's happening on the fringes. What's happening now is much more focused on activating community participation in a real way, rather than in a financial way to like drive the value of those things.

And so you saw an evolution from buying tokens to as credits to participate in the ecosystem through to Proof of capital. So showing you're interested in ecosystem by locking capital up. So that was another step on the journey from like just being a speculator to being a someone who had, you know, an active participation in that system, because locking capital would show that the protocol had had demand. As well as a lot of these protocols were financial protocols, so they had collateral and so that that kind of became a way to do it.

And now what we're seeing more is like what we're doing with the the root network, which is much more participatory driven. So if you're completing tasks and actions and activities that drive utility or usage in the network, then you're rewarded for that participation as opposed to anything financial.

Kevin Whitmore: Right. Right. Yeah, no, that makes sense. And so, Futureverse obviously has evolved into another ecosystem, but obviously in a, in a different way. How did, how did that sort of come about or what was the evolution, evolution there?

Aaron McDonald: Yeah, evolution is probably the right word because if you look back at that, like, core thesis you know, eight years ago now, what we said was, you know, if you build this kind of shared infrastructure and you incubate a bunch of companies that work together, then they're more likely to be successful down the track.

And in that thesis, we, we had kind of mapped out like what would be in that infrastructure, what would be in the services and what would be in the applications. The bit we got wrong was what would be in the applications. So we were kind of like more on the vibe of like B2C SaaS as the application layer.

What we discovered along the journey was the technology kind of thesis within Centrality, when it came to the web three side of things was that in the end adoption is going to be driven by user experience and almost no one was focusing on user experience. So we, we spent a lot of time mapping out what an ideal user experience would look, look like, and then applying research to different parts of that user journey, came up with a bunch of Investments in companies who were building out different parts of that we had patents come out of the team from our research and research side of our team on that side of things.

And so when we got to the end of that journey, we're like, actually, now we have some really good understanding of how to create good user experiences in Web3. What's the next step for onboarding users to that technology? And we found content and it's not a surprise actually because pretty much most of the evolution and innovation on the internet has been driven by content.

And so and so we started to build our second cohort, let's say, of of companies who are incubating out in the content space. And we'd always had like this kind of underlying thesis of like web three and AI as being the two things that were going to be like the game changers and and so that continued through both of those cohorts but really accelerated in the second one as we started to think about how artificial intelligence was going to impact the content creation capabilities and ecosystem and how it would impact game economics and game economies and all those kinds of things.

And so we got a big headstart on the AIGC scene as a result of doing that kind of initial thinking. Started to build out a good portfolio of companies in that space. And then when we got some early success on the content side of things we got approached by some growth stage equity, private equity firms who were looking at what we were doing in those businesses, and then started to look at the broader ecosystem of stuff that we'd built from a technology perspective.

And they, they came to us actually and said, Hey, why don't you roll a bunch of these things up? Because, you know, you've got a bunch of say, a series you know, C, C to a plus, let's say companies that are doing pretty well, which we can't fund cause we're a growth stage investor. But if you put those together, then it becomes a growth stage company and we can get behind it.

So, we took a look at that and actually back in that early thesis, we said one of the outcomes of building a connected venture portfolio is that you might get quicker paths to exit because you could do merger and acquisition if they were already working together and they're already providing core services to each other, then you could get that kind of that second phase acceleration.

And that turned out to be true, that played out even before Futureverse we'd had that happen in the portfolio with other companies. And so it was kind of something that we'd had in our mind. We had someone who was interested in backing us and doing it, and then we went down the journey of actually making that happen, which was a 15 month process. And I don't recommend doing that to anyone.

Kevin Whitmore: Maybe if we do hone in on that a bit, because firstly, I mean I see Centrality, but also Futureverse is kind of unique because it does exist in that ecosystem and it's sort of a collaborative there's a lot of overlap in terms of all the ventures. If you were to sort of be talking to somebody that had their own standalone or involved in a web3 business that was part of that sort of ecosystem, what would your advice be to how they might approach either capital raising or joining an ecosystem or what, what would your suggestion be in that case?

Aaron McDonald: Yeah, I mean, like, we've got, we can wear a few hats in this because we've been we've been founders that have put our own money into things. We've been VCs that have invested in, I think, more than 60 companies now in our third fund with Born Ready Ventures. And we've been companies that have received investment from, from VCs and private equity.

And so, I think the right now it's super challenging like that's that's the hard facts is that raising money from anyone bar a few segments of, of the technology landscape now is pretty tough. You know, VCs are taking a lot more time, they're being more aggressive on the terms, if they invest at all. A lot of them are focused on their existing portfolios.

And so you know, it's a time where the deals that have been done are being done on companies that have fundamentals. And so when you're approaching investors I think, think about how you can pitch the underlying fundamentals or get traction on your underlying fundamentals before you go into those pitches. That's a really key thing, I think. There, if you're in the AI space, there's definitely capital out there although investors are starting to get a little bit sharper now you know, seeing, cutting through what's, what's real and what's not.

If you're in the game space there was a tee off. Or gamefire space. There was a tee off for a while. But it seems to be now between us and Andresen and a few others, there's, there's a bunch of new funds out that are starting to kind of reinvest in that space. I think off the back of some of the success that has come out of Fortnite and Roblox marketplaces, as well as the impending launch of Vision Pro.

So the, the approach is kind of sector specific. You have something like defi for example is really hard now because of the the U. S. regulatory, you know, lack of clarity, and so in that space like make, you know, I'd do your homework on your jurisdictions because investors are looking at that. There are licenses available in multiple jurisdictions now, so if you can get one of those, get one of those that's going to help your process.

But apart from that like general capital raising rules apply which is, you know, make sure you have built a good founding team that you have solving a real problem that you're that you're demonstrating progress on, on traction and your fundamentals are clear. That you you know, that you're being a bit clearer now about which VCs you're targeting who, you know, from a sector sector basis. And that you're going to be flexible on terms because the reality is that's, that's the way the market is right now. You just have to be able to accept that if you can't bootstrap yourself through and you do need external funding that, that terms are going to be a little bit more favorable towards the VCs than they have been in the past.

Kevin Whitmore: And maybe on that point, I guess. The timing aspect of this, I mean, you, you guys have seen this probably more than anybody around the, the brutality of kind of these waves of cycles that happen in this space, to what degree is it maybe prudent to kind of, yeah, wait. I mean, when we touched on the fact that if you can't wait, obviously that, that, that's, that's a scenario, but if you could wait in terms of timing how that plays into things.

Aaron McDonald: Yeah, I think like if you can continue to bootstrap and survive and demonstrate progress on your fundamentals then you're going to be in a good position when the market starts to flip, like a really good position. Because you wouldn't have given away, you know, so much in this period and you showed that you could survive it without funding, which is like a really big bonus.

I think the landscape around, particularly around tokens now as investors are a little bit shy of, of doing things like SAFTs and pre sales particularly, and the good part, I guess, of what's come out of the US recently is there was some clarity in the Ripple case in, in the way that the that, that decision came out it was clear on which parts of that process were okay from a legal perspective and which parts weren't.

And so that's now showing a path forward for companies who might be based you know, or targeting US customers with a little bit more certainty on that side of things. And so that means now, you know, not necessarily doing pre sales, even if they are to institutional qualified investors. Maybe focus on getting your product in market first and bootstrapping a community around it and then, you know, create liquidity in the secondary market and go from there.

And so so that's coming through in a lot of the like you know, deals we're seeing now is that founders are more focused on, on that side of things, which is good overall for, you know, both the consumers as well as the, the startups, if they can pull it off. I think one thing's like really good for New Zealand companies is that and founders is that typically Kiwi founders are better at that than our, say our US counterparts because New Zealand hasn't had access to the same capital markets as as overseas founders have had.

And so we tend to produce founders who are better at bootstrapping and getting to cashflow positions faster in New Zealand. And so there's an opportunity there to take that capability and, you know, push through this period and, and get out the other side and show, you know, real traction and, and, and start to be on the good side of the upswing.

Kevin Whitmore: How do you see some of the Kiwi founders in terms of dilution once they kind of get to that growth phase? Because that seems to be a concern sometimes to your point around lack of capital. Yeah. Just the, you know, the terms that we end up, end up with sometimes.

Aaron McDonald: Look, there's no doubt that it's got better. Like over the seven or eight years we've been investing the growth stage has matured a bit in New Zealand. It's still not, you know where it should be I think because let's say B series is a bit better than it was. You basically had to go offshore to get anywhere past a B previously. You can probably put a lead round at least together on that basis here in New Zealand.

The, the liquidity options after that in New Zealand are shit. And so now at some point. You're going to have to go offshore because exit options aren't great here. And so while there is some maturity developing in that kind of middle phase the later phases of, of companies are going to, are going to keep forcing New Zealand Kiwi companies offshore as a result of it.

Having said that. The one industry which has the ability to escape that trap is the Web3 industry, because it is a global capital market with global liquidity, and so, you know, if there's a policy direction to try and keep companies in New Zealand you know, tech companies in New Zealand, then this is a really exciting opportunity for New Zealand as a startup ecosystem because the NZX has got a very small chance of solving the problem that they have. But Web3 companies can access global liquidity from, from markets mature, you know, large liquidity pools that are used to dealing with companies that are based anywhere.

And that I think's one of the really exciting opportunities, particularly for countries like New Zealand, where those malformed capital markets exist. And it forces businesses offshore and it forces value offshore, and we pay millions and millions and millions of dollars in taxes a year in New Zealand because we can access capital from these global markets in a way that other companies can't.

Kevin Whitmore: Right. Interesting. What sort of team do you think you need to have around you to succeed in this space? What are the people you sort of have as co founders, but also people involved that are most close to you?

Aaron McDonald: Yeah, I mean, I think like obviously having a good co founding team is really important and have a good like cross section of skills in that team.

And, you know, it's like the famous four, you've got like, the sales guy, you've got to have your product guy, you've got to have your tech guy, and you've got to have your like commercial legal guy and so, or girl. And so I think that formula keeps winning so have a good, well rounded founding, founding team apart from that, like the thing that, you know, really been useful for us is pick those early investors carefully.

You know, you want someone who is a is a, is a, an investor that is deeply, deeply values the thesis that you're building around. That they're not just there to sprinkle some dust because it's the fashion. If you look at our recent capital raise with, with Futureverse, we raised close to a hundred million New Zealand dollars from growth stage investors who are deep believers in the Web3 thesis. And we did that in the middle of arguably the worst market conditions for raising capital across the board, but even particularly in the v web three space.

And, and that's because those investors have that deep commit conviction. And so, you know, pick, pick your, be picky with your investors even though it's very hard to do that right now. I think it still carries true that you want someone that believes in you because the thing is that markets are going to change, they're going to impact the way that your forecasts work or the way that your you know, proposition rolls out and you might have to pivot and all of those kinds of things.

And so you want someone who's not just there for the fashion and and they're going to get behind you and support you no matter where the wind is blowing. The the other thing is get really good legal advice and tax advice. You can't, you know, I think it's expensive. And sometimes it's hard to get the right firms involved. It used to be very hard to get things like an auditor and stuff like that. It's got a lot better now. You know, in New Zealand we now have at least a few firms that are really well versed in the space. The team at PwC on the tax and corporate structuring side of things are excellent. Minters is really good on, on the legal side of things and the regulatory side of things. And so we do have some really good knowledge here and in New Zealand, please don't skimp on that.

The, you know, the, the, the one thing I tell founders which is a bit of an extravagance, but pays itself off I find in multiples is get yourself an assistant. You know, the amount of time that you're going to spend organizing meetings and travel and all that kind of shit. You know, if you value your own time, the value that you might value for dollars that you're going to get by having an assistant support you in that process and help you a good assistant, like help you filter out the bullshit so you can focus on the things that matter.

It's not a common thing that, that VCs or founders will tell you, but it's something I've personally experienced is added like heaps more time for me to focus on the things that are actually going to drive real value instead of being, you know, doing admin.

Kevin Whitmore: Yup. For sure.

Aaron McDonald: And, and also like, you know, not to like blow smoke up you guys, but Callaghan and NZTE both really great resources that you should tap into for industry knowledge, you know, connectivity.

The grant systems are amazing. From. from, from Callaghan. We've seen that, you know, make a difference in dozens of companies that we're involved with across the funds. And so we have these really great, you know, resources in New Zealand for helping you kind of get past those initial phases of discovery, particularly in something like this, which you know, in the early days Callaghan got behind us in an industry that was, you know, very much still emerging with not a lot of clarity about where you could monetize or create value or or even find investments.

And so so having the ability to have innovation partners like that with you on the journey that are prepared to take risks that, you know that this thing might become something I think has been really useful.

And on the other side, NZTE, when it comes to like getting your brand out there and getting you into networks with either other, with customers or market entry or investors, you know, both really good resources.

Kevin Whitmore: Cool. I remember being at, I think it was an AI forum event and you were talking a few years ago and you were talking about in New Zealand, the zebra concept.

So rather than all of us punting for, for more unicorns, could we have a thousand zebras? Yeah. Just, just interested in kind of retouching on that and how that's, how you still think that might be relevant today or how that might've changed at all, or, or, or whatever?

Aaron McDonald: No, I think there still is. Like you know, the, the analogy I used was you know, have a, have a herd of zebras or aim for a her herd of zebras rather than a unicorn because unicorns aren't real. Like they happen through magic. And I really mean that, like we have a unicorn now. So it's kind of ironic that I'm saying that, but but the, you know, one of the, I'd say, and it's not just me there you know, you can read a Harvard study on this stuff, the difference between, you know, companies that make it to this stage and ones that don't, you know mostly luck, you know, you, you can do everything, right.

You can be an awesome founding team. You can have a great product market fit. You can have good execution. And you could just time the market bomb, you know and or someone else might come along and do something slightly different. And so there's so much serendipity in the mix of success and creating a unicorn that trying to do that is a folly, because you can't create that button.

You can do all your things right. So what can you control? Well, what you can control is this like ecosystem approach, which is if we're all like working together, helping each other using each other's services, you know, filling the gaps in each other's propositions, then together, we're going to be stronger.

And that actually showed up on the journey to creating Futureverse as a unicorn company, because any one of the companies that came into that could have, you know, failed over those years without the support of the other companies around them. And and you know, we went through two bear market cycles before we got to the stage. And so building that resilience in those companies by working together, bouncing off each other and, and feeding that snowball effect is what produced that in the end. And so as a, as a thesis and and a in a way to grow the ecosystem, it does actually work.

And for Kiwis, like, I think it's one of the, few startup communities where that can happen. It's like an unnatural advantage for us compared to other places. We are not so zero sum in New Zealand, we're much more open to co collaboration and coopetition. You know, you can go go and have a yarn with a founder and like be real.

And so, and it's not, you know, it's not just in our ecosystem that I've seen, that I've invested in, like I said, lots of companies. And you see that across, across the board there is this, you know, about 30 to I think 40, 40 percent of our portfolio is offset offshore. So you can see the difference between the way they interact with their ecosystems and way our companies interact with each other.

And so you know, use that Kiwiness to your advantage to, to get out there and build a more resilient, connected ecosystem in New Zealand that, you know, makes us more resilient to, to those next stages when we go offshore.

Kevin Whitmore: Cool. Awesome. Tiago, do you want to have a, you got a question?

Tiago: Yeah, thanks. First of all, thanks for making this happen. Thanks Aaron for, for the time. Great talk. I actually have two questions, but they are kind of related to the, to the investment kind of thesis and, and side of it and how to, how did you approach investors in those sense? One is that on the Zebra thing, I, I love Zebra. I consider myself to be one, we are bootstrapped and, and going through those brutal market cycles since 2016, so, and, and surviving.

But this, and, and I have companies that we, we spin off that were funded by, by VCs, but they're usually after the, the unicorn narrative. And it's hard to kind of sell the zebra because they, they usually want to kind of strap you to the rocket. And if it flies great, if, if it doesn't it's not made to kind of survive. Right.

So in that sense, and your experience, if there are VCs that would, would like the, the zebra thesis, and I understand that with Centrality and, and Futureverse, like having, having different shots that some may be zebras, but they together can be like a collective unicorn.

And then, more technically, and I think this is the question we also have multiple initiatives. We started with infrastructure with blockchain infrastructure, which, which is the base for the company. And now we are focusing on more, not content creation, but more consumer focused or even like blockchain infrastructure focus, right? But one thing is that... We've been designing this tokenomics to be no premints, no kind of flow of tokens to any particular particular player and that means that there's no like 10 percent for investors.

It's basically the token fueling the network. Right? You're, if you're working, like, if you're providing infrastructure, if you're selling the network, or if you're providing something that's valuable and it's on the blockchain, then you have tokens. And so this makes a lot harder to kind of sell tokens because we, we are not sure that we will make tokens, but at the same time, what we are building is that, okay, you have this blockchain, but we also have companies that will work on this blockchain and those companies, they can be, they are not like decentralized. So they have equity in them.

And sometimes I get, and I discuss to investors and it's of course hard to explain to the, the, the standard investor about this, but how do you go about it? Like selling tokens versus selling stake in the company that will work on this ecosystem and how is that being understood by you as an investor and by the investors that also, you talked to.

Aaron McDonald: Yeah. So if I can go back to your first question which was about can you remind me of the first, the first question?

Tiago: How investors see Zebras? How to sell a Zebra to investors?

Aaron McDonald: So I think the, the hard answer to that is not many do see it. Like we, I think are relatively unique in that sense. The the great counterpoint to that though is that that Web3 is made for that scenario because it's community driven.

And so if you can get if you've got a, an idea that gets community support, then you can use that to fuel your you know, fuel your journey and especially on the content side. You know the idea of selling products to fund further development isn't a new one, but it's something that's much more powerful in web three, because the community become, can become owners of that content through the, through the process of having that content linked to an NFT.

And so in a way that wasn't possible before. So that garners a different kind of community support. And that might get you to the point where you start to generate the kind of cash flows that a VC could be interested in plus gets you to a point where you're past, you know, past that initial bootstrap.

You're probably still going to need some kind of angel funding to get to that point but that's, that's generally, you know, the founders, 3Fs, friends, fools, and families, I guess to get to that point. And then and then, you know, really lean into the community side of things. I don't think you could go out and hunt for VCs that have that zebra thesis, because they're all driven by the, you know, the unicorn idea. I, at least I haven't come across any that specifically invest on that basis.

On the second point, I think like the, the trend nowadays is towards building utility value in a token before you do sales the pre selling I think is going to be less and less popular going forward particularly with the, with the situation in the US from a US VC perspective. But but what we can see sometimes is either safe notes, or investments with warrants.

And so an instruction might be, invest in the equity of the company because they believe in the company and then have a warrant in the investment that says if you launch a token, then we want to, you know, we want to get it at a pari passu basis or a discount basis or something like that. And that, that can be a way to give you use some freedom to make sure you go about things the right way, but also, you know, don't just chuck a token in for the sake of a token and, and at the same time give the investors some you know, potential upside if it turns out to be that that's you know, the way that you do go down. So maybe look at structures like that.

The you know, I think if you, if you were to describe like most of the tokens out there, they're in the, in the web3 space, the most of them are unnecessary. You know, they're not actually adding value to the way that a protocol works. And in my, in my personal view tokens should be primarily linked to protocols. You know, I'm talking about like fungible tokens and so if there's a protocol doing work, tokens generally have a good utility and then they're like buying units of electricity, you know, the, the work, the things doing work and your you know, your, your, your system requires those things to make them work.

If they're like on the other side, you know, on this, the let's call them the attention token which you know, a lot of the Web3 market is, is, is a liquid attention economy. Then, I personally, we don't go after investments that look like that, you know, I know that a lot, a lot of VCs will but they just have terrible, you know, long term prospects because unless they're creating some kind of value and it's, and even, even if they are protocol tokens, like every startup, there's a good chance they fail but but at least you're starting on something that can actually drive fundamentals into the, into the utility of it.

Kevin Whitmore: Maybe just off the back of that, John, John's just got a question. Is the new root project selling tokens to raise funds for the project on top of the funds already raised, or will the tokens only be distributed based on participation?

Aaron McDonald: Yeah, no, so there's been no pre sale of root tokens. So the only way for the community to get tokens is to play the game, the future, future quest, future score game and and complete tasks within the ecosystem that help it grow and, and earn tokens as a result of doing that.

Kevin Whitmore: I think that kind of answers the next question which is do you recommend tokens for team members as part of a TTE from your experience and is Root doing that?

Aaron McDonald: Yeah, so in that case, there is, so in that overall token economics, there is a portion of tokens that are locked for the Futureverse foundation. And so the foundation can make grants available to things that I think it thinks are strategically valuable to the to the ecosystem.

I think there wouldn't be any argument that incentivizing, you know, developer, developer teams and stuff like that build on the, on the network is a bad thing. And so that's a way, that's a vehicle that you can start to reward team members or ecosystem members that you think of, you know, think of teams in the web three context as, as a little bit broader than what you would from a company perspective. In a company setting, you know, you have employees that are doing all of the work. In a web three setting you've got community like there's no Ethereum company that builds Ethereum it's built by developers around the world.

And the same is true for root network. We have some, some members of our team working on it. There are external developers working on it. And so you get an ecosystem type approach to building these things because they are community owned infrastructure. And so that's a, that's a good way to provide incentives to either direct team members or to community members who are not in your team for building out stuff on the network.

Kevin Whitmore: Moe, do you have a question?

Moe: Yeah, hi, how are you everyone? Thank you for the meetup. I think we have met before. I don't know if you remember me, but he was one of the guys that get me inspired and he allowed me for three hours to represent and talk and explain very holistic idea I had long time ago and he gave me good advices. And I highly appreciate it.

The question is like, as, as, as you mentioned that there are a lot of, a lot of ways to get investors but the right investors is the one that have understanding of the vision and the trust within the person and not just like putting money in, like adding real value as well would be and you, you guys have done a lot of apps.

I can, I remember one of them was the chatting app as a decentralized and and authentication system and the factory contract. I was following like Centrality. And since three years ago, we met, I don't know, maybe you don't remember me at all, but I've been on the research stage from that day to this day.

Right. And just researching, I wasn't aware of much of the technology at that time or software development in like a technical perspective. Even though you reach a level that you know everything, you still need assistance from people who got the experience because they know stuff that you don't know because they've been through things that you've never been through.

Isn't ideal to, or is there like an incubator or an accelerator program within and like a venture who have previous experience within Web3. In a legal perspective, as well as in a tech perspective, that can really accelerate like both ideas and help the process of putting one thing on action.

Aaron McDonald: Yeah, there are, there are a number of what I'd call like good quality, venture accelerators and incubators out there. So Outlier Ventures, they have, I think about 250 portfolio companies now that have gone through Outliers Basecamp programs.

Moe: And what's that called sorry?

Aaron McDonald: Outlier, Outlier Ventures? Yeah. Oh, okay. Yeah. And they they run base camps usually in combination with a brand who's interested in a sector focus. So might be like retail for example. They might do on Walmart, Walmart. Or an, or a network. So they might, if you want to like build a particular network ecosystem, they often run those ecosystem accelerators for the networks. We are actually partnered with Outlier to to do our first accelerator, which is called the Born Ready Basecamp.

Our Born Ready Fund, which is a 50 million US fund which is investing in the Futureverse ecosystem, is partnered with Outliers to run that Basecamp program connected to our ecosystem. There's Blockchain Founders Fund. I think they're another really good one. They are really strong on the founder support side of things.

They they aren't, they are a fund. They're not an accelerator specifically, but they kind of operate like one. They have a very good process for onboarding and supporting founders across a range of different areas. They organize regular catch ups between their LPs and their founders and their portfolio companies to foster collaboration.

They have good support around the different parts of like legal and and commercial and token design and all those kinds of things that follow around around building a product in the Web3 space, community building. There are some good ones out of A16. I noticed they just announced another fund in the gaming space. They've got a, they've got a couple of good acceleration programs.

Who else would be out there? They're probably the main three that I've dealt with that I know, that I know have some good programs. Outside of that, there are the Plug and Play team have a Web3 focused segment in their portfolio. And they're a pretty well respected VC across the board.

Moe: Would Centrality be one of them?

Aaron McDonald: Centrality is a company. So I think like structure perspective Centrality was a holding company, which held investments in a bunch of different companies that it was accelerating and and then there was Centrality, the operating company, which has like people who build stuff and do the research and things like that.

And then there's, and then there's the funds and the funds are separate to those entities. So NetX was our second fund. NetX has has had a focus on web3, fintech and green tech. And and then now our current fund new fund is Born Ready Ventures. So, so Centrality, no, actually Centrality, the company has become Future verse corporation limited. And that's like an operating business. But attached to Futureverse is the Born Ready Ventures and and the Born Ready Basecamp Accelerator.

Kevin Whitmore: And I'll just add to that as well, we're just working at the moment on co designing an activator in the Web3 space for New Zealand businesses, mostly around bringing together the, that legal component we discussed before, which tends to happen siloed to getting a banking partner so that we can align more businesses with, with banking. Which seems to be, as you pointed out before, Aaron, one of the, the biggest challenges at the moment is if we can bring all that together rather than it happening in silos potentially that can, that can help a lot of businesses as well.

Kevin Whitmore: Good stuff. What's, what's your take at the moment in terms of, I guess, the perception of the industry? So there's a lot of frothiness, there's a lot of scams, there's a, there's a lot of kind of, it is a nascent industry, so there's a lot of this is kind of being, I think Caitlin Long mentioned it. It's all playing out really quickly. Like we're repeating all the mistakes of the trade fi industry, hopefully a lot faster than all of them. Obviously when you're building a business, that's, that's got some, you know, the brand is really important. You're working with some, some, some big names all that sort of stuff. How, how do you sort of position the business in terms of, you know, the, the, in contrast to the frothiness of, of, of the web three space.

Aaron McDonald: Yeah, I mean, it's gone through ups and downs of froth, just like every market has. So like the froth right now is AI and is, I get pitched, you know, a dozen companies every day that are, that are nothing more than a thin veil on someone else's, you know, chat GPT's API or something like that.

So I think, I think that the frothiness comes and goes in industries, and we've been through, you know, a couple of moments in froth in Web3 and that does create some risk, I think, for consumers and for investors. You know, the difference in Web3, I think, is that it's like a prototype, I guess, or like a, not a prototype, but like a lead indicator of where the economy's going in general.

Like, you think about like you know, the, the meme stock phenomenon that happened. That's happened in TradeFi. But it's, it was preceded by the activity that happened in Web3. In that more and more of the investment landscape is being offered direct to consumers in a way that was never possible before.

So if you think of, like, even five years ago, the number of apps that allowed a user to trade you know, directly to trade stocks, not go through a broker or something like that, in the traditional markets, was very low. And the number of users on those things were very low. And even now in New Zealand, I'm seeing another one pop up every week who's offering, you know, a segmented view of trading stocks at a retail level. And so, retail position participation in, in the investment sector is growing in general. And what that leads to is you know, more of the market being moved by attention and memes than ever before, and then in general, the market and the the political, political economy and the social economy are driven by memes.

There's like a quote. I don't, I can't remember who said it, but if you control the memes, you control the universe. I, I said it, I thought I came up with it and I found out someone else did. Maybe Elon Musk or some shit like that. And so and so this is just like how society is evolving. And the connection between fundamental value and value of assets is, you know, fragmented.

Let's say at best and becoming disconnected. You look at something like, you know, Tesla as a, as a stock relative to, you know, any possible, fundamental analysis. It's just stupid. But it's a, it's a great meme and so and so, that's the way the economy and investment landscape is going, is it's more consumer driven and it's more meme driven and Web3 is like a bellwether of how that's happening. So I don't think it's an outlier anymore like it used to be. What you have to do and what we always try and do is like, try and be responsible within the boundaries of trying to be innovative.

And that's a fine line to walk. And it's not something that's just the Web3 industry. Look, we wouldn't have Uber today if people stuck by the books. It just wouldn't have happened. We possibly wouldn't have even had the internet you know, in this and the way that it is today. And so cause there was a whole bunch of rules around running to telecommunication services that were ignored for internet companies.

And so there's always this tension between innovation and regulation and innovation and responsibility that you have to try and walk the right side of without letting, you know, letting go of the other side. And we've tried to do that every step of the way. It's not always easy, you know, sometimes you're presented with opportunities to make the wrong choices and those are attractive, but I think through the years, we've been able to walk the right side of the line and even when it's hurt us. And keep you know keep your moral head above water and that plays out in the long run.

Like you said, we have these great partnerships with, you know, large brands that everyone knows in their household. And that comes, you know, after them doing diligence on us and the way we've behaved and the things we've said and done in the past. So so if you look into for the long, long, long haul, there's no better way to go about it.

Kevin Whitmore: Cool. And maybe last question from me. So I attended a FounderCon a few years ago and Rod Drury was asked if, if you, what advice have you got for people looking to follow in your footsteps, and his response was, don't do it. It's madness. And I think he wasn't trying to be pessimistic. He was just it's hard. It's really hard. It took him 10 years of slog. He was on planes, you know, trying to build the business in the US. There were ups and downs. And I think that was sort of the message he was trying to convey as opposed to necessarily being pessimistic.

But maybe what would your, what would your advice be for sort of a web three people looking to sort of emulate or, or follow in the Futureverse journey?

Aaron McDonald: Yeah, I mean, I, like a part of me wants to echo Rod and that it's, it's not for any, it's not for the faint hearted you know, there are there are times when I look at it and say, why the fuck have I done this?

You know, and you think about like pulling the, the Futureverse together, where you 11 companies, four different tax jurisdictions, hundreds of shareholders, their lawyers and so like doing stuff like this takes a toll on yourself and your family and, and the people around you care about you.

Doing it in web three is even harder. You know, that's, that's the, that's the kind of nature of things. And so on the, on the downside, that's like, it's, it's a hard thing to do well, because you want to focus on building value.

You have, you know, you have your plan you want to stick to, but you have all this like drags for attention around you and people and opinions. And so you need to be able to manage those in a way that is not like dismissive because you, you need community participation, but at the same time, like, don't get distracted from your mission.

On the flip side, it's super rewarding. Like, you know, when you pull something off there's no better feeling and, you know, seeing your dream come to life. And and it's amplified in the Web3 space because everyone else feels that elation with you. And so so don't step into it lightly. Expect it to be very hard, harder than running a traditional startup which gets to hide behind the shadows and hide behind VCs, you know, for a period of time before they become a public public company, for example. But, on the flip side, if you're passionate about it, and you're real, and you work hard, you know, the rewards in terms of how you feel about success are amplified as well.

Take time for yourself, like, you know, sometimes it feel like, feels like you can't do that, and I know that I'm not always good at it, so I'm speaking to myself as much as I'm speaking to anyone, but you know, even when it seems like things can't wait, they often can, and just take that little bit of time to look after yourself, be kind to your family.

You know, they're the ones that will help you pull through the tough times. I remember in, you know, the early days of centrality we were living off my wife's salary and credit card. And so you know, that kind of you know, that kind of support from the people you care, you need to make sure you nurture that as well.

Kevin Whitmore: Awesome. Good advice. Just last question from Daniel. What are the biggest traps in the early stages of a Web3 startup?

Aaron McDonald: Yeah, I mean, I think, like, again, it's one of those things that's like amplified a little bit by Web3, but it's not unique to Web3. And I think if I look back at decisions I've made or things I've seen founders do wrong in companies that we've been alongside and invested in you can probably put, there are probably two things specifically.

One is when you get funding be really careful because it's really tempting to go and like all the things you wish you had when you had no money. You just go out and do it once, and then it's like, holy shit there's all these new things going on and new problems that I that I just created for myself. And that can, that can draw your attention away from things that are really fundamentally important.

There's always the temptation, like, to grow the team really massive. Those kinds of things, which which sound like you're going to, like, move faster and, you know and do more, but actually end up, like, drawing your focus away to, administrative stuff rather than value added stuff. And so just like take your time. When these big moments happen, like step back, really think about things hard make decisions slowly. You know, it feels like all the pressure in the world to do, go fast, but just like, take that breath in that moment.

On the web3 side, like, because the community is so involved in what you're doing and so passionate and that drives a lot of the the value creation just be careful not to, like, follow the FUD, I guess, in a sense, because people will be like, oh, why are things, you know, going so badly?

Or, like, you were supposed to do this and it didn't happen the right time or you changed your mind about this or blah, blah, blah. Like you, you as the founder have to have conviction in your course and your path and, and even if it feels like that momentum is going against you, if you believe what you're doing is the right thing, keep doing it because eventually they'll see what you saw and not everyone's going to see what you see.

And it's, I think, 90 percent of people won't see what you see in that long term vision. And so you know, the great founders find you know, hidden gems in user experience or product market fit or those kinds of things. So they are naturally seeing things that the mass aren't seeing because otherwise those opportunities wouldn't exist.

And so, you know, try and bring your community on the journey with you as much as you can. And there'll be times where you can't share the big picture for whatever reason. And they don't, they might not get why you're doing things that you're doing, but don't submit to the pressure cause I see founders, you know, often get the wobbles and they're like, start chasing, you know, shiny objects here, there and everywhere. And they lost their fundamental vision because they were trying to follow the fad or the trend or the customer attention. So I, I, I'd stay away from that and just like stick to your plan. Not in the strictest sense, like not in the sense that you can't evolve your idea as a founder and do the pivots that are necessary.

But just don't do it because of that pressure in the community. Do it because it's, it's going to deliver results to them in the end.

Kevin Whitmore: Fantastic. Awesome. Well, thank you very much. I'm just sharing the QR code. So you can either, you can scan that with your phone and fill out the survey or pop the link in the, in the chat as well. You can do it that way.

But I'd just like to thank Aaron for taking the time. Obviously your your experience and your knowledge and skill set in this space is pretty unique. And so for us to be able to get sort of insights into how you've evolved your businesses, but also everything that you've done so far has been has been pretty special.

So thank you very much for taking the time. Very much agree with the assistant comment you made before navigating her to get some of your time was, was, was a little bit challenging. So I really appreciate it. And especially the fact you've just been back in New Zealand after Dubai, et cetera.

So. Thanks again. And yeah, if you can fill out that survey, that would be fantastic. That helps us orient next sessions as well. Otherwise have a great day and we will speak to you all soon.

Aaron McDonald: No problems. Thanks very much for having me.

Kevin Whitmore: Cool. Thanks Aaron.

Aaron McDonald: Cheers.