Mike Townsend:Today's guest is Nelson Chu, the founder and CEO of Percent.com Percent is apowerful platform for the credit markets. we talked about the credit markets,we talked about the debt markets, venture debt, credit lending, how the money goes through the whole system. Nelson is incredibly knowledgeable about thisand I find it fascinating because it's.

Mike Townsend: Fiveplus trillion dollar market and growing, and not a lot of people know how itall works. So we peel back the onion to discuss the credit markets. We touchedon some crypto and we talked about Percent, so awesome conversations. Secondtime Nelson is joined the podcast, so hope you enjoy. Here's Nelson Chu.Nelson, I'm excited to keep chatting with you. This is our second time, secondtime on the show for you. why don't we kick it off with what we were talkingabout pre-show. So you guys recently changed the name moving from Cadence toPercent, and then just, you know, for, to remind me and then people listening.Just describe like, briefly what you're working on.

Nelson: Yeah,absolutely. Thanks for having me back. I don't know how many people get theprivilege of coming back twice, but very, very much appreciated. Always good tocatch up. So it's been a good run since we last spoke. I think it's almost liketwo years in change at this point, give or take, since our last episode.

Nelson: And it's beena lot of changes on our side as. So we used to be called Cadence. We are nowcalled Percent. We could definitely talk about that and sort of why we changedour name. but just to give a refresher to the audience here, who is listeningin, Percent is the modern credit marketplace, right?

Nelson: And so whenwe focus on things like private credit, things like small business lending,consumer loans, factor receivables, things like that, we help make the 7trillion market that much more efficient for the borrowers who need debtcapital. The underwriters who create these investment products off of thatdebt, and then the investors who want to earn a return, by investing in theseproducts.

Nelson: Everythingwas done via Excel phone calls and emails before Percent came around and now abillion dollars later, thanks to us. I think we're making these ever soslightly better. So we're really excited for everything we've done these pastfew years.

Mike Townsend: So itwas all run on Excel in the background.

Nelson: Oh, wasinsane. Yeah.

Mike Townsend: Yeah.What were you doing? What, what was actually happening in the background? Likewhat was the process?

Nelson: So when wefirst started Cadence Now Percent, we were actually just building a, what welike to think, a better alternative investment platform. And so we werecreating products that were, you know, pretty short duration, good forinvestors to invest in that were under one year.

Nelson: They had lowminimums, like 500 bucks. You could actually just almost try before you buy,essentially. And then we had good yield, right? Nine to 16. And we thought,Cool, good company to start with. Good idea. Let's see how it goes. And so inthat instance, in this three-sided market I had just mentioned around borrowerswho need debt underwriters, who structure it, and investors who invest in it.

Nelson: We were theunderwriter, right? We were kind of sitting in the middle creating theseproducts. And as we were going through this process, we were thinking, goodnessgracious, this is so broken. There is no tech to speak of in this space. Wewere building our own order book management systems because as investors were placingbids, we were just tracking it in a Google sheet, which is crazy and then as,we were kind of sending out compliance questionnaires to ensure these borrowersare adhering to all the rules we had set for them. We sent out Typeformrequests and then as we were, you know, doing asset surveillance, we werethinking to ourselves, Wait, why is there no tools to monitor this investment?

Nelson: We werethinking, Okay, we need actual tech and APIs to actually hook into these placesto understand how these borrowers are doing. So Excel phone calls and emails isnot an understatement. Like that is literally what people were using just toget these transactions done and it's 7 trillion. You'd expect a lot more to bethere. But that's really where the opportunity is. Right. That's why we're soexcited about it. And taking all the things that work in public debt markets,public fixed income, and bringing those efficiencies into the private debtmarkets that are just so antiquated in archaic today.

Mike Townsend: What'sthe line in the sand between the difference on public debt markets and privatedebt markets? Like what would be a couple example on either.

Nelson: Yeah, greatquestion. so public debt literally means public company essentially, right? Soyou have Apple, you have Google, you have Exxon, you have all these publiccompanies that generally raise debt capital, especially in the last coupleyears since the rates were so low, it made sense, right?

Nelson: I couldessentially not dilute myself and still raise capital to feel, to finance mygrowth. And so in that instance, the public company is the borrower. The,investment bank would be the underwriter and then the insurance companies andthe pension funds would be the investors. And so that worked great, right?

Nelson: Everyone knewthat ratings agencies would step in to say, Is this investment grade or is thishigh yield? You had legally required audited financials, so everyone had toreport the same way. On the data side, you knew who played in that space and sonice, well run 52 trillion market on the private debt side.

Nelson: It'sinteresting because so many people have probably interacted with private debtbefore and never actually realized it. So if you've ever taken out a studentloan from like SoFi before they became public, that was private debt back inthe day, right? Cause SoFi is not a bank. And so they need to raise debtcapital from somewhere to be able to finance their loan portfolio.

Nelson: If you tookout a, by now pay later loan loan per se, from a firm prior to them goingpublic, that was also private credit, right? So everything, small businesslending, consumer loans, factoring invoices, litigation, finance, equipmentleasing, the latest, the list goes on, that is all technically consideredprivate debt.

Nelson: And it's anextremely interesting asset class that just doesn't get enough credit, I thinktoday, no pun intended.

Mike Townsend: Ah,good one. So the money is, is the innovation there, like when the companies youmentioned Klarna, affirm the whole buy now, pay later, SoFi, are they likebehind the scenes? Are they innovating in the acquisition of channels forcapital is, I mean, are they like, like crowdfunding or in some way? Likewhere, where's the actual innovation happening in the service area

Nelson: For privatedebt on their side, their model is I can underwrite and provide and create orissue loans better than their bank can. Cuz I know more data around thisperson, right?

Nelson: So I knowwhen their shopping habits are, I know, I'm hooked into their personal bankaccount so I can determine their credit worthiness. And I run a fantasticmarketing machine to kind of get. Borrowers into the door. Borrowers meaningconsumers in that instance. Mm-hmm. the innovation that hasn't happened is onthe other side.

so because they're not a bank, they actually have to raise debtcapital from somewhere else, and that has been what has purely been Excel phonecalls and emails today. They have a huge capital markets team in house thatessentially is out there trying to raise debt, capital, manage it, deploy it,all that stuff.

Nelson: And it's timeconsuming. It's extremely expensive. It's all those things that you'd expect inreally old, outdated industries. You name it. Private debt probably has that inits wheel.

Mike Townsend: What'sthe breakdown of private debt for these types of businesses? Or just privatedebt in general? Is it, are they running, I mean, I'm much more familiarpersonally with the VC market.

Mike Townsend: Youknow, wealthy individuals or funds, are contributing to an LP and, or they'rean LP in a fund, and then investors invest that on equity. But debt is, it'sless familiar, less common for startups. What's the, what's the breakdown ofthe funding sources?

Nelson: Yeah, I wouldsay prior to Percent being around, the bulk of the private debt market probablyconsisted of a lot of credit funds.

Nelson: Who put thismoney to work? so you had, you know, Gallup Capital and Terry's like all theseguys who do middle market lending, they do securitizations or whatever. That issort of the private debt ecosystem. Right. but having said that, you know, alot of these, VC backed companies who need debt capital because they're alender, for example, Right.

the, the affirms of five years ago. Mm-hmm. or SoFis of six,seven years ago. they need to raise money from somewhere and. Theyunfortunately can't call up a credit fund and say, Hey, give me 150 millionbecause we're gonna be great, but my portfolio of loans that I have outstandingis only 2 million.

Nelson: So thatmismatch doesn't really work. So they actually have to raise from somewhereelse and prior to us. Yeah, even being around. The answer to that wasoftentimes individuals like family offices who are making absolute killing,essentially lending out or financing these, FinTech lenders and the opportunityto leverage Percent as a modern credit marketplace with full on, you know,syndication tools, surveillance tools, structuring tools, just to make it thatmuch more efficient gives these guys a chance to be able to continue to growinto the point where they can actually call up that credit fund after a certainstage and it becomes the right fit for them.

Nelson: They can callup a bank and say, I need you to be my under. That all becomes a lot easierwhen Percent has been in the picture for so long, helping them grow theirportfolio to where they are today. And then ultimately we stay in the picturecuz we've been doing all this asset surveillance, like I touched on earlier,that didn't exist, for them for all these years.

Nelson: It just makesa lot of sense to keep us around and help facilitate the process and continueto help them with their transactions going forward.

Mike Townsend: So itsounds like the source of capital for the debt markets comes both from privatefunds that are, are they raising money from wealthy individuals similar to vc?Or what's their source of, Are they gonna banks?

Nelson: You've,you've hit on probably the most confusing part of private debt, which is thateverybody is a borrower and underwriter and an investor. So explain what that,what exactly that means. obviously as a consumer or a small business, I'm gonnabe the borrower, right?

Nelson: I need aloan. I'm gonna go to one of these private debt lenders, essentially non-banklenders for all intensive purposes. The lender themselves, these FinTech c. Areunderwriters technically, right, because they're underwriting loans to these,these borrowers, but they're also borrowers because they need to raise capitalbecause they're not a bank.

Nelson: But havingsaid that, the underwriters who actually underwrite these transactions, forexample, a sell side bank or even a credit fund, they may also be investors cuzthey just choose to hold it on their balance sheet. But as an investor, they'realso borrowers in some respects because they're raising money from LPs, whichinclude the pension funds, the insurance company, the rich families, and thingslike that.

Nelson: So, talkabout a very complex, convoluted market that I have had to try to explain toVCs as I'm raising money. That's been a very fun journey and so we've distilledit down into just think about borrowers, underwriters, and investors. And we'regonna call it a day. If you wanna really dig into it, I'll give you the fullspiel, but probably not a good use.

Mike Townsend: Yeah,no, I think it's interesting actually. I think, I think it's not, to me itdoesn't seem as complicated because it's, it's like a water flow of borrowersor lenders, you know, each person is, is like receiving money. Each entity isreceiving money and then redistributing it. So I think of it as like, you havethe high level capital accumulation sources that would be like Harvard'sEndowment.

Mike Townsend: Theyhave large pools of money, and I think of it conceptually as when you have amassive pool of money, you almost have to frize it or put it into smallerbuckets to be more intelligently distributed. So that's where I would see,okay, we're gonna give 10% to this credit fund and they're going to allocate itacross, you know, 15 or 20 different debt investments or however many theyinvest in.

Mike Townsend: Andthen that money goes to Klarna and then Klarna has operating capital to lendout to its borrowers. So it, it's almost like divers, it's a, it seems sort oflike a naturally evolving. benefit of diversification in that you have theselayers, from as capital flows down. So it's interesting.

Nelson: Yeah. Yeah.Is that, that It's definitely interesting. I would say when the moment they askyou to do a top down or bottom up analysis on the market sizing, I'm just like,Oh gosh, I'm gonna like throw in the towel here. Cuz it is very difficult toquantify. Yeah. But at what its core, At its core, what we do know is that thisis a 7 trillion market that powers so much of, not just the US but the globaleconomy today.

Nelson: And our jobis just make it that much better. because if we can do that, if we can bringmore efficiencies, bring more transactions to market, make it that much moreprofitable to do, This is not a 7 trillion market, right? This is nine, 10, 11trillion easy. And that's our job to try and help it.

Mike Townsend: Yeah.And do you think of it conceptually as these large pools of money? I think ofendowments, maybe wealthy family offices, you know, they're managing budgetsbetween, you know, north of a billion, sometimes a few billion. I forget howbig Harvard is, What are they, like double digit, billions, somewhere in there.

Nelson: Definitelythere. Yeah. And growing, Although this, this recent downturn might have dingedit a little bit, but yes.

Mike Townsend: Yeah.Yeah. And so if I think about where that capital actually ends up, is it, wouldyou say Percentage wise, like ballpark, 20% end up in debt, 10% in vc? Likehow, how do you sort of think? You know, I find it interesting because it'smoney matters and understanding how money flows in the economy is useful andinteresting to a lot of people.

Mike Townsend: Andthese sources of capital are just so large. They, I would imagine they have asimilar investment thesis because it's. Kind of representative of riskdiversification and you sort of have the same goals when you're managing fundsthat large. Do you see, any sort of patterns to the maybe rough allocations oflarge funds like this?

Nelson: I think theyare fairly opportunistic. I remember a time when the endowments almost wouldn'ttouch vc, like venture investing. They wouldn't back the andreessens, theSequoias of the world. That's Wow. because they were risk averse, right? Theywere just like, Yeah, this is too much. Right? This is totally, we might loseall our money and so not worth, And if they had done that, they would've missedout on obviously all of these gains in the VC side of the market in the pastfew years.

Nelson: So that'schanged, right? but having said that, rarely does any of these endowments, forexample, go direct into something. They almost always invest in some sort offund. Mm-hmm. . And so you've got Blackstone, kkr, you know, those Apollo,those kind of, those guys. they raise money from these places all the timeessentially.

Nelson: And so theopportunity for them to be able to get debt exposure is probably becausethey've put it into one of their funds, but that's not the only fund withinBlackstone or KKR that they put into. but you can kind of follow what thoseguys are doing to get almost like a proxy for where endowments are seeinginterest.

Nelson: And so, forexample, a Aries, Blackstone, and KKR all just recently, Venture debt funds.And so that should be very telling us to, if they raised the fund, that meansit came from somewhere there's interest and that's gonna be where their focusis gonna lie. And so makes sense, right? Venture debt is going to be a greatsubsection of the private debt market to be in in the next, I would say, yearor two, simply because venture debt, venture capital vintages in downturnsalways do really, really well, right?

Nelson: The ones whoessentially get the capital as a startup are the ones who survive. And if theysurvive, they're naturally almost by default going to win. So if you can doubledip on the equity and the debt side, not a bad strategy. And that's the reasonwhy you're seeing a lot of these big players, heavy hitters who raised fromthese places set up venture debt funds to kinda put it to work.

Nelson: And that'ssquarely within our thesis as well. We actually just launched our first fewventure debt issuances on the platform, and we're in the process of bringing onventure debt underwriters to really scale that side of our business becausewe're seeing it as such a great opportunity in the next year or two.

Mike Townsend: Whenyou say you've launched venture debt issuances, does that mean you are raisingmoney from a large pool of money, like, family offices or, funds, and thenyou're making, you're, you're making investment decisions, or you're then like,What, what, Does that break me down a little bit?

Nelson: Yeah, sure.Absolutely. So let me, I guess let's give a crash course on, on venture debtfirst as a starting point. Yes. because startups traditionally almost alwayslooked at equity financing as their only answer. So they try and raise moneyfrom VCs. They can raise it through straight equity, like a priced round,right?

Nelson: And peopleare buying shares essentially, or they can raise it through convertible debt,which ends up converting into equity anyway. So it kind of is equity, it's,it's more equity than debt at the right least. And that converts upon anotherequity round example for like an actual qualified financing event.

Nelson: What has cometo, be more prominent recently is really venture debt, right? So venture debtis almost like a venture backed company because they raise equity capital. Theyhave a pretty good balance sheet, cuz you know, they're flush with cash andthey can almost opportunistically raise more debt without dilution, right?

Nelson: So they maylose a couple small Percentage points to the debt provider in the form ofwarrants, but it's, it's worth it. If you raise, for example, a $50 millionprice round, equity round from a VC and you're topping it off with 10 million aventure debt, you effectively raise 60 million in cash with 50 million worth ofdilution.

Nelson: That's a goodtrade, right, for most startups. So that was, I would say, pre-recession.Essentially, it was viewed as opportunistic financing. In this day and agewhere equity is hard to come by now, right? Like VCs have paired backdramatically from here. a lot of these startups are using convertible debt as astarting point, but if they can't get that, then the next option is venturedebt as the other option to be able to kind of continue to either finance theirgrowth, extend their runway, whatever that may be.

Nelson: So a lot ofinterest from both sides, startups looking for venture debt at this stage, andalso venture debt providers, investors, underwriters, et cetera, offering itbecause in this environment, the rates are really high. They're getting 15, 20%on that at this point, in terms of annual returns, that's fantastic.

Nelson: They'reowning a stake of the company also. Fantastic. So it's a great time as aninvestor to be investing into venture debt as long as you trust the underwriterand as long as you do the proper diligence on the company, that's the startupthat's looking to, to borrow, right? so when we launch venture debt on ourplatform, Let's just rewind a little bit.

we historically on the platform have done almost like what'scalled asset backed finance. So think of it as like baby SoFi, baby Affirmwhatever they need a couple million dollars, they have hundreds of loans intheir portfolio. We're creating a product that's backed by those hundreds ofloans essentially, right?

Nelson: In acorporate debt or venture debt scenario, you're kind of just backing thecompany. That's it. Mm-hmm. , nothing more, nothing less. So you're trusting inthe future of that company and the ability to be successful. Now in thatinstance, it's actually easier to create that type of product cuz there's noasset level, loan level structuring, it's just company level structuring of aninvestment product.

Nelson: So it wasvery easy for us to go simpler and offer that. but we offered it this year inparticular because we saw the opportunity in the market to help startups whoneed capital and aren't a lender, for example, and, you know, don't need abalance sheet or anything like that. And also, because it was a naturalevolution of taking down more of the private credit market.

Nelson: We do assetbacked, we do corporate debt or, or venture debt. We kind of fill out an evenlarger part of the ecosystem and our workflow tools can be used in all thosetypes of equations and transactions.

Mike Townsend: Hmm.And the difference between venture debt and asset backed is whether or not theunderwriter is using the assets of the company to make the invest, make theloan, or whether they're using the existing capital that the company hasraised. Is that right?

Nelson: Kind of a wayto look at it. Yeah. So asset back almost always has some sort of asset that'snot the company involved in it. so it could be the loans that they've extended.It could be like franchises for example, do a lot of securitizations, cuzthere's a lot of cash flows coming out of that.

Nelson: So it's notthe balance sheet of the business that you're underwriting against. It's almostlike the cash flows of the business that it's spitting out or the assets theyhave that they've loaned out to people. Those are collateral, right. That youcan essentially use and you can also take over in the event things go south.

Nelson: So thecompany may go under, but the assets are still good, then you know you're in agood shot, in good shape in the event of a corporate debt or a venture debtsituation. If the company goes under you, there's like nothing else left likethat. That means that your debt is gone as well, right? You are senior toeverybody else, but you're kind of, you know, slim pickings at that point.

so that's really a difference. What is collateralizing theactual debt? Is it the company or is it the assets of the company and thebusiness that they're in?

Mike Townsend: Okay,So in that latter scenario and the venture debt, if the, lender makes aninvestment in the company, are they, does it, is it realistic for startupssitting out there in Series A or maybe even below series seed?

Mike Townsend: Are theyconsidering, or should they consider venture debt if they have, you know, 50 Kon the balance sheet or, you know, some relatively small number? is that anoption for them or is it really just VC at that point?

Nelson: So I wouldsay, Most venture debt providers and us included, but we are bringing on, youknow, additional underwriters to supplement and turbocharge what we can do asan underwriting.

they tend to not be offering venture debt to help companiessurvive. It's more to help them thrive, right? So if they only have 50 K on thebalance sheet and there's no real line of sight into more revenue coming in, orjust sort of steady growth and you know, it ish, essentially, you're not gonnaprobably be able to get venture debt.

Nelson: You're gonnahave to take something very dilutive from a vc, either in the form ofconvertible debt or an equity. But if they have, you know, let's say they justraised a $4 million round of a seed round and they're looking for a millionadventure. That's not unreasonable, right? So you can take, it was probably avery dilutive round in this environment at this point.

Nelson: Takinganother million that wasn't dilutive is, and cuz you probably wanted five tobegin with, is not a bad option. So it's for, it rewards those who have beenable to kind of tough it out and slog through this fundraising process. and atthis point, give them the benefit of doubt and help them at least continue togrow in a non-diluted form. Mm, okay. Or less diluted form.

Mike Townsend: So youcan you, So it, it, there's, there's a lot of companies out there now raisingmoney, raising debt on the venture, the equity investments that they've justraised. So I go out and I raise 10 million for my startup in equity. I giveaway 25% of the company. Say, you know, it's a 40 million post money valuation.

Mike Townsend: Now Ihave 10 million in the bank account. I, it makes sense now. Companies aretaking that and going to a debt. Lender and saying, Hey, I'd like to borrow 2million, 3 million, and that's gonna be somewhere between 10 and 12%, monthlypayments on that, and the borrower gives me that money, gives me that 2 millionbecause I have 10 million in cash.

Mike Townsend: Isthat approximately how it's happening? It's about right.

Nelson: Yeah. And thinkabout it from the founder's perspective, right? Like, isn't that nice that Iactually raised 10 on 40, but then I actually have 12 or 13 in the bank, Right?That's, that's not a bad trade. Yeah. having said that, yeah. Having said that,the, the yield is a little bit higher these days.

Nelson: It used to beprobably in the 10, 12, 15% range. It's now closer to 15 to 20. but that'seffectively the right way to look at it, right? Like founders have thatoptionality now. and the other time where they could potentially raise venturedebt is if they have line of sight into material revenue growth this year.

Nelson: So in manyrespects, venture debt providers actually underwrite qualitatively almost as ifthey were making an equity investment instead of investing or, underwritingpurely quantitatively versus on the asset backside. In private credit, thatflip side of the Coin that we were talking about, That's almost exclusivelyquantitative.

Nelson: Like if yourassets don't deliver and they don't perform and you know, they, they don't dowhat they say or thought we were gonna do, this is gonna be how we underwriteagainst it. I don't care whether you're nice to me, I don't care whether, youknow, I feel like you have the future doesn't matter whatsoever, but in venturedebt you gotta like really like that company or kind of married to that companyin some respects.

Nelson: And theirfuture is your future and the future returns on whatever you just gave them.

Mike Townsend:Gotcha. And Venture typically has this mentality of, I'm gonna invest in 10companies like your average VC fund probably. Seven fail, two sort of breakeven, maybe slightly positive and one sort of returns. The fund is the, is thedistribution of venture debt, similar to that?

Mike Townsend: Imean, do they have a very, a much lower risk tolerance for investment becauseinvestors of seven out of 10 of your investments go to zero. It just, you kindof develop this muscle memory of it's okay when, you know, it's, it'scommonplace, It's, it's good. When most of my investments go to zero is the,what's the psychology on the other side, on the, lending side?

Nelson: Yeah. It'sinteresting. there's also ways to structure venture debt, right? So in somerespects there's some venture debt providers who basically say, you know, youhave, I will give you a million dollars, but the moment your balance sheet cashfalls below 2 million, I'm taking my million back. Oh. So that's almost like azero risk trade for them.

Nelson: The yield islow, but still zero risk trade, right? Essentially it's augmentative capital,but don't screw up. having said that, a lot of venture debt providers also takewarrants and almost always take warrants. So think about build, almost likebuilding a portfolio around the equity in addition to the debt.

Nelson: In the sameway that in, unfortunately, like I would say, what is it, 95% of the companiesdon't really make it in some way, shape, or form. Those five, almost likereturn the fund, right? Mm-hmm. that remaining 5%. So same thing if these guysare sitting on a bunch of warrants from dozens of companies, if one or two ofthem make it, it will return the losses and it'll also be collecting premiumsfrom the yield every single month that the ones that are not defunct or notdefaulted are performing.

and that's kind of the way to look at it. So portfolioconstruction. very much applies here as well, which is why, again, in somerespects, you're underwriting as if you're gonna make an equity investment.That's really the best way to do it.

Mike Townsend: So, Iwanna explain that a little bit more. So, if the, if the lender for venturedebt has a warrant, that means they have the right to invest in the next roundor all future rounds, or it depends on, on maybe you explained what would be atypical case for a warrant structure.

Nelson: Yeah. Sowarrants in some respects is just almost like a way to, or the right topurchase at a certain price point, right? And it's up to them as to when theywant to exercise that. but essentially it's almost always done at a significantdiscount to what it's currently priced at. So it's at the company's discretion,but also there is the instances where you can also structure, not justwarrants, but ownership of the IP in the event things go south as well.

Nelson: So there's alot of ways that you can kind of throw in these nuances around the structure.but yeah, warrants at its core is just the ability or the right to purchasecertain things at a certain price point, within that company. Gotcha.

Mike Townsend: Yeah,and it's Ty, I, I hear warrants a lot. I mean, I see it a lot in startups wherean, an investor will have a warrants typically in the earlier stages.

Mike Townsend: I, Ibelieve, because they wanna participate later. So I invest now and then awarrant allows me to make future investments. which is good because, you know,once you're in a company, you wanna stay in it. so Percent and cadence. So the,the ba now that we have the kind of outline of the industry and the structureof how deals are done, we went real deep.

Mike Townsend: Yeah.You know, it was great. I, I love it cuz I learned a lot about how, how themoney flows and what's happening in the market now is, is that, is the generalmodel, 4% now is year the platform to allow these venture debt and asset debt.Investments to occur. So I'm thinking like angel list, where people can listtheir startups.

Mike Townsend:There's syndicates that sort of review or, filter or underwrite, so to speak,although you don't really use that term in vc. And then the deal is sent out inmany ways, I think of syndicates as like a fancy email list. Like you have a,you have a, you know, it's, it's on the website, but ultimately it's justdistribution to investors and sort of a curated, organized, pretty way to lookat information.

Mike Townsend: How doyou explain it in your own words?

Nelson: How do youexplain what you're doing? Yeah. I think AngelList, obviously Republic, allthose crowd funding platforms have done great, right? They, they've been ableto give access to this, side of the market that normally regular investorsdidn't have access. But they are very much in the world of almost what we liketo call CAP intro.

Nelson: So capitalintroduction or matchmaking, right? I have somebody who wants something and Ihave somebody who wants to give something and I'm just gonna help them findeach other. We are far more complex than that because the products themselvesare far more complex than that. So you can almost break down a credittransaction.

Nelson: Public orprivate, doesn't really matter into like what we like to call our five S's. Sosourcing a transaction, structuring it, syndicating it, surveillance it, andservicing it. So I think of those five S's, I feel like AngelList only doessourcing in some respects and maybe a little bit of syndication.

Nelson: And so thecomplexity of what we've had to build is by nature. part of the reason whyit's, it's in the credit markets, that's essentially what happens and it's justa lot more complicated. So our workflow tools enable the borrowers, theunderwriters, and the investors to use. Some of them. All of them doesn'treally matter at the end of the day, right?

Nelson: and thatfacilitates a much more efficient transaction at the end of the day. So whatpeople see on the platform as an investor is almost like what you'd see on onAngel List or Republic or anything like that, where you have a deal that comesup, you can look at the documentation, you can look at the structure and thingslike that.

Nelson: But that'skind of about it, right? Like they don't really see what goes on behind thescenes. But what they get the benefit of is all those things I just mentioned.So for example, for the very first time on, on our platform, you have theability to compare two private credit transactions side by side with one.

Nelson: So, forexample, this small business lender wants to raise 2 million. This smallbusiness lender wants to raise 4 million one's based in the us, one's based inLatin America. The other one has one, has a default rate of 10% on their loans.The other one has a default rate of 15%. this one has, you know, cash controlsto ensure if something goes south, we can pull the money.

Nelson: This onedoesn't. The ability to actually make relative comparisons has never existedbefore in private credit, but it's something that we take for granted in publiccredit because the structures are all the same. Can you compare two startupsside by side? Apples to apples? Definitely not, right? Mm-hmm.

Nelson: there is noconsistent structure among them because they are so almost like unique animalsin their own right. On top of that, you know, we have standardized reporting onthe surveillance side. Investors get the benefit of that. So we've essentiallymapped out the entire private credit universe by asset class, small businesslending, consumer loans, all those things I mentioned so that you can compareone borrower's performance, like asset performance, not structure, assetperformance with another asset perform.

Nelson: The chartslook exactly the same. So as an investor, you can make an educated decisionaround which one you prefer to invest in based on that performance, on theseequity crowdfunding sites. Can you compare, I don't think you get any reportingfrom these startups after you make the investment very minimal, at least,right?

Nelson: Mm-hmm. . Sothis is all parts of the standardization effort that we're pushing here thatyou just don't see anywhere else, and it's very unique to credit in particular.It's almost like a blessing and a curse. It's possible in credit. It is sopainful to do, but we've kind of taken on that mantle ourselves and just, youknow, fighting through it, slogging through it.

Nelson: Because if wecan use the public debt markets as inspiration, if we know that that's grown to52 trillion because of standardization and governance and benchmarks andtransparency, Then where our job here is good, right? We're gonna be able tomake this 7, 9, 11, trillion easily from the work that we do here.

Mike Townsend:Interesting. So it seems like the standardization of the private markets is, isa big deal. What is currently so unstructured in private markets are peoplejust, I would imagine even in private markets, people have, you know, they'reall gonna have accountants, they're all gonna be reporting gaps.

Mike Townsend:Accounting methods is what, what sort of where is like the thorn in the systemand the private markets with how they're unstructured?

Nelson: It's sodiverse, right? Think about it this way. If I'm a FinTech company or FinTechlender that needs a million dollars, first time I've ever gone out for money, Ihave very little performance to show for it.

then as an underwriter and an investor, I'm gonna, there's alot of risk, right? So I want to throw in the kitchen sink at this company incase something goes south. Somebody who has like a hundred million dollarportfolio who's been around the block before can probably get something ratedfrom a ratings agency, has a very different criteria and a very different.

Nelson: So we almostbreak down our market into a three by three matrix where you have small,medium, and large transactions. And small borrowers need, small underwriters,need small investors, large borrowers all the way up to large borrowers, needlarge investment banks who need large like investors, established assetmanagers, things like that, right?

Nelson: So in thisnine sided market, or nine parts of our market, they all had different ways ofdoing things. And what we've been able to do is essentially look at it indetail and how they transact and figure out what that common denominator isacross all of them to ensure that everything looks and feels very, very similarto one another.

Nelson: And they canget the benefit of the workflow tools that we create cuz we've created tosupport any type of credit transaction, not just the 1,000,001, not just thehundred million one. And the net benefit is going to be that our software andour tools have the ability to help a borrower through their entire debt capitalmarkets life.

Nelson: Their firstmillion, their first a hundred million, so hopefully their first 500 million,right? Mm-hmm. , we can stay there along the way, and that's because of everythingwe've built from the technology side in house.

Mike Townsend: Yeah.It's such a big market and what you're doing conceptually is bringingtransparency and through that transparency, liquidity and through thatliquidity economic growth, that that model is not new.

Mike Townsend: Imean, that's AngelList, that's, you know, many other marketplaces. Why do youthink it's taken so long? or what's the competitive landscape look like? Likehow many other players are doing this, doing this directly, Like, and, and howlong have they been doing it? Or is it, has it been going on for a long timeand I'm just not aware?

Nelson: It's funny,the VCs ask us that all the time when we do a fundraising round. And my, mypushback to them, or my challenge to them is really, if you find one, let meknow because you have to be a little bit crazy to want to do this. But goodnews is we're crazy. So our goal is to, you know, go after this extremelyunstructured, difficult market.

Nelson: Thecompetitor landscape from our perspective is really nonexistent, right? becauseyou almost have to do so much. It's not just one thing. You have to be theworkflow. You have to be the data provider. You have to be, the marketplace.You have to be the network effects that need to happen here. And the onlyreason why we've gotten as far as we have is because we did not try and goafter three sides of the market on day one.

Nelson: We were theunderwriter. We've been the underwriter for three and a half years, right? Andso by doing those transactions, we learned every single nitty gritty detail ofwhat it takes to do it, where we would trip up, and we've been able to createthe guardrails to ensure that other people don't trip up the way we have, andat the same time build a reputation for our.

Nelson: So we'vedone, our largest transaction was $144 million. Smallest one was 50 grand. Andso we know everybody in that space now. We've built up a name for ourselves sothat people trust us, cuz if if Percent use their tech as client zero to do a billionworth of transactions, then clearly I can probably benefit from that as well.

Nelson: And so nowthis conversation has been very easy to be able to do. If I'm here as asoftware vendor saying, Oh, I got this, don't worry, I figured it out. I haven'tdone a deal before, but trust me, I know what I'm doing. And then they, theysee the product and it's like, well, what does this do for me? Right?

Nelson: Like, you're,you're off on this, you're off on that. And so we've almost dog food or our owntech intentionally to be able to ensure that we could hit the ground runningwhen we hit the inflection point in our company's life. And the good news isthat inflection point is happening now. Yeah. So it's the most exciting yearsto be up Percent coming up.

and this is, you know, as good a start as any, we we able tobring for ourselves here.

Mike Townsend: Yeah.Yeah. So it seems like it was just largely b2b, largely relationship driven andlargely just complicated for the average person to get into. And because ofthat, you have to take a unique approach to get into the market in the firstplace.

Mike Townsend: It'snot like Yelp where they can just launch, you know, restaurants can join,people can look at it, and then you're off to the races. There's. Rereputational onboarding, you have to enable, I think if even with AngelList,like they're, they're onboarding, their process is not as challenging as yoursbecause individual investors, especially Angels, I mean, maybe that's why theytargeted Angels first and not like, you know, series D list is that there'sjust, there's just, you know, individual people, there's a lot, they can move alot faster.

Mike Townsend: Theydon't need to play as much at stake. Where I, I would imagine what you aredoing is getting, you know, large, larger, credit funds to put money throughyour platform. what, what were the, you mentioned 50 K to a hundred million.What were the types of deals that you would do, previously? Like how did youthink through those, or how did you sort of quarantine a piece of the marketand say, This is what we're gonna go after?

Nelson: Yeah, it's alot of incentive alignment and understanding what those incentives are. So,When we went out, there was no world where we can go to a multi-billion dollarcredit fund and say, Hey, look at this. It's a $2 million deal. Like, you, you,I know you're gonna like this, right? Yeah. That's not happening.

Nelson: So we justkind of kept them at bay. We got emails from them saying, Hey, like, whatyou're doing super small, but you know, maybe if you get bigger, come talk tous. So let's, let's have an initial conversation. I just wanna poke around. Sowe focus at the outset on FinTech lenders, because going back to our earlierdiscussion, asset backed is much harder than corporate debt, right?

Nelson: So why don'twe solve the hard one first and then go after the easy one after that. So wewent after FinTech lenders, because FinTech lenders probably would be most keento trust other FinTech company. And so the, the bar is a lot lower. So we knewtheir biggest pain point, let's take workflow aside, is just capital, right?

Nelson: Nobody wantsto give them the money because they're so young, they don't have experience.Their portfolio is not very built out. And we built that framework with. asthey grow up. That first million dollars became two, became five, became 20,became 25. I think the largest one we ever did was like 28 or something likethat.

Nelson: I mean, it'son the platform. It's significantly larger and it grows. And so we've beendrafting off of their success into kind of pushing later in later stage from adeal size standpoint and learning the nuances and the differences between thesesmall deals versus the medium size deals until it got so large that we did, youknow, 144 million transaction, right?

Nelson: Mm-hmm. . Andthat was kind of our first foray into that larger side of the market. So a lotof experience, a lot of learning, and that's kind of helped us get to where weare today. And we use those initial early guys, the small side of the market tohelp inform how we get to the later and later stage.

Nelson: Until now, wecan have a constructive conversation with those multi-billion dollar creditfunds because the tooling and the workflow that we built has started to almostlike veer into the territory that they're very familiar with. And the pain pointsthat we're citing because we've done ourselves, are very familiar and ring verytrue with them.

Nelson: That initself has made this all work a lot smoother. And so it was three years ofdifficulty, three years. Teaching VCs what we're doing because we had avisioner ahead. But the actual reality was almost like very different one'spitching a, infrastructure for private credit markets and capital marketsolution.

Nelson: The other oneis a tech enabled investment bank. We started off as a tech enabled investmentbank and are becoming an infrastructure solution that pivot, that evolution,that realization of that vision is hard to grasp as a seed stage company. Yeah.Essentially. And there's a lot of bets that need to happen, to believe that wecan pull it off.

Nelson: And now thestory and the tech, it all starts to look a lot better. Mm-hmm. and, and lookslike that vision's coming to life. It's a lot more believable at this point,which is why VCs have become more, much more interested in what we're doing.And we're expecting, you know, the, the next round and the next few years to bethe most exciting in our life.

Mike Townsend: Whatwas the 140 million investment?

Nelson: That was awhole business securitization for a public company. So I was talking aboutfranchises before, right? You can actually securitize or use franchiseroyalties as like an asset, to, to back it. and so that was a interesting deal.We had done a 40 million deal with them, and then we did another 40 milliondeal and the largest one for 1 44 was actually joint book ran with Jeffries.

Nelson: So when youtalk about getting into the right realms of people to, to work with, and theright institutions, definitely that was a good kind of putting our foot outthere. getting our name out there, like stamping our flag in the ground ofwe're here, right? We've arrived because we can do this type of deal and, anddid anything in.

Mike Townsend: Whenyou reflect back on it, was there any. Like network that you were in or yourpartner was in or something because it sounds like the businesses or was inparticular so heavily relationship driven from the capital you needed to raiseto even be able to make these investments. how did you sort of crack in that,that personal relationship network business?

Nelson: Yeah, so Ispent a whopping two and a half years in traditional finance. You did None ofwhich was in fixed income really, to be honest. so this had to come for ourteam, right. And our team deserves all the credit here. And also a lot of, Ithink. Like I give them a lot of credit for actually taking a plunge andleaving what would be a very cushy banking capital markets job to join me here.

Nelson: Right. And soeveryone on the senior leadership team, has come from traditional finance. Isee either on the market data side as product and engineering naturally shouldor on the almost like investment banking, debt capital market side. and so justas a reference point, you know, our head of capital markets used to run DCMAmericas debt capital markets, America like Credit agricul.

Nelson: Our head of,credit, used to lead the entire ABS and CL asset ization and CLO division atDbrs, Morningstar, our president used to be at ubs, in the debt capital marketspace. So you need that type of domain expertise and that network to reallykind of get this off the ground. And so this is not one where really talentedengineers can just come together and build this.

Nelson: You need toactually know where the pain points are and sort of. Almost be, effectively aproduct manager without really being a formal product manager to drive thedevelopment of the product in a way that institutions, investors, and, andanybody in this transaction cycle would be open to adopting.

Mike Townsend: So allthose people sound very expensive. When you're starting off, you know, you haveyour co-founder, are you raising money to hire them? Are you like pulling offone person in particular, giving them a big equity stake that has a bunch ofrelationships in the credit markets and sort of using that to get the flywheelgoing?

Mike Townsend: Like,how, what was the, I mean, it's great now. You guys raised a bunch of money andyou could hire these folks, but how did you crack the chicken in the acreinitially?

Nelson: It's a wholelot of selling in the vision of the future that we're building towards here.Right. And you know, the fact of the matter is nothing's ever as easy as itseems to the outside.

Nelson: Nothing'sever as, Everything takes longer than you expect. Everything takes more moneythan you expect. That's almost like the, the benchmark you should be operatingunder. And so given that's the case, I, again, I give my team, the seniorleadership team a lot of credit for being willing to take that plunge, beingwilling to take a massive haircut in terms of salary to be able to join ushere.

and it's been hopefully, I hope they find it rewarding. Yeah. Ihope they're excited about the future. but it was a bet that they had to make.Right? And it's, it's one that is continuing to pay off these days.

Mike Townsend: So itsounds like you raised small seed funding. Did you have a co-founder?

Nelson: No. So thisis, essentially solo founder with my old consulting company.

Nelson: Gotcha. andso, the consulting company used to help other founders build their companies.So we had a team, per se, to get the company on the ground.

Mike Townsend: Oh,okay. That's, that's helped me explain it. Cause I'm like, Okay, something hasto happen. You either have to raise money with just a solo person, you know, orlike send a ton of cold emails and somehow convert people and get a flywheellike that.

Mike Townsend: I'malways interested in the flywheel on complex markets because, It's, it's justinteresting to learn, you know, other people can use the same lessons. So youhad a consulting?

Nelson: Yeah, I had,I had the benefit of a, a 10 person team that knew how to do product marketing,branding engineering, to get the initial product off the ground, to get thebranding downright for cadence, and to look and feel bigger than we actuallywere.

Nelson: Yeah. Andthat allowed us to really kind of get to, to where we are today as the, thecore foundation. Having said that, you know, we've rebuilt the entire techstack from top to bottom at this point. But in terms of raising seed funding,pre seed funding cetera,

Mike Townsend: It'svery, very helpful. What was the consulting business doing? What were youselling to who? .

Nelson: Yeah. So Ihad actually quit finance in 20 12, 20 13, with a vow to myself to never doanything in finance ever really, Which is obviously the most, the most famouslast words I could have possibly ever told myself. Because capital marketsFinTech is probably the most complicated.

Nelson: Yeah. Of allthe FinTech things to do. so the New York Tech scene was kind of, you know,burgeoning in 20 12, 20 13. And so I said, You know what? Everyone's doing thestartup thing. How hard could it possibly ever be? And I realized in like sixmonths how hard it actually was. I tried to do a startup, I failedspectacularly, I lost all the cash I had ever saved up in finance, including myparents had kicked in as well.

Nelson: And I like tothink I do my best work when our back is against the wall. But at that point,you know, I was broke and had to afford rent and had to afford food. And so literallyI just pull myself up on Oesc, which is now called Upwork, and I had a bunch ofpeople reach out and say, including bcs, Who said, Can you help me with pitchdecks?

Nelson: You look likeyou have, you know about startups, You look like you have a good design sense.Let's give this shot. And that's how that consulting company came to be. It wasa pitch deck development company, straight up, awesome. Telling the narrative,doing the design, a finance background came into play here.

Nelson: I could do afinancial model and all that together allowed these companies to raise money.And the beauty of it was when they raise money, they're flush with cash.They're very grateful for you helping them get there. And so they asked me, Canyou do app development? Can you do mobile app designs? Can you do branding?

Nelson: And I waslike, Oh yeah, I got a team to do all those things basically. And you justlearn, but you grow and you develop. And I think I almost encourage everyfounder to not just one, go through corporate life at least once, but two, toactually run a services business because it is so different than having tons ofVC capital your way.

you actually need to learn how to turn a profit. You need tolearn what margin actually means and what that impact is on your bottom line.How to hire in a margin constrained environment. It taught me a ton, but thecompany did decently well. Right? So at our peak, we had about 15 people. we,you know, I think we cleared almost a million in revenue annually.

Nelson: And so allgood. but, and it had a couple good case studies coming out of that. one of 'emwas block five in the crypto. Well, yeah, I saw you were an investor or Yeah,yeah, yeah. First Angel investor. First Angel Tech into that. Because Zach, Ohyeah. Zach was a single founder at the time. He hadn't even met Flory yet, andhe had the, the name for Block Fi, Great name.

Nelson: He had boughtthe domain, Great domain. And, he had the idea, right? And so I met him and Iwas like, I think you got this figured out. So I'm gonna help you out as best Ican. Why don't you come into our office, I'll park you next to our team andthen you can get the pitch deck done. You can get the marketing website done.

Nelson: You can get,you know, parts of the v one of the product and I'll introduce you investorscuz I know VCs, I've built up a network of VCs over the years because they wantto invest in my clients. And so, I introduced him to Consensus, and that wastheir first lead investor. I was the first lead check way.

Nelson: Yeah. Thelogo is still ours actually. They've just modernized it quite a bit. Builtlogo? No, no. Block by five logo. Yeah. Yeah. So it's still ours. They justcleaned it up, made a flatter and like all that stuff. But it's, you know,that's, It was great. Right? It was awesome to see him be successful and atthat point, Zach was the one that made me go interesting.

Nelson: So, I canclearly know how to build companies. I'm a lot more humble than I was in 20 12,20 13, and I feel like I know VCs enough to be able to kind of get a couple to,to come my way. And so for the right idea, the right time, I would love to dosomething the old fashioned venture backed way instead of a margin business.

Nelson: And so thatwas when Percent really kind of came to life. At that point, we came togetheras a team, the consulting company, and said, What are the gaps in the market?You know, where are the biggest pain points? And we saw that alternativeinvestment,landscape thinking, short, long duration, high minimum, sameyielding investments.

Nelson: In the sameway that you have no brand loyalty to Uber or Lyft, you should pick whicheverone's cheaper, then people would go to the one that fits their needs. Mm-hmm. .And our thought was retail investors would want shorter duration, They'd wantlower minimums, and they obviously want the same yield. And that's really howit all came together.

Mike Townsend: That'sawesome. what do you think of DeFi and crypto? Is that an influential part ofthe credit markets today in any way, or do you see it being, coming somehowinfluential in the private investments that are happening? Like, caveat bysaying that DeFi today, I believe, only has a structure where you have to putup 100% collateral of what you're lending.

Mike Townsend: Sowhen people say DeFi, there's a lot of excitement, but to me it doesn't seemhighly effective if you have to stake a hundred Percent of the collateralbecause there's, you know, no risk on a AMA automated market maker. What areyour thoughts on crypto's influence in maybe credit markets, but maybe morebroadly, just generally like access to liquidity?

Nelson: Yeah. I thinkit's actually sometimes over a hundred Percent. Right? They need like overcollateralized lending, which is crazy. So, Oh man, this question we've triedso hard to be a blockchain company, really like over the years. It it, Oh yeah.I mean, Coinbase is on our cap table, Morgan Creek's on our cap table.

Nelson: Like we havea number of blockchain, companies and investors on our cap table because ofsort of what we thought was an opportunity, right? So in addition to, you'regoing like down memory lane for me here, in addition to, the alternativeinvestment landscape that we thought, oh, opportunity there, in 2018 there wasa whole talk about security tokens, right?

Nelson: So weoperated under the promise or premise that we would be creating regulatedsecurity tokens for all these issuances because that's gonna be the next bigthing. Clearly we are now in 2022 and security tokens are, are not a thing,right? Not a big thing by any stretch of the imagination. So as we saw that thewriting on the wall for security tokens, we ended up saying, Okay, so in thesame way that we need to find.

Nelson: Things thatpeople actually want to do. what would be the lowest hanging fruit to getsomeone to adopt, the kind of blockchain type stuff, right? And the one thingthat we thought was, why don't we mint an Ethereum contract for every singleone of these issuances? So you can almost have like a publicly anonymous captable of all the money that was put in, what did they invest in, what was theinterest that got paid out?

Nelson: And it waslike, kind of cool, right? Like you could, anyone can go on either scan andjust find our stuff and people didn't have to have their own wallets. There'sno keys cuz it's only a reflection. It's not the real thing. Unfortunately, bythe time a few, maybe a year or so after that, it cost us a thousand dollars tomake the youth contract.

Nelson: And it was,we were making like $500 in revenue off that transaction. So I was like, Okay,we gotta stop this. This is not gonna work anymore. Put a pause on that. Andthen we thought, Well, retail no good. Why don't we go institutional? And soone of those, that 144 million transaction, that was the third one.

Nelson: The first onewe did was for 40 million. And that one, we actually were the first evercompany to get a digital asset, mentioned and used in a rated agency report.And so that was a rated rated deal, I think for, Forbes. Michael Del Castillocovered this. but it was essentially showing up in there as like there is amirrored transaction on chain for all.

Nelson: Now that wasall well and good. You could see almost like the cash flow out from theinvestor into the reserve accounts by the trustees. You can then see it flowinto the, the issuer or the borrowers account. You could see the securitieschange hands. Like it was kind of cool, right? We asked, you know, obviouslyeveryone wants to do everything on chain, so we asked the investor, is there anychance you could transact in SDC so we could make this, you know, fully onchain?

Nelson: And theyliterally said, If we do this in sdc, I'm leaving this deal. And so we're like,No, no, no, don't worry about it. Like SD straight up, no, nothing different.Like, don't worry about this blockchain thing over here. Not relevant, right?And so we tried, but clearly that didn't really go anywhere. And finally,recently actually in Bloomberg just did a piece on this as well.

Nelson: On this, weactually helped create or helped launch the first ever credit default swap forprivate credit markets using DeFi. And so we partnered with a company calledUnsen. , which was founded by one of our investors who've been nudging us intothe crypto space. And essentially all it is, is, is a treasure reserve.

that is essentially, cash, right? Stable coins and whatnotwhere there is real world interest feeding it and feeding the treasure reservefrom our products that are generating that, that yield. And then there is DeFiyields or interest being generated on that side where people are staking thingsto be able to get it to work.

Nelson: Now,unfortunately, this launch, or maybe fortunately this launched in June of 2022.And so the DeFi side is not really up and running yet because DeFi is notreally up and running right now. and so we are the only side that's, that'spowering and increasing and addings that treasure reserve. but you know, Ithink, look, at the end of the day, I feel like DeFi innovation is interesting.

Nelson: I think it'sgonna get regulated and the moment it gets regulated, a lot of the reasons whyDeFi has been so successful is because it's been operating unregulatedenvironment. There's a lot of ways to make money and generate yield in thatinstance. When regulators come in, there's going to be a, a day of reckoning, Ithink, for a lot of these companies, and it's going to cause liquidity to falldramatically from there.

Nelson: And at thatstage, what is the innovation that's remaining? That is gonna be what changesthe traditional finance landscape? cause a lot of things that they're doingtoday just do not fly in traditional finance and it won't fly under regulation.There's pockets of things that may be interesting, I think, and we'll see whatthat is, right?

but that's when, that's what I'm most interested in looking at.And it's the reason why we're so interested in what Onsen was doing or helpingthem create it. Because we always want to have our ear to the ground, in whatthe latest innovations is and trying to do something that could bringinnovations.

Nelson: And I thinkwhat they're doing is right. Doing a credit default swap for private creditmarkets never existed before. Using the best of both world. That's a real worlduse case. And I think that is, that's what we like to see.

Mike Townsend: If, ifreg, if more US regulations do come out in the, in the near term regulatingDeFi, do you think that will have a industry-wide, like crypto, allcryptocurrencies will be negatively impacted by that, as it sort of stiflesinnovation by default.

Nelson: I think ifthey ever wanted to be beyond what it is today, which is a lot of scamming, alot of gring, a lot of Ponzi schemes, with the occasional real world use case.If they ever want to get beyond that right, then it's gonna take regulation. Iwould argue for the true purist out there, they want this to be a big thing.

Nelson: They wantthis to change the world, right? When I first saw crypto in 20 17, 20 18,thanks to block five, actually my first impression. Stable points are amazing.Like that is actually a real, real use case here, right? Can you make a lot ofmoney off of that? Probably not. Mm-hmm. . but in terms of being able toessentially allow somebody who's in a country that has a ton of really highinflation, buy or swap into s d digitally and hold onto it and then swap itback as needed to be able to kind of make purchases in their home country thathave now insanely inflated, that's a great use case, right?

Nelson: That's a realbenefit to the world, and I love that. Now, the, the, I think crypto purists orlike the, you know, DeFi crypto Twitter or whatever you wanna call it, thataudience is gonna say, Well, they can track everything you're doing. And it'slike, I mean, yeah, that's kind of the what happens when you go digitally.

Nelson: That is sortof the, the nature of the situation. But think about the benefits, right? So ifyou're here to change the. You can change it in that way, but that's gonna beregulated. Yeah. I mean, you know, Central Bank digital currencies are gonna bevery regulated. but it is something that I think has dramatic implications forhow money flows cross country, across countries, internationally, remittances,all that market can be upended with stable points, which will be very, veryexciting to see, see, do.

Mike Townsend: Isyour general disposition that, that, given that's the correct implementation ofregulation, that it'll be net positive in reducing the scam artists out there,but the trade off for more government intervention will be worth it?

Nelson: I think so,yeah. Yeah. I mean, look, traditional finances outdated, right? There is aworld where sure, the entirety of secur and private debt can be on. We're veryfar away from that. Mm-hmm. , we need a whole lot of adoption and regulation tobe there and get there. But in a, if we were to think pure utopia, optimisticlandscape here, that's possible. Right. With, with this. And so, you know, whatDeFi can do, what, crypto and blockchain can do is a significant step up fromExcel phone calls and emails.

Nelson: Yeah. Right.And a lot of like trusting counterparties. So if you think about that as ourcore problems today and what we're trying to improve upon, then in theory, yes,it can get there. but it is gonna take that regulation to weed out all of this,you know, invest here, and then I'll pump it up and then I'm gonna dump it andI'm gonna tell you to hold it like that is, that's gotta go away.

Nelson: Yeah. And.The public equity markets, like the stock market has gone through hun, likeover a hundred years of this type of regulation to get it to where it is today.And it's still not perfect, right? There is still ways to manipulate it thatpeople are are doing. And so when you think about this being super, highfrequency, like there, these guys are speed running through a hundred years ofregulation essentially in all the scams that are popping up, all the frauds,all the hacks, like it's all happening because there's no regulation.

Nelson: And so ifthey want to speed run through it, they'll get to the same end point and itwill be a good end point for the industry. They just, you know, a lot of peoplemay not like it.

Mike Townsend:Ultimately, what do you think about the reaction that maybe it's not, maybe allthese hacks in these scams are not happening because of, There's no regulation.

Mike Townsend: It's,it's happening because there's so much potential in the technology and throughthat potential. It's like early internet had a ton of porn and illegal drug andweapon sales because of the technology potential. I think it's the industrytends to react like a living organism that if there were no regulation in.

Mike Townsend: wouldthere be a reaction to those scams and those hacks? Absolutely. You know, thecompanies are massively incentivized. The, you know, even the, the Dows outthere that are completely decentralized, all they want is to maintain a safeand secure and sometimes anonymous, but depending on the value propositionservice to people.

Mike Townsend: So Ithink there's, like a naturally evolving immune system that kind of, okay, hackhappened. Well, we could build this patch and, you know, this scam happened.Okay. We have this transparency marketplace rating system. So there's, there isa, maybe an underappreciated market reaction to the negative things that happenand those negative things that happen, they strengthen the system.

Mike Townsend: Youknow, you need hacks, you need scammers, because then that allows you to buildresilience into the market regulation. I have mixed views on because I'm, I'malways interested to see what the reaction is from the market to solve thoseproblems in the, in the, in the short term, the thing you think peoplegenerally.

Mike Townsend: Can'tclearly see is the negative impacts from innovation. That doesn't happen whenyou have over-regulation. So that's, you know, that's just like, how do you seewhat's not happening because you have too many rules. And so I'm, you know,it's easier to see like the CEL is crash and the hack here and the scam here,but how do you see the, the Coinbase that didn't get built because of some ruleor regulation that's in place?

Nelson: So that's mygeneral attitude. Yeah, it's, it's a fair take. I mean, to be honest, like oneof the things that definitely needs to happen is actual enforcement ofsecurities law. Because if you can, actually, most of the things that have beenissued are securities at the end of the day. Right? Or commodities.

Nelson: Most of 'emare not commodities though. So if we go into that pretense that most of 'em aresecur, They have to be filed and you can be eligible or you could be up forsecurities fraud. Like that will deter a lot of people just inevitably mm-hmm.. And so you don't, nobody wants to go to jail for this.

Nelson: They want tobe able to kind of get away Scott free. And if regulators aren't here, thenlet's just do what we can. Right. the concept of insider trading and frontrunning and dark pools, like these are things that have been, used to runrampant in the public markets and have now been tamped down a little bit.

Nelson: And that willprevent these pumps and dumps these skyrocketing prices and the free falls thatyou see where you can just get completely wiped out. Algorithmic, stable pointsdo not work. Like I I called that from the very beginning. They will neverwork. Yeah. They will never work. because there's always incentives are allscrewed up.

Nelson: Yeah.Someone's always gonna try and break you. Right. And if you're not gonna bepegged something that's real, that's a real asset, it's gonna, it's gonnateeter and it's gonna teeters, it's gonna fall cause the trust is gone. So likethat would've never passed in a securities law type of world. Right. . Now,when it comes to, the things that, you know, like the, what's not gonna getbuilt right in, in the events of this, I think there needs to be a goodunderstanding of what is a feature and what's a bug.

Nelson: So in thisinstance, the hacks happen way more frequently in, in the crypto world thanthey do in the, traditional finance world from a frequency basis, I would saymore so, or per Percentage basis, more so than dollar value and more so thannumber of times. and it's because there is no reversibility, right?

Nelson: In thisinstance, like it kind of just happens and so everyone has to agree that we'regonna walk it back, right? Like we can get consensus around let's just forkthis, and then this becomes the new feature, and then let's ignore whateverhappened over there. I mean, the other way to do it is just to not make thingsirreversible and just have guardrails in place to block it because it lookslike fraud or it looks like a hack, or it looks like something can happen.

Nelson: And that'swhat the banking system has done. Mm-hmm. right there is. Checks in place toensure that you meant to do this. There are things that happen that basicallysay, Yeah, this doesn't look right, this doesn't feel right. Let me put a stopto it. Let me confirm this and then we'll go from there. So all those thingsare things that, you know, I would say they're features and not bugs, thatinstance, that actually add value to the ecosystem that you just don't reallyhave in crypto and DeFi right now.

Nelson: That I thinkcomes with regulation as well, and you're just not really able to see.

Mike Townsend: Yeah,yeah. Valid point there. It's a super interesting topic. Nelson, are youactively writing or tweeting or is there anybody in particular or any booksthat you wanna throw out as places that were inspiring to you? over the recentyears?

Nelson: Yeah, Ithink, it's, Oh, let me just hold on. Get this, There we go. I'm trying to getthe background, but, Oh, might have to edit this part out. Sorry.

Mike Townsend: That'sfine. could also leave it off. What is it doing this point? You wanna leave itoff? Okay. Unless you wanna watch something put on some, uh, . .

Nelson: All good.yeah, so in terms of things that I've been reading, I actually do keep up withpodcasts pretty regularly. It's fun, right? I think it actually gets you a goodpulse check on, on the world. I love deep dives that the acquired podcast does.I think they just, you know, go really, really deep into companies that youshould never see.

Nelson: I thoughttheir breakdown of like Taiwan Semiconductor was fascinating cuz one of thosecompanies that powers everything we do today and you just don't really, youknow, see otherwise. I would say in terms of books, I've been reading, let'ssee, what have I done recently? I read Tony Fidel's book recently, the guy whocreated the, the iPhone or parts of the iPhone.

and that was an interesting read if only for the fact that, heevolved from corporate life or startup life into corporate life, into back intostartup life. And you kind of talked through that journey. . And in thatinstance, I felt like I lived through a lot of those things as well. And it waslike extreme, almost like relatable to a fault and to a point where it was kindof scary.

but I do recommend most of our team members read it as well.and then something that, guides us and is part of required reading for us as afirm is, Hamilton Elmer's Seven Powers. And that is just kind of a goodbusiness breakdown of how you can always stay on top of what you're doing andhow you can continue to evolve and adapt, in a way that, you know, no one elsemay be seeing or doing.

and so using that as a framework for what our strategy lookslike going forward has been great. Right. So I think there's like five booksthat are required reading now for joining Percent. and we, we ask them about inour one oh ones that happen periodically a few weeks later. but it is, you know,helpful Yeah.

Nelson: At the end ofthe day. And those are things that I, I always definitely recommend. Awesome.

Mike Townsend: Dude,this is fun. I'm glad that we got a chance to come on and talk again, andcongrats on your recent progress. And, one day we'll make it a thirdconversation.

Nelson: That'd begreat. Looking forward to that, Mike. Really appreciate it. Thanks for havingme on.

Mike Townsend: Seeyou buddy.

a powerful