Fintech Fridays EP39: The Power of Digitization and How to Get Exponential

NCFA Canada | April 23, 2020

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EP39: The Power of Digitization and How to Get Exponential

 

HOST: Tristram Waye, Fintech Friday's podcast episode

GUEST: JAMES WALLACE, Co-founder and CEO, Exponential (Linkedin)

In this episode of Fintech Fridays, Tristram Waye has an in-depth conversation with James Wallace, Co-founder and CEO of Exponential.io

The discussion looks at:

  • Exponential thinking and why it’s hard but necessary
  • How Exponential sees the digital world, and their unique full stack approach to it
  • Why the private markets are both archaic and a gigantic untapped opportunity for digitization
  • Why accreditation decides what gets built, and why that needs to change, and much more

Expo logo March2020 - Fintech Fridays EP39:  The Power of Digitization and How to Get Exponential

BIO:  James Wallace is co-founder and CEO of Exponential, a global digital finance company aimed at creating access to a meaningful life for everyone, everywhere.  At its core, Exponential is a fully-integrated venture capital firm with access to investment banking and stock exchange capabilities.  James launched his first international business at age 11, first storefront opened at age 17, first software company developed at age 18 and has owned/operated more than 20 other businesses since, mostly in the digital technology space.

 

 

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Listen to more podcasts here: Season 1 | Season 2

 


Transcription of Interview

Intro: Welcome fintech Friday's a weekly podcast brought to you by the National Crowdfunding and Fintech Association of Canada and partners.Covering all things fintech block chain be AI and alternative finance.

Tristram Our special guest today is James Wallace, co-founder and CEO of Exponential. James, great to have you here today.

James  Great to be here. Thanks for having me.

Tristram Why don't we start by talking a little bit about your background? What was your journey to where you are today?

James Well, I was a serial entrepreneur even up until I was 17. And that would have been 1993. I opened a storefront in ‘93 and realized that I really didn't enjoy the retail environment. People turn into little mini monsters even the nice ones get a little weird. So I contemplated for quite a while: What do I do if I...and actually it came from from a family that had a manufacturing distribution, commercial, manufacturing, distribution background and I didn't enjoy that either. So I thought, you know, I don't enjoy working with people and not working with people. What do I do?

And in that contemplation, late nights at the store, I started thinking about the internet and thought, is that a way to distribute things and it just seemed a lot more fun than manufacturing and selling and distributing goods. So, in 1993, I started building what I thought was going to be this beautiful pre Amazon ecommerce distribution platform. And it turned out to be nothing more than a glorified digital brochure and catalog site. Took me months and months and months to build. But at that point, I realized that the internet was here to stay even though back then people were still saying it was just a fad. And I also realized that technology computer programming was a profound exponential lever, something that you, with relatively few dollars, you can build something put it into the world and have it, you know, go viral, and have it be shared with the world almost overnight. So I got really excited about that, and took... diverged away from computer programming, and more into product development, and began to hire computer programmers. Just became a serial tech entrepreneur and I've been playing in technology, building companies. More recently, have sort of put aside the the founder hat in favor of taking my capital, our capital, and my advice and our advice and deploying that into amazing founders that are building extraordinary products and services.

Tristram And that is the foundation for your current operation Exponential is that right?

James That's correct.

Tristram Now, tell me what is the vision behind Exponential?

James  Well, the the original vision is actually intact. And that is something I don't get a lot of opportunity to discuss in the financial services circle, because we talk a lot about what we're doing with our securities exchanges and investment banks and so on. But what's still at the core is -  and in fact, all those those products and services that we built, teams that we built, are built in order to service the the value creator, the true value creator. So we have some a very venture centric mind. We believe that innovators and tech startup founders are extraordinary value creators. And we have basically essentially grown all of these products and services to surround that. We stated very, very clearly that we invest in startups that alleviate suffering, or expand human potential in order to bring to market products and services that allow access to meaningful living for everyone, everywhere. So it's those people on a day to day basis are still regarded as our core focus. Yeah.

Tristram Okay. And so I saw you mentioned in one of your podcasts and you talked about exponential thinking, could you go into that a little bit and explain why it's important.

James Yeah, The the human mind actually can't think exponentially, it can only imagine exponentially. And I can only do that if it struggles very, very hard to do that. As much as I love exponential from a business model standpoint to a sort of systems building standpoint, I still - as much as I played with exponentials, I still have to remind myself to get out of linear thinking. But the three dimensional human brain is stuck in linear thinking. So you know, one way to really convey this message is that, you know, 30 linear steps and you're 30 feet away 30 exponential steps, and you're from Planet Earth to the Moon, back to Earth, back to the moon, is an extraordinarily different way of mapping growth and things.

And so, what I what I said earlier, as well about just creating something, putting it out into the world, especially via the internet, especially on social platforms, we can see just we can see just extraordinary adoption, extraordinary proliferation and sharing. So these exponential principles are rooted in that sort of thinking. How do - how does one create bigger leavers? How does one get more done with less, which is still, you know, you can do that incrementally and linearly as well. But when you start thinking about algorithms, Salim Ismail, a friend of ours and author of the book literally called Exponential Organizations, puts it in 10 different categories and talks a lot, as I said, algorithms and dashboards and staff on demand. These sort of - the ability to gain access to something.

One of the principles is not ever owning, because there's overhead and cost associated with ownership. Leasing for a fraction of the cost and giving it back when you don't need it anymore. There's a lot of different exponential principles. can be employed and deployed by an enterprise to facilitate growth that is, you know, again exponential so many, many, many times, even month over month, and definitely year over year.

Tristram Okay, and one of the other elements that you talked about in that particular conversation was was about the concept of curation, and the importance of a an abundance mindset in the exponential economy, is this is kind of what you're talking about here?

James Yeah, yeah, I think so. I think that all those things are critical in the future. To me I - for me, I see them slightly separated, but coalescing in that setting in that new world, certainly.

Tristram Okay. Now, how about about giving us a sort of an overview of how Exponential works as an organization?

James  Well, it was It's actually really, really good that we had an opportunity to put the founder, as we say, we actually could call them the value creator, as I mentioned at the core. That's something that's not as obvious sometimes. And essentially, having gone from actually a super angel fund, so it was just my partner and I put on our own capital, deployed that over the last three years, and then just now recently actually became venture capital. For those that don't know that the only difference between an angel and a venture capitalist is, venture capital plays with other people's money. And so we started building things that would allow other people's money to come in. Because we realize obviously, the more capital we can deploy in this framework, the more we can shift.

In our - one of our mandates, perhaps our core mandate is to migrate society to an era of prosperity and meaning. And through essentially digitizing everything and creating this new digital economy, which is, you know, democratized open, and and freer. So getting back to where we were, we realized that the digital economy was forming around us. And we could either be an active participant or a passive participant. We were going to be a participant no matter what. We made a couple of investments in companies that were really excited about the ICO craze. We realized that we couldn't participate in that because there was a lot of issues, legal liability, lack of clients. We foresaw that this was going to turn into something that would be not worth engaging that and I think that we've seen recently that is the case. The venture capital fund, though our angel fund was very interested in the idea though, of democratizing access to early stage investments, which I think the ICO craze showed an insatiable appetite for the retail public to invest in things that mattered and specifically early stage. And a lot of those white papers that, unfortunately are no longer companies, some that were funded millions and 10s of millions of dollars, unfortunately, were very interesting. They had a lot of really interesting ideas. They got people very excited, and a lot of people put a lot of money into them. So we thought there was something there, not just on the the issuer side, the founder side, in terms of fundraising, but also on the investment side. That there's an untapped need. Not a market, not an opportunity not to want, it felt like a need for investors to put their money into meaningful things.

And so, about two and a half years ago now, I think, we approached Bermuda who was the only open regulator at the time that was willing to have this conversation about a digital security. And we spent several months and several hundred thousand dollars and finally, with one of our startups, we came out of there with a federally approved digital security offering. So we were ultimately the sole seed investor in the world's first federally approved digital security, offering. That allowed us to really understand the framework, compliance, legal, accounting framework and also the fundamentals inside for the issuer in the founder - what were they going to be required to do? What was the ongoing compliance requirements and so on?

And then also the investor side, we started talking to crowdfunding platforms and investment banks who were doing private placement deals or broker dealers in the US. And that led us to realize that we really needed to bring in house the expertise to bring private placement deals to the world, and to list on crowdfunding sites. So essentially, what we ended up compiling, or creating was - if you think about it, from left to right, on a capital markets lifecycle journey, you have early stage, which is typically represented by a venture capital. Growth stage, which is typically represented by investment banks. And you have markets, which is the IPO event at the end of, you know, series A through series E, the big liquidity event. And so we ended up with a group of venture capital funds, a network of investment banks in several countries, and a markets team that was connecting via API to federally registered and regulated digital securities exchanges.

And so in house, we were able to actually take an enterprise from the earliest stage all the way to a major liquidity event. And then we layered on just recently, the funds team which has onshore offshore capabilities. It has a digital asset fund which is listed on DealSquare, powered by Neo Connect and JV from FrontFundr. And we have an entire feeder fund into the offshore for digital ventures. So we've set up a way for almost everyone in the entire world, from retail public in Canada to offshore large, international, global institutional investors to invest in this digital asset ecosystem.

Tristram That's one of the things I wanted ask you about is this important idea about the challenges for regular people to invest in new projects with the accredited investor rules. Can you talk a little bit about that and, and how you're helping with this problem?

James I think for the average person that doesn't know to really give context - to it to be sort of fair, but also give context - I mean, we all know the saying the road to hell is paved with good intentions. And I don't want to believe that this was ever constructed in a way that was meant to keep people out of the most lucrative investments and allow for what really amounts to a boys club to emerge of people that that are not only getting access to these really interesting, exciting investments, but have cornered the market on determining what gets built. And so you know, in the US, for example, there's only 2% of the population is accredited in Canada it's 4. So that means in Canada 96% - in the US, 98% of people are prohibited from making early stage investments. Due to this accredited investors who have an exemption for whatever reason, typically just because they have a lot of money.

So we - there are people, and this is what's shocking - there are people that work in the foreign investment bank - analysts and so on, understand everything about, not only investing in general and early stage investments, but the actual investment itself, that are prohibited from investing. And that's just because they don't have - that that one investment that they're running - just because they don't have enough money in the bank, the government doesn't think that this person is sophisticated enough to make an investment decision. And because they just don't have, you know, $5 million or a million dollars depending on the jurisdiction. This changes, but almost all jurisdictions have this professional, sophisticated, accredited investor exemption. And so, just right there, we can tell this is nothing to do with the capability of an individual to make this investment decision or, and or it's just a lazy definition, it's easy to to apply regulation to. So back to the original point, which is really, really important, is that in the US, there's about 500,000 accredited investors, which amounts to just less than 2%. Only about 3000 to 5000 of those people actually use that exemption to invest in early stage startups, either directly or more likely through a venture capital fund. But what's really, really alarming, if we talk about absolute financial inclusion, which is not just access to a platform, but it's equity in the things on that platform, and therefore making - voting essentially with your dollar to determine what's gets built in the new world. That's the sort of financial inclusion we're talking about.

But the reality is that 30 people that manage the US's, you know, 30 biggest venture capital funds are essentially determining about 90% of what gets built. And those 30 people are exactly who you think they're like - you know, 85% of them are white, rich, older men. And so, this is not about a system, that creates the world. And at least as I, as far as I can tell, it creates the world - that the world, the world around us that the world actually wants - the people the world actually want. So our belief - and that's why the Digital Asset Fund that we released recently, launched in Canada, we launched retail public, as we call it here. It's OM form compliant and it's also TFSA and RSP eligible - we wanted anyone in Canada to be able to put, I think the the minimum investment amounts $500, we wanted anyone to have access to that fund. And again, we truly believe that every dollar is a vote for the world that they want to see in a few years.

Tristram I think  that's a really great way of explaining the the issue with the accreditation, which is - a big part of it as a knowledge problem, but, it's around the idea of determining the future by voting for what you think should get built. I think that's a fantastic way of looking at.

The one thing I wanted to ask you about, in addition to that is just for a clarification, I recall you discussing the difference between an electronic security and a digital security and, and sort of defining what those two things are. And more importantly, how does digitizing an asset increase its value?

James If that's a great question, and a very reasonable question. I think we can even add the paper component to it, and this is probably obvious to a lot of people but not so obvious to some. The paper security was the thing that was traded, the thing that was stored, the thing It was literally handed from person to person for hundreds and hundreds of years going back to, you know, who knows, actually. But some of the earlier sort of stock exchanges and stock trades were in Europe, and they were about sending vessels over to the new world. And obviously, more recently, but still a long time ago, the New York Stock Exchange was a group of men in the park in New York, trading paper securities. And that led to what we see today. Not just with the New York Stock Exchange, but with all securities trading on all major exchanges.

And I think that there was the technology to take it from digital (paper) to electronic was a significant event. They used to require warehouses of like many, many, many warehouses all over the place to hold these securities. And for a lot of people that remember, and I even remember, the idea of bearer shares, where the bearer, the person that held the shares on that thing. It didn't have an electronic representation anywhere. It was literally that thing - and obviously one of the reasons why they're gone is because of compliance issues, you could track who the owner was. They're largely gone from the planet today. But this migration from paper to electronic allowed instead of you know, seven days for someone, a client, to find the time to climb three storeys and go over, you know, this this large floor to find this one little paper security and then put it - give it to a courier. And send it up the street or across the country to be able to put that on on a microchip and be able to retrieve that as quickly as they could, was obviously an innovation.

Now, many still have that paper certificate warehouse its just about the retrieval is much, much quicker. Now the difference between electronic and digital and I, definitely get the confusion there because digital is a technology and electronic is also, I guess, a technology. But the difference is - and so why often say a paper security is a security, and electronic security is not a security, and a digital security is a security. And the difference is, is that is a difference of ownership. It's the difference of control. The electronic version is a facsimile. And, I can't, and no one should, downplay the benefits of electronic versus paper. The public markets, and one of the arguments against digital and not against digital but put toward the idea of how important is this digital paradigm, is they work pretty well, right? And that's - that's very true compared to the paper model. But it's not at all true compared to the digital model.

And so, the - for example, I mean, even in the electronic world, we have theft, loss, so broker dealers or other investment dealers, stealing these things are going bankrupt and losing them. We also have I think it was Dole, the Fruit Company, and unbeknownst to itself, not its fault, but it's investment banks fault, sell shares, that didn't exist. And that is only possible because someone made a mistake somewhere, and electronic version of the security was created and was correlated to a system or a database that didn't know that that shouldn't occur. But digital security on the other hand - and the first point actually I want to make before I finish that thought there - is that you know, this comes in digital securities are typically one fifth to one 10th the cost of trading electronic securities, simply because a lot of the intelligence of the security is embedded in the digital version and not the electronic version. So you don't need all these other market participants, transfer agents, custodians, clearing selling services, etc. to get involved because it happens naturally. It's quite literally programmed into the thing.

But the digital security itself, is basically created from a quasi-public quasi private, meaning people that should have access have access, investors, issuers, other important service providers, also regulators, perhaps government officials can see this blockchain, this distributed ledger, essentially issuance. And so therefore, because it's public, because it's immutable, or quasi public, I should say, and because it's immutable, this thing of theft, and loss and, and selling things that don't exist, simply cannot happen. And so it's much, much more secure it is. And that's why we say it is security, because it is representing the paper security, which is the world we live in today. In three to five years, there'll be digital native security issuances that aren't correlated to paper. But for now, because that that blockchain is immutable and public, we can know for sure that it represents the actual security. So that's why we believe it is a security where the electronic version is not.

Tristram Okay, that's terrific. And I think the one thing a lot of people don't realize when they're, you know, when they're doing a trade on their phone or whatever, is all of the processes in the legacy market is just an incredible number of people, processes, checks and all this other stuff that they never see. And they probably have no idea even exist. It's enormous.

James It is absolutely enormous. The number of things that get moved and the cost that gets buried and so people - I'm glad you brought that up, because the - you know, the cost of large trades, for example, how brokers have to put aside 5% of the trade and take three days to settle it, the amount of capital that's locked up from that as well. And there's all of these things that are occurring, and fortunately or unfortunately, it's - I think it's cool, especially the retail public market has these now, these cool little RobinHood and Wealthsimple apps that made this look really easy. And you can say, well, it's, it works well, and it's cheap. Right? And but the reality is, is that the costs are buried inside the investment itself. So all they've done, it's kind of like when you buy a house, you don't pay for that, that broker, right? Of course you do. Right? The seller has built that into the cost of the house. So if there were no brokers, if there was a software to do that, that house would be 3% cheaper. So in this case, as well, what we'll see is, is that the retail public has been convinced, misled, indoctrinated, into thinking everything's free now. But the truth is, it's baked into the cost of the item. So the item, the cost of the item will go down or the value go up, by the way, the the investable benefit

Tristram Yeah. And so, taking that by extension - so, the concept of when an asset is digitized that it increases in value. Can you explain that a little bit based on way you're approaching this here?

James Sure. And I think one of the the best sort of frame of mind to have in thinking about this is compare say the US dollar to the Zimbabwe way dollar. Or more fair would be the Canadian dollar to the Zimbabwe dollar. The US dollar is its own currency. Bretton Woods, you know, was an attempt to make the US dollar the world's reserve currency by taking it off the gold standard, etc, and largely succeeded. The Petro dollar creates sort of this world reserve currency, reality or status, that makes it unfair to compare it to any other currency and that's why the fed by the way can print all these trillions. But anyway, for a normal state, Canada versus Zimbabwe - if we look at what it what makes the Canadian dollar worth more than this, and it uses Zimbabwe dollar, obviously, because recently it had massive hyperinflation. And there's a lot of reasons, and so obviously, we understand that's Canadian - Canada's proximity to the US, helps. Canada's good school system helps. Its fondness of equities, and innovation helps, etc. There's no doubt that there's things that the country is just more fortunate to have. But it has also done a really good job of enhancing the attributes of currency, of its currency - Canada, to become fundamentally more valuable. And so it you know, if we looked at two parallel paths, two parallel universes where Canada was actually Greenland, and had made very different decisions in terms of its priorities economically, we could see a Canadian dollar that would be worth vastly less than it is today.

And so some of the things, there's eight, I mean, there's probably more than that you could imagine more, but typically, there's eight characteristics of money that increase or decrease the value of that money. And they're things such as the divisibility, durability, portability, acceptability and so on. So again, the divisibility, you can take $100 bill and divide into 50s or 20s, or 10s, etc, that gives it more utility, more people will accept it. Acceptability also. Even the difference between American Express and a Visa card is significance, its value. Visa is a bit more valuable in some sense, because more people accept it. Durability, can it be destroyed? etc, etc.

And so the one thing that is also important to understand is that the people that are doing the digital asset thing right today are not saying, I'm creating something out of nothing, and it's only going to exist in the digital asset world. I think that that is either naive or willfully, you know, incompetence or an attempt to take advantage and not a smart approach to this. So, we have simply said we're going to acknowledge the world that exists today. So in our fund, we have some of the smartest people that represent real estate, smartest people that represent ventures, bonds, public equities, precious metals, etc. All of them are our experts in their own asset class, finding the best paper assets, the best conventional assets, the best real world typical assets they could find. And then we are adding a digital enhancement to it. And so this digital asset, this digital representation of it, which is actually not a facsimile, but an actual representation of that asset, now becomes more valuable because of all the things that I said. It becomes much more portable.

So let's say public equities, buy Apple shares. The markets in the in the US are nine to five and Monday through Friday, they close and that's it. And so if I take in, some people that know the markets a little bit, GDR, ADR like an American Depository Receipt, and I wrap a bunch of Apple shares inside and then I take that digital version of it and I port it over and trade it on a foreign exchange, a foreign federally registered and regulated digital securities exchange that is open 24/7  365, I've added value to that thing. It now has larger window, like in that case, the market never closes. So that portability of it becomes - lifts the value of that asset. The access - more people can access, you know, you list it on - multi list on several different digital securities exchanges, all of a sudden new markets have access to that thing that have never had access to it before.

The durability it's immutable, is an indestructible, distributed ledger technology. You can't have a database failure and it gets wiped out. It's distributed, it's backed up to a point where it can't be harmed, actually. So all of those characteristics if we compare a digital asset to a currency, if we look at the eight different characteristics, every single one of them is massive. enhanced by the digitization of any asset, really. So it really comes down to whether you take that digital representation and make use of it. Do you port it somewhere? Do you trade it in a market where it wouldn't be traded otherwise? Do you have more people attempt to access that? And if you do that, the value of that underlying asset would have just been stuck offline, unavailable, in North America outside of market hours, you will naturally increase the value of that thing.

Tristram That's a great way of looking at it. Now, from a point of view of looking at investments for your funds, how do you approach that process?

James From the venture side, we've not had any issues in terms of volume or quality. And it's simply because we've been doing this for so long. So in that one seems to be a bit different than any others. So to comment on that, I would want to comment on on that, generally. I'd want to comment specifically on ventures first. I think we're really fortunate that I and many of us in the organization have just been in ventures for a very, very, very long time. So I think I probably, on a day to day basis, take for granted all of the people, the wonderful people that I know and trust now, and actually like, as well, many of them are friends. And many of those people are our big names in the ventures world. That creates just an extraordinary amount of high quality, sort of deal flow for us to analyze, and we have to throw a lot of technology at it to process at all. So that just happens as a matter of - as a matter of being and very fortunate. I think I commented on the rest of them.

And we we love to actually acquiesce to expertise. We love to acknowledge what we don't know, and sometimes even try to figure out what we don't know what we don't know, and get people in place to either teach us or manage that thing for us. With our funds, we've compiled just an extraordinary Investment Committee, that are again also fairly well known people and are experts in their in a category. And what's amazing is, as I said, each one of these is not only an expert in precious metals or real estate, but they actually are operating on the edge and working meaningfully with the digitization of that asset. They have been working with in many cases for decades. And so in terms of finding the investment opportunities, we rely heavily on them to feed to us. And our intention is always - our investment strategy as a fund, compared to another fund, needs to be better on just with paper alone, that the digital enhancement of it should be just extra alpha, extra gains and extra returns. And we always want to hold ourselves to that very, very difficult and strict requirement that our paper conventional investment strategy alone needs to be better than than anything else that we see.

Tristram Okay. I recall that you had discussed in one of your podcasts or or presentations that the existing nature of private markets is largely archaic. Can you elaborate on that a little bit?

James  That Yeah, that's interesting. And actually, again, a lot of people probably don't know just how big the private markets are, and how disconnected and it is, and how, how poorly it runs. And what I find interesting is that we're really focusing on the private markets right now. A) because there's a lot more opportunity there. First of all, it's a vastly larger group of markets than the public markets. And again, that comes as a surprise to a lot of people - vastly, vastly larger.

And also, going back to the the other point that I made too is that, it is sort of true, the public markets work fairly well. The rest of the story is that they could work about 10 times better, 10 times faster, 10 times cheaper. And we want to do that too. And that is really for us, the most important thing, because our core determination is to democratize access to early stage investments and early stage fundraising. Absolute financial inclusion. So that will require the public markets. But what I find really interesting is that we are in the private markets very intentionally. And I think that this is just, you know, that idea of ventures, eat your own dog food, we decided that we were going to follow our own principles and do two things. One is go to the market that needs it the most, and then also learn before you go to the riskier market. And so, I think that there's a fairly big financial reward for us if we can solve that private marketplace issue. And that will help us to go to the public, which has a lot more liability and a lot more risk, with a lot more clarity, performance data as we've learned a lot of our lessons and now we can make a very, very confident bold public offering.

But in the private world, I mean DealSquare itself is quite an innovation. And that is a private marketplace, that was as I mentioned, JV'd, created by Neo Connect, Canada's second largest federally registered Stock Exchange, and FrontFundr, an exempt market dealer that focuses largely on early stage companies is in a FinTech sandbox, and focuses a lot actually on crowdfunding. And they created this thing called DealSquare that is the private marketplace and really the front end UI for a system that Neo created called Neo Connect, and a back end that allows dealers to connect to each other. So the DealSquare thing is essentially the ability to allow investment dealers to see private placement and offering memorandum fund opportunities. And so that, you know, the reason why I describe that is because that seems like - that should have existed long time ago, 20 years ago, 25 years ago...

Tristram Yeah

James ...when we were first building marketplaces, and yet it doesn't exist. And so you know, if I look at the complete far end of that, and we do see some actual angel lists doing syndicates, and some of these ATSs trying to get the permissions to do secondary trading. But if - I mean, our goal is to have the entire lifecycle of an early stage venture go from six to twelve years to six to twelve months.

And again, that's another reason why financial inclusion is sort of a matter of fact - exclusion pardon me, is because not a lot of people can park their money for ten years. And so if we can shorten the window on that, and then  we have more people willing to participate. And you have to create liquidity, especially for public markets.

So in the private side, I think as we, as we become - as we introduce more and more efficiency, and the reality was so back to that venture capital thing. You know, people had shares paper shares in these companies, and it could be things like Uber and Facebook or it could be a bunch of other tech companies that we never heard of because they didn't survive. Almost no liquidity. No marketplace. Nowhere to park those shares, you know, trade them, even at a discount because you want to get out early.

Most GPs, general partners of venture funds, have no desire to help LPs get out, and so, you know, they don't want to facilitate trades. And I really don't know why, to be honest, no one's - well, I have some suspicions. Securities laws and trading are very, very difficult to jurisdiction base. There's a lot of work that needs to be done. And incredibly I think, actually it comes down to the thing that needed to exist facilitate all this didn't exist, and that's distributed ledger technology. So now that we put that into sort of the toolbox, all of a sudden it's like, yeah, private marketplace is an absolute disaster, unnecessarily shocking that no one has taken that on, even for self interest. Like a lot of people that have those illiquid assets and have no way to sell, you think that a bunch of them would get together and create a solution, they haven't.

So I think that introducing the visibility first, so just marketplaces where you can see things for sale, and then introduced the sort of trade engine and the ability to create sort of a central source of truth for securities that enables trading, I think we're gonna see massive, massive, massive, not only efficiency in terms of the amount of trading that goes on in private, which is very little, but we're going to see, as I said, the cost drop and access increase. I think, when people think that they can get out in ten months, or even twenty or thirty months as opposed to ten years, people will put more money in. So I think we're going to see the private market increase in size, but a lot of that will conflate and hit and I think migrate into the public markets. So we're just going to see a portion this sort of merge.

Tristram  Yeah, it's like - it's like adding, you know, by having liquidity, you're adding velocity to the entire innovation and investment process.

James Yes.

Tristram Now, what regulations or what challenges does this particular approach face right now? Or are there many challenges in terms of setting up a good secondary market for private securities?

James None. There are none. Other than the participants, the sort of proliferation of information and the acceptance of that information as being real and meaning getting marked participants to actually participate. One of the things that was different, I think, than the people that were doing digital security things around us was that we actually approached regulators and we talked to multiple regulators around the world and we said: listen, we have no desire to innovate within your current regulations and legislation. We promise actually that will strengthen it, protect it, only innovate on top of it. Cool. And most people are like, well, that's great, because we're typically - what we're seeing around is people trying to attack that, pretend it doesn't exist, misuse legislation, misinterpret it, etc. And so fortunately, I guess for us, is that we had a real business case for making this work.

So we also spent a lot of money with accountants and lawyers to make sure that we're always always, always far on side. Now we did invest in startups, they were playing in FinTech sandboxes asking for exemptions. And I do think that more good, more inclusion can occur when regulators do allow for these temporary exemptions and see that they're not going to cause anyone to harm, other than maybe the people that are extracting significant amounts of value from the ecosystem. But our intention was to build a model that could exist today. And so the reason why I very, very bluntly confidently said, none, is because we actually believe that we have a system that is full circuit. It goes from one end to the other. That all necessary stops and checks for compliance are met. And all the issuer and the investor are getting maximum value with actually the least number of stops. And that if a regulator had to look at that they would say this is fantastic. In fact, it's much - aside from being cheaper and faster, it's much, much more secure. And if we believe that the regulator's mandate is to protect the investor, then they cannot object to it being more secure.

So I think, in what we what we see today, and a lot of people are not aware of this, that there's massive cross jurisdictional digital securities trading occurring today, and a lot of regulators that are just fine with that. So back to what I was saying earlier about this VC FinTech engine, this sort of global digital securities marketplace, trading ecosystem that we've created ourselves, is actually fully contained with our investments. And obviously, we're working with our investments to bring in more participants. We're seeing firsthand as well, that that is very true. So those people trading those cross jurisdictionally, these large amounts of digital securities, are people that we sit on the boards of, and so that, you know, this isn't just a press release or an article. And we're very, very excited actually about just bringing - I think the large institutional investors, the presentation is simply, are the offers simply one fifth to one tenth the cost? Yes or no? It's not this whole world is going to be different. You know, corporations are sociopaths by nature. We appeal to their self interest, which is profits in, and this system does that. They don't need to - hopefully the people inside the large financial institution are really excited about the implications of it as well, but the business makes it very clear business decision. On the other hand, if you know retail public people putting $500 on on early stage startups, they care about the implications more, you know. The costs are actually a kicker, and they're embedded and it's great. We feel great about it. We focus all of our energy talking about the emerging digital asset economy that is open, free and democratized. But we do not talk about that with the institutional investors and financial services companies. And they are more than happy, as we've come to find out, all of this passes, their Chief Compliance Officer and Chief Investment Officer. They read the long white papers that prove what we're saying is true, and then they're happy to just run some experiments, see that it is more secure, see that it is providing tremendous savings and then just increase their orders over time.

Tristram And what - and the one thing that you're talking about here that's incredibly valuable, much of it, but the idea that the compliance and the regulators are involved all the time in the process of developing out this ecosystem and this idea, because if you don't include those guys, you're gonna have a big problem eventually.

James Yeah, exactly. I mean, as a ventures guy, part of me really understands like, look at Uber. Uber didn't ask permission from the cities, they just did it. And I think that's a bad message. Because the two innovators and FinTech because the power of the SEC is very centralized, as opposed to, you know, attacking the taxi cartel in Austin, in Miami, in LA,which is in itself a really big thing to do but but trying to move the SEC away from its - what it believes its own, its current mandate is, is orders of magnitude larger than destroying a TAXI cartel.

And I think what I find fascinating and again, I don't know why we're able to see this and I'm just grateful that we were, but instead of feeling and we're in combat with - we sat down with ministers of finance, we sat down with, again the regulators and just said teach, like, teach us. What do you want? We don't you know, I'm not an economist and I'm not I don't come from compliance helped me understand. And they told us, we were, we thought, well, that's okay. Like that's not in opposition to what we want to do.

And I think there's this illusion or delusion that is very real in the FinTech world, especially in the crypto world, that the regulators and the money suppliers, and the central banks or maybe even in some cases, and some people interpret them as evil, but that they are also in opposition to what they're trying to create. That's largely not true. And back to your point, too, about these are people too, and you find out they're pretty cool. And when you can show them there's more security, they get excited. They're not as boring as many people might think. And what we found Stacs, which is out of Singapore, you and the Global Stock Exchange has a fairly large share in it. I actually flew out there, sat down with those guys they're extraordinary. And they built this marketplace where trading venues around the world can connect and trade cross jurisdictionally. Actually Stacs is an acronym for Securities Trading Asset Classification and Settlement System. And it's designed solely with distributed ledger technology to facilitate that. Not just blockchain based DLT based securities trading, but cross jurisdictional. And they're talking to major nation National Stock exchanges, and doing tests, beta tests, large beta tests. Anyway, they also were keenly interested in regulators perspective.

And here's what's amazing, is the amount of work that goes in to sort of proactively creating all of the documents that the regulator needs for companies to submit, you know. Even just small IPO, small public companies excruciating. It's extremely costly to the business. You can't be building your sales team and operating - expanding business objectives when you're filling out compliance reports and details and submitting that to the SEC or equivalent in your jurisdiction. And so the question was obvious. The question was if this is immutable and quasi public, and if every single trade is memorialized to this ledger, if we could give you that sort of God view and your jurisdiction where you can see every single trade that was ever made, and also some of these public company reports that have to be sent in, but minimized so abridged versions of everything. Would you stop these companies from requiring - from you requiring them to submit all this stuff which, let's be honest, they almost never read and his only resource or sourced when a public problem occurs and they look six months ago, and then they start some sort of enforcement action. In this case, so that's very reactive, the crimes already occurred, or the infractions already occurred. In this case, they can spend time and we can actually embed machine learning AI and even just predictive analytics for them looking for certain sorts of behavior. And they can proactively look at market participants that may be offside. And instead of having the 99% that are innocent, providing all of this detail that disrupts their business, instead, they're searching for the 1% of people that are offside, which seems like a more fair system, and they're excited about that model.

Tristram  That's great. Now for a final question. What are your thoughts on, you know, coming out of the current shutdown that we have. There's some discussion around the challenges that entrepreneurs are having. And how venture firms can help get our entrepreneurs and startups back on the road to recovery and building things. Do you have any you have anything that you wanted talk about with regard to that?

James  Well, I think the one one thing that's great about ventures world and especially as we emerge from this, again rich white man, venture capital led model of ventures, which is just really refreshing. We see more female entrepreneurs, we see more angels emerging, we see more venture capital investment theses, focusing on founders first and community and so on. And that has really led I think, especially in the Toronto area, in New York area to communities, real actual communities, and not just a set of Starbucks that venture capitalists and founders meet at. And I think what  we're going to see right now, and I know every single country has its own approach and has its own programs.

Canada so far seems to be doing a fairly great job of wage subsidies that include tech companies, I've been actually quite surprised to see that, not so surprised because the federal Liberal government has been really involved in tech sort of investments and in supporting the tech community, especially here in Toronto. But I think that the thing that we need to do is to support each other. And and I think, where venture capital funds and angels can do follow on investments to provide bridge capital. And again, I was surprised the federal government has put forward a significant - in fact, our - one of our venture capital funds, is able to I think, investments that are made in January, that the federal government will match those. And if we choose to follow on up to a certain amount match that as well. And so this, that is pretty extraordinary. And we put  one of our investment bankers on that, compiled a bunch of information, created a slide deck and distributed that to our founders to help them determine - I mean, if you don't need the cash, the capital, that's fantastic.

Many early stage startups do need that. And so that support is important. I don't know how long that will continue. And so I don't expect to necessarily want government participation. We will take it while it's there. I think what this is going to come down to is that founders first mentality, whether it's real or not, first of all, is going to be seen. So the venture capital firms that have said it, and aren't there for them at this very, very difficult time, are going to be found out, and that's a good thing.

And regardless, I think that the innovators are - these are people that naturally take a lot of risk. It's hard, even in good conditions. And so I'm hopeful that the mentors and the advisors and sponsors and the LPSare able to just over deliver and the fact that we're at home and when I have to waste time on commuting, and in some cases, maybe for some people showering, they should use that time that they get back to do zoom with their founders and actually ask them, not only how's your how's your runway, how's your mental health? How are you feeling? And I'm hopeful  that we take that trend, going from strictly looking at investments sociopathically, to realizing that there's full spectrum here of people, and it should have a social impact, sort of, or social responsibility. And the founders do matter. And the founding team is amazing. And realizing that actually, when we take care of the people, the investment becomes more sound, and more interesting. And I hope that this, one of the benefits that we that we get from this extraordinary event that we're all living through right now, is that we just get more of that. We realize it's all about that.

And we should stop some of these little silly things that we do, as a matter of probably just legacy mechanics of venture capital and instead just collapse it on the people. And not just like I said, solving basic business issues, but ensuring that people are safe and secure and as happy as they can be and as healthy as they can be. And I think if we focus on that the business takes care of itself from there.

Tristram Have I lost you James?

James I am here.

Tristram Okay, there we go. I want to be mindful of your time. Is there anything that we didn't discuss so far that that you wanted to talk about today?

James  No, I say, wow, this was - I can't believe nearly an hour went past. Yeah, I could do this for another hour. But I think you asked the very, very awesome questions and I had an opportunity to get a little bit more detailed than I normally do, so hopefully, anyone listening to that, that that's useful. So I know I appreciate your time. This is great.

Tristram  Well, you know, we can always do this again sometime.

James  Anytime. I love talking about stuff, so anytime you want to talk, I'm here, you let me know.

Tristram  Okay, great now before we go where can people connect with you and learn more about Exponential so we can get that in the notes.

James Exponential.io is the best place to go. From there, you know, click around to see  what calls to you. There's gonna be a lot of options to join the community, make investments, submit applications for funding and so on. There's a lot going on in that site. And I think I think it's pretty concise though. So you'll be able to find your way pretty quick.

Tristram  Okay, that's terrific. Thank you so much for your time today.

James  Sounds great. Thank you.

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NCFA Jan 2018 resize - Fintech Fridays EP39:  The Power of Digitization and How to Get Exponential The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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