In the Eye of the Storm
Proof President Josh Cook on Banking w/ SVB
👋🏽 Hello everyone, gm gm, WELCOME BACK to another edition of the Overpriced JPEGs newsletter, where we’re catching you up on the world of web3, NFTs, and the metaverse.
Today we are publishing an interview with Proof President, Josh Cook, a Silicon Valley OG who previously served as a Partner at several San Francisco law firms specializing in startups.
It was Josh who made the decision late last year to move a portion of Proof’s assets to Silicon Valley Bank - believing it was one of the safest choices he could make.
In this conversation, Josh and I talk about what it’s been like this past week as an NFT project with funds in SVB, the recent Proof FUD, and the feeling among Silicon Valley founders now.**
We’ll have more coverage of the SVB story - including a step-by-step breakdown of how folks made 30%+ returns trading USDC on Friday, and what opportunities exist within NFTs now – in tomorrow’s inaugural edition of Overpriced JPEGs PRO!
**Note: this is an evolving story. This conversation was recorded in the early evening of Sunday 3/12.
Transcript of a recorded conversation between Josh Cook and Carly Reilly. Edited for clarity and brevity.
Carly P Reilly: Welcome, Josh. Thanks so much for having this conversation with me during these turbulent times.
Josh Cook: Yes. Wild Times.
CPR: Let’s start with the basics. You are President of Proof. I think of the President as like a CEO, but then Kevin Rose is the CEO. So help us understand this role and what you do.
JC: Sure. It's a really grandiose title. I like to say that Kevin and I almost make a complete CEO. With a lot of help from a lot of people. I worked with Digg as their first outside counsel and that's where I met Kevin. In the past, I've worked with a variety of media companies, consumer products, SAS, fintech and obviously now kind of DeFi, and NFTs.
I’ve tended to work with companies that were two or three people, and then ultimately sold for billions of dollars with 1000s of people. But by the time they get there, I’ve found smarter lawyers to help them.
But I'm there, I guess, as the shepherd along the way. It’s that experience that I bring to my role in Proof. It’s operations and strategy. I work closely with Eli on the art program. I work with Maggi on events, we partner with our BD team. And then of course things like finance, which we're talking about today, is squarely up my alley.
CPR: Am I right to say it was your decision to move part of the Proof treasury to Silicon Valley Bank?
JC: 100%. I said, with so much hubris [self-conscious laughter]: “Kevin, we’ve got to move from Mercury [another bank for startups] to SVB because that is obviously the smart thing to do.” [More self-conscious laughter]
And not only that, Kevin and I have been working through a broader treasury strategy that includes our crypto assets. And I've been pushing him to reduce our exposure to crypto relative to our overall balance sheet for many months.
And we were, I guess, joking that in this case, not having been so conservative, might have ended up being a good thing.
CPR: You're saying: how ironic would it have been if, just by virtue of the fact that you guys have a lot going on and therefore hadn't converted your crypto to dollars to be held by SVB, which you saw as the safer move, you ended up being saved…
JCB: Exactly. Most start-ups in the tech world and the web2 world, for example, keep no exposure to anything remotely dangerous. If you are raising money and you've got $10 million in the bank, you're not like hey investors, I'm gonna go put a million of this into BTC. Like that’s not a thing.
But in this world, no one blinks an eye at it if you've got that exposure. Large companies in this space, and there's only so many of them, are holding 10%, 20%, 30, 40, 50% of their holdings in crypto and in the old world not that long ago you would have been considered insane for doing that.
CPR: No good deed goes unpunished. What is your history with SVB? You've worked with startups for decades now. And in Silicon Valley for decades. When you made the recommendation to Proof to move to SVB, what was that based on?
JC: I've been working with SVB for close to 20 years. And there are people who have worked with them even longer than that. They are not just a stalwart of Silicon Valley, but they're a partner to many of the players. They are just a core part of the Silicon Valley ecosystem, for founders, entrepreneurs, companies, investors.
They felt like a “person” you could count on.
I really started my career on the heels of 2001 and 2002, so that era is all blurry to me. But back in 2008, 2009, 2010, when the shit was hitting the fan, I sat in boardrooms with investors and entrepreneurs, and when we said, hey, where's your money?, there was a sigh of relief if it was at Silicon Valley Bank.
And it wasn’t just that it meant their money was safe, it meant we had a partner on the other side. We could call SVB up and say “hey, look, we're not in position to raise more money, we are basically insolvent, we're trying to figure out a solution here, can you give us some runway to figure out the right path for us to get there, and we'll make sure you guys get taken care of?”
And they would agree. As long as you were treating them like a partner, they were always there to take care of you.
And that’s why I would recommend them so highly to my clients. It’s why I wanted to use them at Proof.
CR: It feels like you're describing a kind of family-style service that you feel you couldn’t have gotten from a JPMorgan or a bigger bank. Because there was this sense of, they're in our backyard, we're all going to the same restaurants, and coffee shops. It was almost an old school way of doing things: friendliness and a handshake. Is that a fair summary?
JC: Yeah, I mean, there was a real feeling that you could call someone there and have a conversation when you needed help. That might be a silly thing to say, to some degree, because they are much larger now than they were 20 years ago and they have offices all over the world. But it still felt like the case, which was their magic. Their website was terrible compared to other banks now. The user experience was terrible. They were so old school. But despite all that, and despite being in a tech savvy world where they were the least tech savvy, there was a charm and a reliability.
In some ways you thought: yeah, of course the bank is behind technologically, it’s because they're focused on other things, they’re so concerned about making sure you're safe and they’re taking care of your business.
CPR: Welp.
JC: [laughing] Right, well we’ll talk about that. But that was the feeling you had there. You conceded, okay, you can get a better experience at Brex or Mercury or another younger bank, or even to some degree, a more established bank like JPMorgan, Citi, or Wells Fargo where even their user interfaces were a lot better. But anyway, that’s the basis, which is why this is all really surprising to many of us.
CPR: Talk through what this last week has been like: when did you start hearing the rumblings and what was the progression from Tuesday or Wednesday to today [Sunday]?
JC: It was, maybe even as early as Tuesday, when I first saw the news report that they were taking losses on their treasury bills because their interest rates were so low relative to what you can get today.
And I didn't think much of it other than like, oh, wow, another weird byproduct of a crazy time in the economy with the changes in interest rates.
It was the next day [Wednesday] that I started getting reports from various sources, saying, Oh, this might be more worrisome. People should be thoughtful. And at that time, I started reading more and actually looking at their finances.
I'm not a CFO, but I can read a spreadsheet and I was also talking to smarter people than me, who are CFOs in Silicon Valley. And the consensus was very much, hey, this is not a liquidity problem. This is not a fraud problem. This is an odd decision to be so deep into treasuries at those rates and they're gonna have some work to do to dig out of this.
It didn't feel like a moment of panic. Maybe on Wednesday night there were thoughts of some people pulling their money, but after I talked with a handful of people, my decision was simply to accelerate a plan we already had in place, which was to diversify by moving a good portion of our money out of what basically amounted to a high yield money market account with SVB and into T bills.
We already had that teed up, so we thought: let's just accelerate and get that done so that we're not so exposed. But I honestly didn't feel the rush to pull out.
The next morning [Thursday], I started hearing rumblings that people were starting to move money and so we called our banker to accelerate our plan.
You have to understand, this isn’t like having $100 in my bank account, where I can go push the button and move the money. These products are a little more sophisticated, so you have to actually talk to someone to make changes happen and on Thursday, it was pretty difficult to get someone on the phone.
My main question actually was: Are the funds in our money market account actually custodied at SVB and on the SVB balance sheet, or are these off-balance sheet and custodied elsewhere, which was a possibility and, in fact, was what it looked like in our account. That, of course, would have meant we were insulated from the risk.
Throughout Thursday, SVB kept reassuring me that our money was off balance sheet and custodied elsewhere, but then later in the night they finally got back to me and said, Oh no, it is on the balance sheet.
And by that time it was already getting late on Thursday so of course I said hey, let's move as quickly as possible to move that off balance sheet, whatever’s fastest, I don’t care.
But by that time it was pushing into the morning and the next thing you know we're hearing about the FDIC stepping in and that was that.
It wasn’t until Friday that we really understood the level of the run that had occurred; that people had moved money out in the billions.
CPR: And so what did you tell the team at that point?
JC: Well, even though the FDIC had stepped in, people had run some pretty early analysis on the balance sheet that made me feel like, okay the resources are there, the math will work out.
So long story short I told the team two things:
I think we're gonna get this money back. But we don't know when, so that leads to the question:
Can we make payroll? And the answer was yes, we can make payroll immediately. And we'll make payroll for the immediate future. For us, we had enough resources to say, it's business as usual, no one's jobs are at stake here. We're going to keep operating. And I think this money will come back to us. But also, it's Friday, we're gonna learn a lot more early next week and so I'm asking you guys to be patient. And if you're worried, I’m happy to talk to anyone individually.
CPR: Have you all said publicly how much money you had in SVB? Or what percent of your capital was locked up?
JC: Kevin tweeted something about it today, but in general we've been private about those details. But we've got years of runway one way or another. But also, look, anything can happen in the world these days. My friends are like… where… do I put money now? The mattress?
And that's the underlying problem right now. I think everyone feels a level of insecurity that anything can happen. I’m glad the government is doing something. This is what the government is good at doing: providing a backstop & giving us all reassurance that, hey, not everything is FTX not everything is Silvergate. SVB is neither of those things actually. And we're going to ensure that people get their money and feel good about moving forward.
CPR: I'm curious about your feelings toward SVB. Because this is a nuanced case. This isn't a case of FTX, a company that was deeply fraudulent. In hindsight, SVB was excessively risky, but not in obvious ways. The excessive risks, to your point, were not that they put their money in Bitcoin. They had a mismatched duration problem of long term T bills & mortgage backed securities. Things that felt safe but that lost a lot of value, because interest rates went high. And that devalued the assets they had been invested in.
JC: I mean, remorse and sadness, I guess is how I feel. As I mentioned before, they felt like a key partner in our ecosystem. And we are, as an industry now, one key person weaker. And the truth is there’s no other player that feels like they can fully replace the role SVB played. I'm not trying to pick on JPMorgan, they do a lot of great things in the world, but being an early stage partner just isn't one of them. And whether they have it in them to change that seems unlikely.
And so that's something that is going to set us back as an industry and will hamper us for, I don't know, years or decades to come. Because reputation and trust and integrity are built with patience and time.
And, you know, I don't want to let SVB’s decision making off the hook, but I do think that they were in part a victim of circumstance. There was a lot of craziness in the last few years. And so there's a bit of a feeling of ‘there, but for the grace of God goes I.’
CPR: What is your plan now for Proof? And obviously some of this is dependent on what happens over the next week. But, do you go back to Mercury? How are you thinking about playing this as things unravel?
JC: I'm not sure I have a great answer to that. I gotta figure that out. I'll spend time considering what that looks like. You know, we skipped over the USDC conversation and the impacts there. We'll see when redemptions open up because banks open up on Monday. That was the only part I played in a run on the bank [laughing] - I converted a very small amount of money, relatively speaking, from USDC to cash. I also think that will turn out fine, but we shall see.
CPR: I want to ask about the impact on Proof and Moonbirds. Birds fell from 6 ETH to 4 ETH, something like a 30% drop, seemingly in the wake of the announcement that Proof had money at SVB. What do you make of that?
JC: I mean, part of me wants to throw up the “I don't know,” emoji. That's our world, I guess. There were definitely individual voices wanting more information, but I think the vast majority of community members we talked to were grateful that we stepped up and said something in any case.
I think that as a company, and certainly on these important matters like finances, we present ourselves with a lot of integrity and transparency.
We also had a big announcement the week before, of course, where we put a line in the sand about where we're going. And so I imagine there were some people who were already debating what they wanted to do and heard the SVB announcement and just felt like, I just don't need to worry about this.
And I get that. I think, regardless of whether we were safe or not, it was just like, I don't want to worry about this. I want out. And they were probably people that were on the fence anyway.
We hope the people that have bought in will be happy with where we're going and will be stoked with some of the things that we have coming out.
I always have my eyes open. I'm watching because I'm seeing our web3 world go through momentous shifts, and maybe we've been too slow or too patient on some things, but I've been talking to the team since the first day of January – really since late last year – saying “you think last year was interesting? Hold onto your seats, this year is gonna be insane. I didn't expect S-fucking-VB but we knew our world was gonna get crazier this year. And if we can be a part of that and make some interesting moves… that's kind of fun. And I’m a person who's a dealmaker. I like to be on the sidelines looking for that and thinking about that. And now we have strategically positioned ourselves to grow.
CPR: Is what you're alluding to here that chaos and downturns create some of the biggest opportunities for deals? And so you’re thinking, what can we scoop up? Or what acquisitions could be at play here? Is that where your head is?
JC: Yes. There are great companies in these situations that will have a hard time raising, for example. We can be there as a partner. There are companies that won’t make it through this time, who have great people or products, or other assets that will be interesting to us. As I keep telling the team, we've got a Northstar, we've announced the Northstar, we've got reasonable blueprints. Now we just have to build a ship across the ocean and hope something interesting is on the other side.
And so we're being watchful. And that's part of the decision-making that goes into something like Proof of Conference. That was really difficult. But – and I hate to say it – that was the responsible thing to do. And we can quarterback or armchair quarterback, how we sold it, how we marketed it, but those sorts of hard decisions will keep us around and in play for years to come. And I think that's going to be important, because this is going to be – for the next couple years – a very tumultuous market for us, as we all figure out what the hell we're doing.
CPR: I was wondering if, as the SVB stuff was going down, you were thinking: Thank God we canceled Proof of Conference and we're not on the hook for a $2 million stadium or whatever the costs were there. Did that flash through your mind?
JC: Maybe it should have. But, you know, I’ve already put that so far behind us.
Carly: Is there anything you can tell us about what you’re eyeing, when you say there's opportunity in the space right now?
JC: [laughing] No I can’t but I think, like I said, with the North Star and art, you can think about creating a verticalized business for us. And I think that can ultimately exist in a lot of markets. I know some of the community feels like there have been communication problems and so forth, but we hope we can continue to earn back trust there because I think what we're building will ultimately show a lot of value back to our holders, and really be a place for onboarding a lot of people beyond our community. So we're excited about being able to empower them, and also be along on the ride with them for growing this NFT ecosystem overall.
CPR: Josh, thank you so much for joining this was really interesting on a number of different levels. And I mean, this is an evolving story. So by the time this comes out tomorrow morning, Lord knows everything will have flipped on its head and nothing will be relevant anymore.
JC: [laughing] Thanks for having me. Let’s stay in touch.