Vertalo’s Dave Hendricks Discusses Benefits of Direct Listings, and Education Over Promotion for Content
Dave Hendricks is the CEO of Vertalo, one of the fastest-growing blockchain startups in the world. Vertalo has been busy in recent months, having announced several partnerships and new tech products at a crucial stage in the company’s growth lifecycle. We had a chance to sit down with Dave to talk about his busy year, and the some of the biggest trends that he has identified in digital finance. Check out the latest from Vertalo on the company’s website, or see Dave Hendricks speak live at CIS next week!
Question 1: What growth have you experienced over the past year as a company? Describe some steps that were integral to where you are now.
Hendricks:Vertalo has grown in many ways in the last year, but I would start with the growth of our network and community. The most important way that we grew was in our understanding about how we could and should work with other participants – the issuers, investors, broker-dealers, exchanges, custodians, KYC-AML vendors, and issuance platforms that form what most thought was the basis for the security token and digital asset ecosystem.
We decided that connecting these players via Vertalo’s APIs would create more value for the digital asset economy as a whole. We saw this glue, this connective fiber, as the missing element in the whole equation, and as experienced entrepreneurs in the data management going back decades, data-based partnerships is where we naturally ended up.
Much of Vertalo’s growth came through a combination of partner integrations and some educational and failed experiments with direct issuers. We realized that the problem we could solve was integral, meaning by acting as the glue between these providers, the data pipes, that we could create a lasting business that would be less subject to one-time revenue effects and price-based competition. We decided that primary issuance was not going to be our core business, and that we could partner and coexist with pure-play issuance platforms. We sharpened our focus towards data management and process improvement, with an eye towards providing pipes to manage and move the data created by digital asset offerings.
In the course of that differentiating effort, our vision and ambitions grew to adopting the moniker ‘The Operating System for Digital Assets’. We’d rather be Microsoft and supply software and allow companies to build around and on top of us, instead of being IBM and merely making the hardware that was sold once. Along the way we grew our team and our client base, and as importantly the base of partners that we can connect to issuers and investors, so they can obtain the oft-touted benefits of digital assets and security tokens.
Question 2: Describe the gap that exists between directly owned assets and wallet custody?
Hendricks: Wallet-based custody comes in so many flavors that it’s easy to get confused. As the Vertalo team sees it, almost all problems in the world of digital assets begin and end with Wallets. Wallets are hard to use, period, and the major impediment to mass adoption. Some wallets are hardware-based, some are cold and custodial, others are self-sovereign and software-based, and some are just called ‘hot’ and some are just called ‘cold’.
Wallets are the cause of ‘mass avoidance’ of Digital Assets.
So Vertalo has decided to ‘abstract’ the wallets so that investors in digital assets could focus on the underlying security or asset and have choice of how they wanted to custody: self-sovereign via apps like Metamask, custodied via instantly spawned and centralized mechanisms like at Coinbase, or custodied elsewhere like you would see at Prime Trust or Kingdom Trust.
By spawning new wallets at the time of cap table onboarding or capital formation (before, during, or after the round has closed) we enable a greater level of anonymity while making the process easier for issuers and investors alike. How can we expect Security Token offerings to achieve mass adoption if we expect less-technically sophisticated investors to operate their own custody? Coinbase already demonstrated that simplicity is the road to mass adoption, no matter what crypto purists think.
Question 3: You have a ton of content output. Between your social media accounts and weekly newsletter. How has content helped guide your marketing strategy?
Hendricks: The Vertalo content strategy has always been focused on education before promotion. Our newsletter has thousands of regular readers and a stratospheric open rate that regularly exceeds 40%. We were email guys decades before we were crypto guys – who wasn’t – and so we have curated the Vertalo Digital Asset Review as something that seeks to educate its readers through general interest stories, 95% not about Vertalo, most about its partners and the larger community that’s building what we see as the future. There is no editorial content of any kind in Vertalo’s newsletter and almost no promotion of Vertalo, but if you read between the lines you can probably grok what we think is important. The reason why the open rate is so consistently high is because it isn’t promotional and it isn’t click bait. The Vertalo newsletter is not trying to sell you.
Our social media game is not as strong as our newsletter game. We are going to work on that.
My own appearances are slightly more promotional, but when I opine on panels or within interviews I try to focus on the two topics of ‘usability’ and ‘business models’ related to digital assets. As a CEO, I am very product and business model-focused, and I’m really passionate about that. If we don’t make the tech easier and the unit economics don’t make sense for everybody, this thing isn’t going to reach mass adoption soon enough for me.
Question 4: Describe the importance of your partnership with PrimeTrust. How does that alleviate the bottlenecks in real estate transaction?
Hendricks: Prime Trust and Vertalo have been co-developing technology for over a year that solves problems related to usability and custody. Separately, Vertalo has designed its platform to onboard existing, seasoned assets and the related stakeholders who own the assets. The onboarding process can utilize Prime Trust tech, and it brings direct benefits to their 1000s of existing clients, and new ones we are developing together.
In order to onboard the biggest seasoned assets from the comfort of analog ledgers and familiar practices, you need to offer a substantially better user experience (product) and comparatively better unit economics (business model) or else you are going to end up pushing a rope. No one is going to migrate their business if they don’t obtain real and lasting savings and investor comfort.
Prime Trust and Vertalo are working together to make digital assets a viable approach to managing REIT funds and fractional ownership of real estate and you can expect to see us issue a white paper in Q4 that lays out this approach, features, value, benefits, etc.
Question 5: Describe the IPO model of today. Is it endangered? Why?
Hendricks: 10 years into a tech bull market funded by easy money and 10s of thousands of VC-funded startups, you would expect more companies to access public markets for secondary liquidity, but that’s not the case. The majority of secondary funding secured by investment bank-driven IPOs continues to be captured by ‘too-late stage’ companies that have been tapping into VC funding long after their predecessors ever did.
IPOs are dilutive funding events. But the price is set by the investment bank that is running the deal. Sometimes this leads to well-priced offerings where the price of the shares at the close of the first trading day are 5% +/- the offering price agreed upon by the bank and the issuer. In many cases something else happens: the bank and the issuer decide to list at $10 a share, but the price at the end of the day ends up being $15 a share. This sounds like a success, but in reality, it means the IPO was mis-priced and the company didn’t raise as much as it could have. Zoom was one such company, everyone thinks the IPO was a success, but clearly the offering price was too low and Zoom ended up selling 20% of the company for far less than the market was willing to pay. This can end up being a mixed bag for the company and its investors, and is the subject of much hand-wringing, most recently by Uber investor and VC Bill Gurley who has recently started socializing the concept of ‘Direct Listings’.
Direct Listings may be a real threat to IPOs and the investment banks that derive fees from this model. In a direct listing, the company offering the shares lists directly on an exchange and the market sets the price, not an investment bank. This approach enables a company to tender shares from its existing shareholders and investors, avoiding some of the lockups that frustrate the sale of shares until 90 or 180 days after the initial offering.
Vertalo has designed its platform to facilitate direct listings in this manner. By uploading an existing cap table, tokenizing the share ownership in that asset, and connecting that cap table directly to exchanges like OFN, tZero or the Singapore stock exchange, a Vertalo client can access secondary venues to trade shares without an IPO process, nor any further dilution. We have architected this to be agnostic to security token protocols, blockchains, and regulatory jurisdictions.
As this approach moves beyond the current proof of concept phase, Direct Listings will become a real option for companies that are too big to get easily acquired (greater than $150 million) and too small (<$1 Billion) to go public with a big bank. But in order for this to happen, Vertalo and its partners need to complete their work building the rails to make this next major trend come to fruition. Once we do, the IPO is likely to still exist, but there will be another option besides M&A or IPO.