Demystifying the world of NFTs with Electric Capital

Heather Stern: NFTs have exploded in the last year, with sales volumes surging to over 10 billion and brands such as Taco Bell and Nike jumping on the bandwagon. For many of us, it’s a landscape that’s both exciting and daunting—which is why I’m so excited to be speaking with Maria Shen. Maria is an NFT expert and currently partner at Electric Capital, an early-stage venture firm focused on cryptocurrency, blockchain, FinTech and marketplaces. She was immersed in this space way before SNL made a music video about it, and she believes that crypto assets will take over in a way that none of us is expecting. So, I’m so excited to have her here today and want to welcome you, Maria.

Maria Shen: Thanks so much for having me. It’s great to be here.

Heather: There’s so much that we’ve been reading about and trying to understand about this brave new world. And, again, you’ve been immersed in it for a while. So let’s talk about your background. Tell me about the path that led you to Electric.

Maria: Sure. I think the interesting thing about the NFT space is that things are changing so rapidly that everyone who’s even considered kind of an “expert” in the space is learning at the same time. Everyone needs to constantly learn to stay on top of it. As for my path, I studied political science and computer science at Harvard and afterwards went to work at Microsoft for a few years as a PM [product manager] there on search tech. After a few years of that, I went to grad school to get my master’s in computer science. While I was there, I decided to start my own company in the supply-chain space. After graduation, I worked on that full-time—and that’s, eventually, what led me down this crypto rabbit hole.

So back in kind of 2015-2016, there was this rise of direct-to-consumer, where brands like Warby Parker and Casper all of a sudden realized, “Wow, we can sell to people directly through Instagram.” And there was just this explosion of small businesses that would make goods for people and sell them directly through Instagram. They were really good at product, and they were really good at marketing; but they didn’t really understand the supply chain on the back end, or how to scale that or how to work with manufacturers. So, I effectively built a supply chain as a back end.

One of the issues that kept coming up was this problem of payments—especially international, cross-border business payments. There were the usual things that you would find really annoying, like foreign transaction fees or just waiting a long time for the wire. But, really, the most important thing was that neither of these parties pre-established trust. They would pay a 20% up front and maybe 80% when they received the goods, and no one liked that arrangement. The small businesses didn’t like it, because 20% for a small business—a few thousand dollars—was a lot for them to sink into something where they weren’t sure what the goods were going to look like. And for the manufacturers, stopping their work for H&M for two weeks to work for a small business and only getting paid a few thousand dollars—and not knowing if the rest of the payment was going to come—was also very high risk.

I had heard about Ethereum when I was getting my master’s. I’d heard about Bitcoin when I was at Microsoft, and I knew Bitcoin was digital money. Ethereum is like internet money, but you can program stuff on top of it; you can write rules on top of it. So, I thought, “Wow, that would really solve my issue, because I can just take internet money and then write escrow on top of that; and it can be really lightweight, and it can be really cheap.”

I started looking into that in 2016 and realized very quickly that the infrastructure was not ready for any sort of real-world use case, so I didn’t end up pursuing that for my startup—but that is what ended up getting me down the rabbit hole. And I realized very quickly that the tech was real, even though the infrastructure was immature.

By the time 2018 rolled around, I remember crypto prices had fallen, at that point, like 80%. I thought, good time to get into crypto and joined Electric. For me, Electric was very different from just joining a venture-capital firm. I think one of the interesting theses that the founders had for Electric is that a crypto-focused VC firm would be fundamentally different and would need to be built differently. Both of them [the founders] are previous entrepreneurs; they’ve started and sold four different companies. The last one they started together and sold it to Facebook.

So, they were looking for people to join the team who were builders, who could code, who had an engineering background and who had built products before—because back in 2018, and even now, crypto is moving at such a fast pace that the amount of internal infrastructure you would have to build to maintain a VC firm is really quite a lot. And so, to this day, I think we’re all still pushing code. We feel like the differentiator for us is being very engineering-heavy and being very product-focused. This means that we can go out and participate in the open-source ecosystems that crypto has to offer and that we can build a lot of products and infrastructure in-house, as well.

Heather: In your role you largely focus on NFTs which have taken over in the last year. I’d love to go back to basics. Can you walk us through what an NFT is and how it relates to cryptocurrency?

Maria: The simplest way I think about NFTs is that they’re simply assets that we can hold—just like our iPhone, or our house, or our car—except these are digital assets, and now we can earn them on the internet. That feels like a small shift; but it is actually, fundamentally, a step-function difference from real-world assets—the reason being that, when an asset is digital, effectively transferring it or doing anything with it is close to instantaneous, right? Because information travels at close to the speed of light. That actually, fundamentally, changes what assets can be.

And so, taking a real-life example, there’s a very robust secondary market for flipping sneakers or for people owning sneakers—and also for luxury watches. All of these things mean that people have to take an inventory, and then they have to ship it out.

One of the companies that we invested in is a company called 4K. They have these items represented as NFTs and now, all of a sudden, you can flip things at higher velocity. That’s number one: All of a sudden, you don’t need to pack and ship something—and then they don’t need to authenticate it on the other side. All of this trading can happen instantaneously.

But what’s really interesting with NFTs is that, because they’re also programmable, you can think of those as kind of open APIs, you can also create things on top of them. All of a sudden, you can pull together, let’s say, a bunch of the best-selling sneakers and create a sneaker index. If you pull it together and then fractionalize that pool, you would actually be able to own a fraction of a collection of sneakers—and that would be an index that tracks the price of those sneakers. And now that you have, effectively, this derivative product on top of it, you can also create options on top of that. So, you can hedge the price of the sneaker, and you can use these auctions to then create insurance products. The kind of design spaces is infinite, because there are so many different things that you can do on top of that and that can happen very, very quickly. That’s the starting point to think about why NFTs are different, but there are lots of other things to explore too.

Heather: I heard that, when you decided to move to Electric Capital, some of your friends thought you were crazy. Why did you ultimately decide to go forward? And what was it like shifting from a founder to an investor in the organization?

Maria: Yeah. I feel that there are a lot of things that are high perceived risks but low actual risk. There’s kind of like an arbitrage opportunity there, almost where the perceived risk is high and so people won’t go for it even though the reward is also quite high. But to a lot of people, the risk reward doesn’t match. If you actually think the risk is much lower than what I thought that, effectively, the market thinks, then the reward does match up to that. I think a lot of the choices I’ve made really follow that framework.

For Electric, perhaps because I had a technical understanding of crypto, it was very interesting as a technology—and I think there are different considerations for what the risks could have been. I felt like the riskiest thing, which is what everyone thought would happen, was maybe nothing would happen. Maybe it doesn’t take off. That wasn’t exactly the bottom line for me. And so, worst-case scenario would be a new kind of way that maybe different entities could work together and share a database without having to really trust each other.

I think the best-case scenario was that bitcoin actually unlocked a new way to create incentives at scale, to coordinate people who had no affiliation with each other, who didn’t know each other. And once you can start coordinating people at scale, I think the fallout is a lot of things that we’re seeing right now. You’re seeing communities form, you’re seeing DOWs form. You’re seeing people coming together to manage treasuries of hundreds of millions and billions of dollars. And that’s all because incentives can align in this way. The rewards can be distributed, and people can trust the system—even though no one is technically running the system. So, I think the vision of that was so big that it didn’t quite feel like a high-risk thing for me to join.

Heather: What’s been most surprising about working for a venture-capital firm since you’ve joined?

Maria: That’s a good question. I think there are a lot of things, frankly speaking. When I was working on my company, when I was an entrepreneur and when all my friends were founders, I think we had a set of expectations for how venture worked. We knew there were certain rules, like, venture firms are looking for the billion-dollar unicorn. I think for a lot of people, it was kind of unclear why that was the case. Like, why did it have to build a billion dollars? Isn’t $500 million also a lot of money?

Heather: Is that okay. Do I have to be a unicorn?

Maria: Yeah, or why is acquisition considered a bad exit? Like, why does it have to be an IPO? And I think a lot of the answers we got felt kind of hand-wavy, where it’s like, “Oh, well, you know, that’s just the venture model.” And I think now, being part of a VC and understanding that VCs are businesses as well—at the end of the day, there is a business model that VCs follow—and, understanding how VCs look at returns, and how the business model informs the way that they look at investment opportunities, I think that’s been a huge shift for me. It has really made me realize that not everyone needs VC capital. I think VC capital comes with a very specific set of requirements that could be construed as baggage. If you’re trying to build a fundamentally different kind of business, if you’re trying to build a lifestyle business, if you’re trying to build a business that can just have a great exit, those are all things that I don’t think are a great fit for venture capital. So, I think just understanding the VC business model a little bit better was really interesting for me, because I’ve been on the other side of things as well.

Heather: Do you get pitched all the time now?

Maria: I think because I’ve been on the other side, I am much more open to people who reach out to me cold. And to the best of my ability, I’ll always try to reply; because I know how difficult it is to try to break into a circle if you’re not part of that circle. Truthfully, you don’t know where the best ideas come from. Often, people who hustle really hard are the ones who are very successful in the end.

Heather: Crypto in tech, in general, is largely male. And as an investor, you said you’re really interested in working with women—particularly minorities and immigrants. Talk to me about this and how you are realizing that as a passion of yours.

Maria: I remember when I worked at Microsoft, one of the perks was that there was never a line for the women’s restroom, because there were so few women working there. Obviously, tech has always had an issue with having more women in the workplace and having racial diversity or diversity in general.

Frankly speaking, I think the problem is worse in crypto. I think that’s changing now; but for a really long time, it was either ideology-driven or technically-driven. And I think because of that initial cohort—not a lot of women were in it—it becomes harder and harder for women to join. They’ll look at this crowd of people—and the number of times I walked into a room and I’m the only woman—I think, for a lot of women, that can feel like, pass; there are other things that I can work on.

On the flip side, I think the issue with lack of diversity is there’s a lack of opinions. And I think when there’s a lack of diversity of opinions, things are more fallible. One of the things I really love about working with NFTs is that it’s actually brought in a lot of people who were not always in the crypto space and who were not always in the finance space. It has brought in a lot of diversity, not just women, but a diversity in thinking. There are a lot of artists and designers, a lot of people who are very community oriented—so I think that’s been a really positive progression for crypto.

Heather: Without diverse opinions, things become more fallible. I think we’re getting to a place where it’s not just about tokenism or good will. It’s actually good business sense; it actually helps drive innovation.

Maria: I think the principle of crypto is to be more democratic, right? To break down centralized control, to return more power to the people who actually contribute. And part of that is that you need diversity to build a really robust product. What’s interesting about crypto is that because so many people are anonymous, it’s actually led to diversity or a leveling of playing fields—because no one really knows whom they’re talking to based on the name or based on the profile picture, right? If your profile picture is an animal and your name is a gender- neutral word, then you could really be anyone on the other side of that.

Heather: Yeah, it’s no longer walking into, some fancy boardroom with a bunch of suits, right? It’s happening in this different realm, which is really exciting. At Lippincott, we work with big brands who want to stay relevant, who want to grow, who are experimenting with different ways to express themselves and connect with their communities. Tell me about some innovative ways that brands are tackling NFTs, and what advice you would give to brands who have not yet dipped their toe in the water but want to.

Maria: I’ve seen a lot of brands start to issue NFTs, and I think the biggest mistake that I see is that they view it as dropping merchandise—in the sense that, “Hey, we’ve created this thing. We’re going to sell this thing in the end.” I think NFTs are an incredibly crypto-native thing, meaning that it really was, like, organically emerged from the crypto community. So due to some of the ways that it’s designed and some of the ways that it’s used, it often starts with something that looks like kind of a toy use case. I think it’s hard to simply break in. I see brands who come in and issue NFTs as merchandise and then leave. The most successful NFT communities are just that. They’re communities.

NFTs are assets; but, to me, they’re actually viral assets in that, by being digital and by being nonfungible—meaning that they can’t be exchanged for something else, meaning that they’re entirely unique—they’ve become this kind of identifier. I think, at the end of the day, humans really just want a sense of connecting with people. We want to find our tribe. We want to be in rather than out. There are primal needs that everyone has. I think NFTs actually tap into those needs, because the first thing that happens is someone looks at a picture. Because NFTs are visual, we start to emotionally respond to it. And a lot of these NFTs that have taken off.

People have experimented with different ways of doing NFTs. They’ve experimented with game assets. They’ve experimented with music. They’ve experimented with different things. But the thing that took off first, which I think is no accident is this idea of profile pictures. And it’s because, when we see a picture of something, there’s some of those characteristics that humans really kind of bond with on a psychological level. Then there’s this interesting behavior that maybe some of us have seen on Twitter, where people will change their profile picture to the NFT that they own. Post Malone changed his photo to a bored ape, and Steph Curry changed his photo to a bored ape. On the surface, I think that looks like a kind of very trivial or weird behavior; but it’s actually a fundamental unlock because of the amount of connection we need to feel to something to say, “Hey, I’m going to have this thing represent my identity. I am this thing now.”

So, I think the first thing is that NFTs have become a way that people identify themselves. People in their Twitter profiles will say, you know, husband, founder, Bored Ape Yacht Club member, number 1, 2, 3, 4…that is identity. Weird that we can feel identity with a JPEG, but that is the emergent behavior that’s happening. Communities can grow very quickly. At its core, NFTs are about people mutually identifying the kind of common factors among each other and then forming a group. It’s almost like Reddit subreddits, except it’s the thing that you own that speaks to what you’re interested in and what your values are.

Brands need to approach NFTs with that in mind—that it’s not just merchandise, it’s not a t-shirt, it’s actually about engaging your fans or your users: a) on an emotional level; and b) as a way to bring them together into a community. Now we’re starting to see these NFTs—rather than being kind of profile pictures— they’re actually becoming memberships, right? They’re community memberships. And these memberships come with a set of perks or a set of utility. I think it would be really interesting for brands to think about that, as well. How do you create a space for people who own this NFT to talk to each other or to interact with each other in different ways?

At NFT NYC, there were multiple parties where the tickets were actually gated by the NFTs that you own. So, in order to RSVP for a party, you actually can connect your meta mouse wallet or whatever wallet you’re using. And once you verify that you own this thing, you can go to the party. Some of the parties are exclusively for X owners.

I think NFTs are very, very social assets, which gives them the ability to go viral. And so, I think brands should really consider that aspect when they’re working with NFTs.

Heather: Looking toward the future, what are some of the ways in which you think NFTs will be used?

Maria: Reputation and identity is a big one. Discovery will be another big one. Financialization will be a big one. So, let’s imagine that you go to a Taylor Swift concert and you’re able to receive an NFT as a proof point. You have to physically be there to receive this NFT. I’ve actually had this happen at a Blau concert, where he flashed a QR code in the middle of his set and you can claim it with your phone. Basically, if you weren’t there, there was no way you could have gotten the QR code. It was really a moment-in-time kind of thing.

So, let’s imagine that starts sticking. If you somehow collected all of Taylor Swift’s concert NFTs for an entire year, you’re a mega fan. Like, that’s incredible, right? It would be really interesting for there to be places for mega fans to get together, where you need to have attended every single concert for an entire year to enter this discord. And now, they can chat with each other about different things. And for Taylor Swift’s team, they can actually look through, because all of their transactions are public, to see exactly which wallets hold all of these concerts. We can tag them as super fans, and we can really communicate with them through their wallets. We can give them new things to claim.

Let’s say that the Taylor Swift team says, “If you’ve been to every single concert and you have the NFTs to prove it, then claim this early access to tickets or claim this exclusive party we’re holding backstage for Taylor at the next concert.” And in order to hit the claim button, you need to verify with your wallet that you own these assets; and you would be able to claim that. So, there are really kind of complex and interesting experiences that you can start building on top of NFTs.

It’s going to spill out of crypto, as well. As we live more of our lives online, we’re going to have multiple identities. So how do these identities establish themselves? They need some sort of reputation signal. If you have a reputation system, you can start building a credit system on top of that. And then, all of a sudden, you can have credit systems or lending systems based on the reputation that someone has built up digitally—even though they have no government-issued identity.

So again, the paths that you can go down with NFTs that represent reputation identity is really interesting. And I think that’s going to be one huge area. I think NFTs right now are this really chaotic data type, and that feels like websites from the ’90s—before Google came in and organized them. You don’t know where to start; you don’t know if it’s verified; you don’t know if it’s real; you don’t know who has it; or there’s just so much metadata that’s missing, that’s technically there, but no one has yet organized it in a way that’s really consumable. I do think the next Google is going to come out of this as they start organizing NFTs, creating discovery and recommendation engines on top.

I think the financialization of NFTs is just going to accelerate, as well. And we’re going to start seeing NFTs not only as individual assets but as kind of wrappers, as well.

Heather: It’s clear that we’re just at the beginning of this and it’s changing all the time. So, you’re learning all the time. How do you keep up?

Maria: It’s very visceral when you experience it, whenever something new comes out, trying it out. Then, I also think just being really open-minded. Things are moving really, really quickly; and just being really willing to learn is really important. The thing I’ve identified as the unifying characteristic for people in crypto is that they’re all intellectually curious. It’s all part of an exploration, I think, and then being willing to be open-minded and try things.

Heather: When you were talking about being in physical spaces, like a Taylor Swift concert—getting access and collecting things that live in the digital space—that’s essentially the promise of the metaverse, right? Where you’re in both of these worlds at the same time, but yet your identities can be different? I read that you said you have a “thing” for metaverses. Talk to me about that and where you see things headed in that space.

Maria: Yeah, I actually got into NFTs, because I was really into the metaverses. We’re starting simple, for sure, but the metaverse to me is this idea that we’re probably living more of our lives online than we are offline in terms of the types of connections that we make and also just being very flexible again with our identity. Probably by the time I, hopefully, have grandkids, I think it’s going to be really wild to them that we ever lived in a world where we only had one identity—and this identity was a name that our parents gave us. And then the government gave us a piece of plastic, and that was it. And we couldn’t forge our own persona, and we couldn’t forge our own identity. And we only had one. I just think that’s going to be so bizarre to them; because I think part of this idea of a metaverse is—once we’re really identifying with the lives that we’re living online—having multiple identities and personas that we create ourselves and forming social connections in a fundamentally different way.

It’s no longer about, “Hey, I went to school with you, so we’re friends.” Or like, “Hey, we lived in the same neighborhood, so we’re friends.” I think it’s going to be much more about, “Hey, we have the same interests, and maybe that interest is expressed through NFTs, maybe it’s not—but we have the same interests, we found each other online. we’re in the same online spaces, so this is how we’re forming our connection now.”

I think the metaverse is really more about a shift in how we’re forming social relationships and how we’re identifying ourselves rather than are we living in this kick-ass 3D world with Oculus goggles on.

Heather: This podcast is all about showcasing today’s rising leaders and icons in the making, so I wanted to ask: Who’s your icon?

Maria: Oh, I definitely do. I came to the US when I was six, I came here with my mom, who came here by herself. And so, she’s 100 percent my icon, because she came to the US as a single mother with a child and had no language abilities and had no transferable skills. While she did have skills in China, they don’t transfer—again, because of language difficulties, because diplomas don’t transfer, etc. And I think that making your way in a new country—working cleaning jobs, working all sorts of jobs that you would have never even considered in your home country—is really incredible. And what’s even more inspiring is she’s still doesn’t speak a ton of English but somehow runs one of the biggest food distributors in Northern California. She distributes food to all of the Asian supermarkets, and she’s done this all by herself.

At the start of the pandemic, before people kind of caught on that it was going to be a big thing, she had a feeling that it was actually going to be much more serious. She pivoted her revenue streams really quickly and ended up, like, tripling her revenue, because she made the right strategic decisions in the beginning. So, she continues to astound me. She works harder than anyone I know. She’s definitely my icon.

Heather: It seems that the apple’s not falling far from the tree. And the experiences that you’ve had and, again, the role that you’re playing in helping the rest of us understand and get excited about what’s to come is really wonderful. So, thank you so much, Maria.

Maria: Thank you for having me.