Episode 7: Nothing Ventured, Nothing Gained: VC, Crypto, and Silicon Valley

In this episode of Asset Management Corner, Andrew Dean and Chris Mulligan sit down with Scott Walker, the Chief Compliance Officer at Andreessen Horowitz (aka a16z) to discuss all things VC and crypto. Scott’s varied background, including as the SEC’s expert on digital assets and blockchain technology, gives him a unique perspective on the intersection of compliance and crypto. Andrew and Chris also discuss some recent changes to the SEC’s Wells process.

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Transcript

Andrew Dean: Hello and welcome back to Asset Management Corner. We are your hosts. I'm Andrew Dean. He's Chris Mulligan. We are partners at the Law Firm Weil, the podcast where we bring our experiences as former senior SEC officials in the Division of Exams and Enforcement and talk all things SEC and asset management. On today's podcast, we are delighted to be joined by Scott Walker, CCO, and Andreessen Horowitz, who's going to talk to us about VC firms, Silicon Valley, crypto, a lot of interesting topics to get to with him. But first, we wanted to talk briefly about something that happened during the shutdown. I've talked about it in another context, but we want to address it here. And that is Chairman Atkins' speech on the Wells process. As some of the Wells process is a process by which potential defendants or respondents in SEC investigations are given a chance to make their case to the staff about why they should not be charged after being told by the staff that the staff is inclined to recommend charges against them. And the idea of this is to allow that potential defendant to speak directly to the commission and give their view on why they shouldn't be charged. You know, the Wells process has always been discretionary. There is some publicly available guidance on the enforcement manual about when to give a Wells process and about how it might work. And, you know, like there are some instances where it just may not happen. There may be, for example, in the notice may put a potential defendant on notice of a possible asset freeze. It might disrupt a criminal investigation. So there are reasons why Wells process may not happen. But traditionally, it's been exercised unit by unit, region by unit at the SEC on how it works. In a lot of respects, Chairman Atkins' speech on the Wells process was fairly conventional. The themes that have been common, I think, throughout is that senior leadership will meet with defense counsel. That's one of the statements he said. That's always been the case. The enforcement director has not always attended. That's the case under this commission, and that was the case in prior commissions, although there still will be times, I believe, where the enforcement director will meet with teams on cases. Chairman Atkins highly encouraged white papers. When I was at the SEC, we did this a ton. They give potential respondents, defendants a chance to provide information to the staff before having to make potential disclosures that might be required under a Wells process. And Chairman Atkins talked about how the Wells process may not always be practical, which I've already addressed. But there are some fairly significant changes that are worth pointing out. The first is that there are four weeks for a response. To traditional default is 2 weeks. That is a very short amount of time, particularly if the investigation has been going on for several years and the staff maybe did not give the individual or the defense counsel a great sense of where things were headed or the timing of it. So I think that four weeks is just meant to address that issue. But I think more importantly, and this probably obviates even that point, which is the sharing of the investigative file. I think this is the most important change, clearly. In my experience, and not just what I've heard from defense counsel, but my own experience in the office, is I think the SEC did have across offices wildly inconsistent approaches in how much information they might share during the Wells process. In my view, it's probably a good process to share with potential defendants, respondents in most circumstances what the investigative record looks I think in order to figure out what the settlement value is of a case for both sides, I think there needs to be an alignment of an understanding of the law and the facts. And I think the more information that the defendants have about how the staff thinks of the case is better at getting to that point. So what does that mean? That means perhaps more sharing of transcripts of key documents by the staff. I think the same documents that weren't shared in the past won't be shared now. So if there's whistleblower identifying information or other similar types of information, you know, we're not going to, you know, that's not going to be shared, obviously. But I do think that there is going to be more of a sharing of information during the wells process. So pretty interesting speech. I have heard chatter in the market that there's going to be a form of a working group or another group that kind of works on making making some of these other principles more durable in the form of the enforcement manual. There might be amendments or changes made to the enforcement manual on the Wells process. So we'll look forward to that and watch. I think there's a lot of SEC priorities right now. My sense is if that's going to happen, it's probably something that would start up in the new year.

Chris Mulligan: Now on to our interview section. Very excited today. We actually are having our first guest, who's an in-house position, and we could not be more excited for him, Scott Walker, who has been my friend for a decade. We worked together at the SEC. When he was at the SEC, he was the crypto guru. He was the senior specialist for digital assets and blockchain technology in the Division of Examinations. When I was working in the Division of Examinations, I worked closely with him all the time because he was the person person you had to ask when there were questions that came up at that time, ascending world of crypto assets, so deep expertise. Anyway, Scott has moved on, and he is now the chief compliance officer at Andreessen Horowitz.

Andrew Dean: Upstart firm, upstart firm.

Chris Mulligan: Yeah, upstart firm. And he continues to be an absolute thought leader on everything to do with crypto and venture investing. He's written so many different articles, modernizing markets for tokenized future principles for tokenized securities and broker dealers, creating a safe harbor for crowdfunding regime and collectible tokens, on and on. Anytime you have a question about what's happening in the crypto market, what's happening in the venture market, Scott is really the person to ask because of his background at the SEC and his really incredible position right now at A16Z. So we are just absolutely delighted to have Scott. Welcome to the podcast, Scott.

Scott Walker: Thanks, Chris. Thanks, Andrew. I appreciate that very kind introduction, Chris. And yes, it was a pleasure working with you back back in our staff days and now in the private sector.

Chris Mulligan: Absolutely. So Scott, can you tell us, obviously you were in-house, then you were at the SEC, and then you were back in-house at a venture firm, at the venture firm in Silicon Valley. Can you just tell us what your day-to-day life is like? There's been so much change and evolution in Silicon Valley just in the past, I mean, month, six months. I mean, you name it, seems like it is changing constantly. Can you walk us through sort of a day in your life at A16Z?

Scott Walker: Yeah, I'm happy to do so or to attempt to do so. And by the Anyway, you just kind of alluded to my background. So just for everyone to contextualize my comments, I was corporate counsel at BlackRock before I went to public service and was a staffer in the SEC. And I had worked mainly in, obviously that was big asset management with hedge funds and ETFs. and never had worked in venture capital prior to my work at A16C. And I have absolutely loved the transition. The valley is just incredibly fast-paced, and A16C is just a really great collaborative work environment. My day-to-day is full of just a lot of opportunities to learn. I drive a great deal of satisfaction at the energy that is in the building. It's fast-paced, so it's not for everyone because it's very challenging with respect to all the uncertain outcomes that you have. So As a CTO, I'm confronted with unique challenges regularly, whether it spans, and this is what we were just talking about before, flipping down the mic, if there's a CFIUS issue or there's a code of ethics issue, or there's a new proposed rule or interpretation or FAQ coming down from the SEC, or a deal that needs to be reviewed, whether it be from a conflicts perspective or the perspective of its alignment with the fund governing documents, Really, there is just a wide range of topics that surface on a day-to-day basis, Chris. Like I said, it's not for everyone. There are certainly uncertain outcomes all the time. And you really have to be adaptable. And you have to recognize that while they're always shifting priorities at the firm and in the valley generally, just because of where advanced technology is going at any moment in time, You never know what the catalyst for growth is going to be. And so you just need to be resilient and roll with it. I will make one further comment here. As a regulatory lawyer in this space, there's an extra layer of uncertainty, and this surfaces daily. And this, Chris, is where we engage, right? Most of the advisors act, most of the SEC regs that apply to RIAs never contemplated venture capital, like as a business model. And so I am so frequently working with kind of this square peg, round hole type scenario, where I'm trying to apply case precedent or rules or interpretations to fact patterns and business models that don't necessarily align, which I have to admit, it makes it exhilarating, but it also makes it challenging.

Andrew Dean: The SEC is trying to figure that out too, by the way. They were.

Chris Mulligan: Trying to figure it out when we were working on it 10 years ago, Scott. Yeah, it's been quite a journey. So how do you think the SEC is doing? All three of us worked there for a long time, and we know they're trying. The last chair had a difficult relationship, I think, to say the least, with the venture capital industry. Now, obviously, you have a new chair that has expressed a real openness to new technologies and the venture space. But what can they do? What can the SEC actually do to help you make your life easier and also help your firm do better?

Scott Walker: That is a great question. It's a very broad question, and we could go in a number of different directions. To start, I think where, first off, This administration seems to be focused on, from my perspective, the right things. So there's a renewed focus on capital raising, on providing guidance, on being a little more collaborative with industry, and that directionally is the right place to be. I think having kind of a shared North Star in that regard, I think is helpful. I think that putting efforts forth on kind of renewing the IPO market and the burdens of being a public reporting company is a focus area for this administration, and I think rightly so, because I think that is a major area of concern for portfolio companies, for venture capital, for American innovation generally, and frankly, for retail investors. I know there's an effort underway to enhance participation in the private markets for retail. I don't have fully formed thoughts on that, but I think that tends to be a byproduct of treating symptoms and not root causes. I think focus on really the capital markets and making them attractive again, you know, giving kind of compelling incentives for issuers, I think is really better, kind of better ROI for staff resources. I think from the perspective of this administration's view on technology, both how it's being used by asset managers, by private fund sponsors, as well as then within the portfolios themselves and companies developing, I think that is a breath of fresh air. There's no longer this kind of hostility towards innovation in the crypto blockchain space. There is no longer just this skepticism about AI, generative AI, which by the way, is a at this point, generative AI is a substrate in all businesses. So, existing businesses, right? So the idea that, and I know, Chris, we spoke about this a number of times, but the proposed, the ill-advised proposed rule under the prior administration dealing with dealing with AI was, you know, for asset managers was just, it was just directionally kind of the wrong way to go. So I think I think the continued focus on allowing innovation to develop and have kind of a wide berth is really, really important. And understanding, of course, that especially for IAs, we already have a very flexible statute and body of regulations that address kind of most of the concerns that would come from a commission perspective. They're just being applied to new workflows, new technologies, new types of investments. So anyway, in that regard, I'm happy with directioning where we're going. And I don't know that I supplied you with necessarily the wish list that you asked for.

Chris Mulligan: No, no, no. I think you raise a lot of good points. And look, there's always this tension, right? Because when we work together at the SEC, and now, we're trying to apply these general principles to unique fact patterns. And sometimes, I'm like, why can't the SEC just give answers? Why can't they just say? But the problem is if they give the wrong answer, a definitive wrong answer, we're in a far worse position than we were when we were just trying to grapple with general principles applying to a fast-moving industry like you're dealing with. So there's always this tension, I know, within the SEC. They feel it. And being on this side, I feel it as well. It's like, I don't want the wrong answer either, right? And so it could be a real challenge to get that balance.

Scott Walker: I'm curious, Chris, how would you answer that question that you just asked me? I mean, what do you think is the the key reg or two to adjust for the present, directionally where private fund sponsors are going.

Chris Mulligan: Yeah, I think that SEC recognizes something has to be done with digital assets and the custody rule that has to be figured out. The no action letter that just came out recently was a very small step in the right direction, but I think there's a lot more to come on that. And then I think figuring out AI and record keeping, there's a lot of issues around record keeping and the documents that are produced by AI that that I would love to have unclear guidance on.

Scott Walker: That's interesting. And yeah, I will just echo the comment about the custody rule, certainly. I think if we're going to dive down the hole on crypto, I definitely think custody first and foremost, but obviously there need to be rules with respect to, or either exemptive relief or safe harbors as it relates to offering the secondary trading, registered like trading venues. I mean, there are a whole host of rules that need to be adopted to just provide some clarity and certainty. And even if it's not through formal rulemaking, absolutely like no action relief and exemptive relief or interpretations to at least help industry develop and try to make up for lost time.

Andrew Dean: All right.

Chris Mulligan: So your job is really tough. We got it, Scott. You got a tough job. All right. Now you got to tell us what's going on. Andrew, you want to take the next talk about venture?

Andrew Dean: Yeah, tell us, and you can go wherever you want with this one too, Scott. So trends in venture, where are things going? Chris and I are here in New York and DC. We got the East Coast bias. Where's venture going out west? Tell us.

Scott Walker: Where's venture going? All right. Any direction. I love the open-ended nature of that one. Okay. So a couple of things. Let's start with AI. AI, obviously, it's just been an absolute game changer. And from a a deal flow perspective, I think I just read an NVCA report that said, I think two-thirds of the deal value for year to date has gone into AI. But interestingly, it's not just investment class or category. As I mentioned before, it's a substrate in everything. And that's also changing, that's changing kind of how we do things. One of the things that I mentioned to my team frequently in my department is just to keep your eyes open for new tools or new tech to either supplement our existing compliance program or substitute our existing tool set that enhances like our analytical capabilities or reporting capabilities, et cetera. But that has a profound impact on kind of our workflows. And I don't think lawyers generally don't think about like changing our workflows in a dynamic way, but that's actually the kind of present state of things. All right, going back to the question, trends in venture. I think liquidity is probably the biggest issue. This is probably something that for those that are not in VCE day in, day out, that don't quite appreciate, but the absence of liquidity, and there are two sides of this coin, is a major issue. So in one sense, the dearth of IPOs has meant, this is to the surprise of no one, obviously private companies are staying private longer. As a result, you just don't see as many technology companies, high growth companies, IPOing, or at least in an earlier stage of their life, as was historically the case. As a result, there are just fewer exit opportunities for venture capital. Now we're seeing an uptick in mergers and acquisitions activity, and that is offsetting the dearth of IPOs to some degree, but it's not a total dollar to dollar substitution. Now, I think as a result of this, you saw the lowest fundraising, 2025 has been the lowest fundraising year since I think 2017, if I have my numbers correct. And that's a function of liquidity is not coming back to LPs. Institutional LPs are just in a position where they have their allocations to venture into private equity. And then of course, they have their obligations to their stakeholders. And so you're not getting that kind of recycling that you would ordinarily see. So I think that that's a big issue. And I think as a result, you're going to see some kind of creative solutions, but then also kind of the advocacy I was mentioning before about like trying to get the SEC to really promote some changes in capital raising or IPOs. The last trend, I would say, and this is like a happy one that I want to report, is venture capital, both from an institutional LP perspective, as well as venture capital sponsors, seems to be increasingly a global game. However, the deal flow appears to be very much local. So the US remains dominant in capturing venture capital investments, right, being the place where VC money gets put to work. And I think within the last quarter, about over 70% of investments were US investments, so US companies, which is huge. I mean, that's a terrific trend, especially if you're kind of very US-focused in the way that A16Z is.

Chris Mulligan: And would you say still Northern California? Is that still the primary driver? Or is it more at least geographically diverse across the United States?

Scott Walker: No, there was a trend over the last five, 10 years where it was becoming more geographically diverse. But with AI capturing so much deal flow at this point, and really the Bay Area being unequivocally the epicenter of AI, you've seen kind of a reversion, almost like a reversion to the mean of those dollars.

Chris Mulligan: Everyone's come back home. Everyone's come back home.

Andrew Dean: And into the city too, yeah.

Scott Walker: Yeah, absolutely.

Chris Mulligan: It's fascinating you mentioned liquidity. Andrew, I think this is our third or fourth straight guest who has talked about the importance of liquidity for private funds and sort of the lack of liquidity has had a lot of ripple effects, like we talked about. how the importance of DPI now?

Andrew Dean: I've learned a lot about acronyms in these last podcasts.

Scott Walker: So there's TBPI and then DPI, right? And TBPI is what the investment committees of the LPs want to look at. But then when it comes down to it, it's DPI that is the comforting, like that. You build that. It is that.

Andrew Dean: For our enforcement listeners, we have some of those too. Explain the difference between those things and why they care about it.

Scott Walker: Oh, sure. so TPPI is the then value, that's the total value of paid in capital, right? So in other words, when you close your books at the quarter and you've valued your portfolio, what is the value of the holdings relative to the investment dollars, right? The dollars that have been put to work. That's what we would all consider return. But it's not actual dollars back, right? But DPI is the dollars that have come back to you. For the dollars that you've put to work, how much has come back? It's just been deposited back into your bank account, right? You can put to work for other purposes.

Chris Mulligan: It seems to be a universal theme that emphasis on liquidity is something that all of our guests have been talking about.

Scott Walker: It's fascinating. So you asked me about my day-to-day. I didn't mention that as a CCO, I'm often meeting one-on-one with LPs, whether it be part of a fundraising effort and they want to know about the compliance program, they want to know about regulatory issues as they're doing their due diligence, or if it's just existing LPs that want to come in and kind of check on the health of operations of the firm. And so I'm meeting with LPs all the time or prospective LPs. And It is, Andrew, Chris, it's amazing how frequently this topic comes up. And not necessarily the basis of questions, just as a comment or kind of a thought. It is present on all LP's minds. And so obviously from a fund manager perspective, we are very much sensitive to this phenomenon and aware of this. We need to make decisions based off of recognition that our limited partners, for which we are the stewards of their capital, need the capital back, right? They want that liquidity. And so it's a factor in decision-making, for sure.

Chris Mulligan: Thanks so much, Scott. We really appreciate you taking time out of your busy schedule. And as someone that often has to schedule calls with you, I know how difficult it is to get on your calendar. So I really appreciate you taking a little bit of time and telling us what's going on in Silicon Valley and about your day-to-day experience. It's great to see you again. And it was really a pleasure to have you on our show.

Scott Walker: Likewise. Well, thank you, Chris. Thank you, Andrew. This has been a lot of fun. I appreciate it.

Andrew Dean: Thanks, man. Appreciate it. All right. That was an awesome conversation with Scott. Really appreciate him joining us. Thanks for joining us, folks, for Asset Management Quarter, and we'll catch you next time.

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