Beware of the lesser-known Ides of February.

Cannabis Overload in CA, Kraken without staking, and the Fintech M&A outlook is bleaker than you know.

So, let me first address the elephant in the room (for me at least…) I took last week off. Last week was the first anniversary of the passing of someone very close to me. Unfortunately, I have learned that whenever you’re having a rough week to start…the universe will only make it worse by piling things on for ya. Yay life! For me February has always been a tumultuous month with chaos abounding so I call it the Ides of February. However, a great big thank you to everyone who checked on me and also thank you to everyone working to keep me accountable on my goal of writing at least once a week.

Last year, I was in the middle of shutting down my own startup and figuring out what I was going to do professionally when my loved one passed away, so I didn’t actually take the time I needed to mourn. I didn’t allow my brain the time and grace to actually think about what my life would be without this person. So needless to say last week was a doozy. I went all in on my feelings. I went all in on getting comfortable with the loss of this person which means they’re not around for advice, comfort, and support. Super sad kid over here.

I think that our culture has started leaning heavily into the propaganda that each person is an island with no need for others. Y’all I’m here to say that is a lie. BIG FAT LIE. We all need each other. We need friends and family (whether blood or chosen) to help us when we feel out of control, confused, or scared (or any of those other feeling things…). And that isn’t a bad thing. Don’t let anyone make you feel bad about being in your feels and needing the support of others. If someone does make you feel bad - well, fuck them. When it dawned on me that if I couldn’t write this newsletter without bawling my eyes out then the newsletter probably didn’t need to be written right at that minute I felt so much better.

All that being said, I’m super excited to write this week on a bunch of different topics so I hope y’all are ready. Also, I had a great webinar watch party last week with some friends at KKR and Skadden where we watched Unit21’s webinar on Compliance Trends in 2023 and it was an absolute blast! I loved hearing what people thought in real time and I think I’ll open up our next watch party to the whole Highly Regulated community. Watch for details in your inbox for this event next week. The team at Unit21 has built some phenomenal resources for folks looking to address their fraud concerns head on so I can’t wait to share with everyone!

(Also, check out my Ohio musician only playlist that I made last week while I was home. I promise we have some people other than Kid Cudi from our state!)

Rant of the Week

Ok. Y’all. Let’s talk about building in the defense sector. Right now with everything happening all over the country with balloons and surveillance from who knows where has many people in tech talking about defense. I love it. When I worked at Johns Hopkins I got to work with teams building absolutely game changing technology that would save lives and help protect our nation. But a few things were necessary for me to be in that position. Like Government Clearance. Like LOOOOOOOOTTTTSSSS of background checks.

To be involved in any way in the defense industry requires a heck of a lot of security. This means folks can’t really build in public. This means that folks can’t just take money from anyone and everyone. I remain amazed by the amount of investors who have taken money from people or places that are at odds with the United States government who then think they can and should get into funding companies in the defense sector.

At Vol. 1 Ventures, we have a few portfolio companies in the defense space. And whether we like it or not, VC’s and LPs could cause these soon-to-be unicorns to fail. Not every venture fund can and should be in the defense space. If you are operating in the space, then how you build your fund from the get-go is important. This is the one area where a tiny misstep can have deadly impacts.

Fintech needs M&A now. Bless.

Forbes published a great article recently about the state of Fintech and the likelihood that many startups get acquired soon. I completely agree with the premise of this article that many fintech companies need to get acquired NOW. I won’t say that I agree or disagree with the companies they highlighted, but I think this conversation needs to be had now while many fintech startups have gone back out in search of funding.

The one thing I ardently disagree with is the assumption that these startups are acquirable. As GP for Vol. 1 Ventures about 50% of the decks I see are for fintechs. About .0001% of these are acquirable if they were to go up on the auction block today. Why? Because they have not taken IP, compliance, fraud prevention, privacy, or a myriad of key building blocks in finance seriously. As many of you know I also consult with a few firms like KKR on their M&A teams. In this role I do extensive work looking into the fitness of fintech companies seeking acquisition or lead the due diligence when a company decides to make an acquisition offer.

However, the sad truth is that many fintech startups have been built in such a foolhardy way (without concern for risks and compliance) that a larger bank or company would be remiss to take on those risks. Sorry to tell many of y’all…but Goldman Sachs does not want to purchase your ugly baby of a startup that runs their mouth off about how shitty regulators are while keeping their customers financial data on a google doc that is viewable by every single employee at your Series A company. A heck of a lot of fintech startups have put legal and compliance on the backburner to the point where it is now a MASSIVE LIABILITY for any potential acquirer. And this will come up during M&A. Now more than ever shareholders are demanding that public companies bow out of situations that give regulators pause or reason to look closer at companies core business. Nowdays nobody is going to pay money for something that they will also have to spend years and millions of dollars on placating regulators. It’s just not happening.

Until fintech startups start thinking of themselves in a professional manner, which includes abiding by financial regulations and following basic corporate governance rules from the get go (which means yes, probably raising more money initially so that they can pay a legal team and compliance folks) we can expect a bloodbath in fintech over the next few years.

Kraken…Staking not allowed.

Ohhhhhhhh Kraken. Even before the news hit that the SEC is hitting Kraken with violations over staking, they were a controversial company. But now everyone is rushing to have thoughts on their company and “staking” fundamentally. I talk to a lot of people who just honestly don’t know what staking is so let’s go back a smidgeon.

First off, many folks are asking - just what is “staking?”

Staking is a method of earning rewards for holding certain types of cryptocurrencies. By staking their coins, users can earn rewards in the form of additional coins. It is a form of passive income, as users do not need to actively trade or mine to earn these rewards.

In its most basic form, staking requires users to hold their coins in a specific wallet or exchange for a predetermined amount of time. This wallet or exchange must support the staking of the specific coin. During this period, users will receive rewards in the form of additional coins, depending on the amount of coins they have staked and the time they have held them.

Staking is becoming increasingly popular as a way to earn passive income in the cryptocurrency space. It is seen as a low-risk, low-effort way to earn rewards, as users do not need to actively trade or mine to earn them. Additionally, it can be seen as a way to support the network, as users that stake their coins are helping to secure the network and are rewarded for doing so.

Staking in cryptocurrency can be a risky endeavor, as it involves the user locking up their coins for a predetermined amount of time. This means that the user is unable to access their coins during this period and is, therefore, unable to take advantage of potential price movements. Additionally, if the network fails or is hacked, the user may lose their coins and any rewards they had earned. Lastly, if the coin's price drops, the user may not be able to recover the value of their staked coins. Therefore, it is important for users to understand the risks of staking before committing to it.

Why is “staking” illegal?

Cryptocurrency staking has become illegal in many countries due to the lack of regulation around the industry. Without proper regulations, it has become easier to manipulate and use staking for fraudulent activities or to launder money, as users can stake their coins and receive rewards without having to provide any evidence of the source of their funds. Moreover, staking is often seen as a form of gambling, as users are taking a risk in the hopes of earning a reward, and so may be subject to the same regulations as gambling, making it illegal in many countries. In addition, some countries may view cryptocurrency staking as a form of investment, which is subject to additional regulations. This means that it is particularly important to be aware of the regulations and laws in your country before engaging in cryptocurrency staking. It is also important to be aware that staking involves putting your funds at risk, and you may not get the rewards you are expecting, so it is important to understand the risks before getting involved.

I think something most people fail to realize is that if something is illegal in other nations there is a pretty strong chance that it will become illegal in the United States. This action by the SEC shouldn’t have been a surprise to anyone and just really again shows how much you need to diligence companies in the crypto space. If you diligence a company with staking as a major part of the company you would have come face-to-face with previous actions around the world and can easily make a connection to what will happen in the United States. Personally, I think most forms of staking are going to run into issues with the SEC. My theory is if staking is helping the network more than the holder the SEC will move in. Contrary to what the SEC says there isn’t really a way to “apply” to use staking within your business so many folks in the crypto space have been practicing staking in pretty shady ways so nobody is really in the right when you look at these enforcement actions. This is a great case of an agency being behind on technology and industry taking advantage of that to do crime. No bueno y’all.

A wake-up call for cannabis in California

The weirdest thing that I encountered when I moved to California was the constant onslaught of cannabis. Weed ads. Weed stores. Weed bars. THEY ARE EVERYWHERE. For someone who isn’t that familiar or interested in cannabis, it felt both a little ridiculous and overwhelming simultaneously.

Now, it’s becoming pretty clear that the cannabis industry here is reaching a crossroads. Cannabis is regulated out the ass. Cannabis is expensive. Cannabis is a hard industry logistically. Recent filings by the Apple store of Cannabis—MedMen—has laid that all very bare.

MedMen is barely hanging on as a company. They once were held out as the gold standard that all marijuana dispensaries were held to, but due to the dependence on debt within the cannabis distribution and sales pipeline it’s a hard standard to live up to. In California, many companies are purchasing their stock on credit - and are now unable to sell their stock or pay their debts.

The fact that cannabis stock can be bought on credit really blows my mind. Really think about that. You can buy cannabis on credit. How do you regulate the purchase of an asset on credit that some states and the federal government consider illegal? What do those purchase agreements look like??? (Seriously, what do they look like?)

I think a lot about cannabis regulations because it is just so complicated. I think cannabis might be the only space that is more confusing and full of gray areas than crypto…and that’s saying a lot. Just for example think about how folks within cannabis have to think about banking.

The banking landscape for cannabis companies in California is ever-evolving…always a great start. While the federal government still considers cannabis an illegal substance, the state of California has legalized recreational and medical cannabis, creating a unique set of challenges for financial institutions.

In order to provide banking services to cannabis companies, financial institutions must comply with the Bank Secrecy Act, which requires banks to file suspicious activity reports and comply with anti-money laundering regulations. Additionally, banks must comply with state laws, which vary depending on the state. In California, banks must comply with the California Cannabis Banking and Financing Law, which includes guidelines for cannabis banking.

In California, banks can provide financial services to cannabis companies as long as they comply with the law and follow certain guidelines, such as adhering to strict anti-money laundering protocols and filing suspicious activity reports. Additionally, banks must ensure that cannabis companies are in compliance with state laws and regulations, including the tracking of revenue and taxation.

The banking landscape for cannabis companies in California is complex, and banks must be aware of the regulations and guidelines that apply to their services. By understanding the laws and regulations, banks can provide financial services to cannabis companies while staying compliant with the law.

So after reading that you feel confident you could follow the letter of the law right? LOL. Due to everything those regulations encompass, most companies in the cannabis stack (from startups to growers and distributors) are actually underbanked or unbanked. This has a lot of impacts from security to taxation. None of these are easy to solve and all of them are great examples of the cannabis industry dying a death by a thousand cuts in California. I’m very bullish on cannabis as an industry, but unless we can get a banking and credit system that allows for the industry to operate in a way that mirrors other retail or pharmaceutical sectors it will continue to struggle. Right now what we have is a lil’ goblin that wants to be a beautiful mermaid but it just can’t be because of everyone throwing gasoline on it.

Mail Call

Okay so since it’s around Valentine’s Day I picked a good DM that I received from someone seeking to figure out why they aren’t getting the desired outcome from dating and they are seeking advice…

“Hey Stevie! I’m really struggling with dating and I appreciate your frank tweets on the subject so any insight you might have is welcome. I really want to find my forever person. I want a partner I can build a life with. I want someone that will allow me to be myself and more. For the past few years, I have been in and out of some pretty toxic situationships and relationships with people that I knew weren’t right for me but I couldn’t get out of without causing one or both of us pain. How do I go about finding the person that is right for me so that I stop this cycle of crap?

-Sadly Single in NYC”

I get soooooo many questions from folks asking this same question. First off, if you are looking for your forever person…ACTUALLY LOOK FOR YOUR FOREVER PERSON. This means stop entertaining people that you know aren’t adding to your life or building you up. Don’t have a string of one-night stands and situationships and wonder why you aren’t in a stable relationship. If you are saying you want one thing and doing another the problem is actually you and your self-control or your motivation. You might not actually want what you think you want and that is okay. Second, be honest with people about what you want. If you want a serious relationship say it as soon as it’s not weird so that nobody wastes their time. There are plenty of people who want the same things you want to honor yourself by seeking those people out versus the folks who will literally cause you pain and suffering. You deserve to love yourself and enjoy the time you’re spending with someone else. I also think that if you have a less-than-ideal track record of dating it will make it harder for someone to take you seriously as a true partner. Nobody wants to be responsible for teaching someone else how life and relationships work. That’s just a lot to put on someone else who most likely is a fully functioning person in their own right.

If you have any other advice for Sadly Single in NYC let me know.

And this day after Valentine’s Day give yourself some extra love and space to be truly happy and content.

Until Thursday,

xoxo

Stevie