Business and Bitcoin With Les Kreis

May 4, 2022

Venture capitalist and lifelong entrepreneur Les Kreis joins us to share common themes he found working in both public and private ventures. We discuss his philosophy of entrepreneurship, cryptocurrency, and the importance of building a strong team.

Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at info@byrdadatto.com.

Transcript

Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences. Creating simplicity in 3, 2, 1.

Brad: Welcome back to another episode of the Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my cohost Michael Byrd.

Michael: As a business and healthcare firm, we represent clients in multiple sectors and multiple specialties, especially healthcare. This season we are searching for common ground for our audience, and we’ll be bringing in many guests to help us. This season’s theme is The Universal Language – Business.

Brad: Yes. And I’m excited for today’s guest. He has a background that’s extremely unique and especially as it relates to this new modern currency.

Michael: Well, I thought you were going to acknowledge the fact that our guest today, you went to college together and I’m guessing that the stuff he has on you is legendary.

Brad: You know I would say, Michael, what [00:01:00] happened in college especially at TCU, go frogs, stays in college. Like all my college friends, Les and I have an understanding that we have a nuclear stalemate. Our guest goes there, I will go there. But we won’t go there yet, let’s hold off before we bring on our guest. I have a question for you now, though. Do you like scary movies?

Michael: Well, first of all, we’ll stay away from the red button. I might actually get blown up too. I just, I don’t want to do that. And actually, no, I don’t like scary movies. Why are you asking about that?

Brad: Well, okay so growing up in New Orleans, as you know, most of the city is below sea level and because of that, the graves have to be above ground. So the reason being that high with the high water table if it rained really hard and you bury grandma, she might float up and float by your house one day. So they built all the tombs above ground and as kids, we would go to the cemeteries, to play hide and seek. Sometimes in the daylight sometimes in the dark, but it got pretty spooky in there.

Michael: Yeah. [00:02:00] And, I guess it never had occurred to you that you didn’t have to be scared if you just didn’t go play hide and seek in the cemetery.

Brad: Maybe. Yeah well, some of these cemeteries have these giant mausoleums. They’re so large, they actually have a gate and walkway into them where all the family members are buried. Some have these huge sealed doors on them, and obviously it allows your imagination to kind of go with it. So this fear of the unknown, what was behind the wall started making people’s imaginations go wild. Which we have an entire series of books of horror books written all in New Orleans. You might’ve heard a few of them like Interview With The Vampire.

Michael: If I remember, right, weren’t you neighbors with the author of that?

Brad: I was, yeah, that’s right.

Michael: Okay. Well, so where are you going with all this?

Brad: So the unknown has always led to fear allowing our minds to create these monsters and boogeymen. And so there’s a gap between what’s reality and the myth that creates it. So today’s guest has constantly challenged the mythical [00:03:00] roadblocks of moving into uncharted waters as relates to many different industries, including cryptocurrency or crypto. And he was an early adopter of analyzing this new type of currency specifically Bitcoin.

Michael: So I think I just heard you say, are we having the Loch Ness Monster on as a guest? And is Nessie a pioneer in crypto?

Brad: Yes, Nessie is. With a Scottish accent.

Michael: Okay. Yeah, of course Scotland. I knew I’d get you there. Wow. Okay well I think you actually hit a vocabulary word cryptocurrency. That sounds kind of scary, so we’ll find out what our guest has to say, but according to Siri, our research assistant, cryptocurrency is a digital currency designed to work as a medium of exchange through a computer network that’s not reliant on any central authorities, such as a government or a bank.

Brad: Awesome. Good catch. Yeah, [00:04:00] when we have vocabulary, we have to define it. Michael let’s bring on Les.

Michael: So Les Kreis, Leslie, has 25 years investment experience across many different financial instruments, both global, public and private equity markets. Les is a principal at Steelhead Capital Management based in Fort Worth. Steelhead manages a portfolio of small business investments and startup ventures. He’s the managing partner and co-founder of Bios Equity Partners LP. He’s a founding member of Cowtown Angels, a Fort Worth based angel investment network. He was a vice-president at HBK investments. He, as you mentioned, Brad went to TCU. He was a finance major, graduated in 1994. You know, this is actually shouldn’t be on his bio as it is actually a negative, but he knows you going back to college. And I do have to say Brad that [00:05:00] Les and I met not long after you came to Dallas, so Les and I have known each other for a long time now. And you know we always play the name game, what’s our common connection. And Les for the only time in my life, our common connection is my mom. He knew my mom before he and I knew each other. And I’m not competitive, Les, I just have to say and acknowledge I’ve known her longer.

Brad: Welcome Les.

Les: Well, it is great to be here. I’d like to say that if I was picking myself as a monster, I’d probably choose like Wolf Man or something. Nessie does not sound really like a monster that I would want to know.

Michael: Yeah. It’s not you it’s Brad. Scotland, I mean, he just can’t not go for Nessie I think.

Brad: I mean, yeah everyone knows Nessie has a good Scottish accent.

Michael: Okay. All right well, we are going to have to move into talking about you Les or [00:06:00] we’ll lose Brad for sure right now. So we gave a brief background, but I’d love to just hear kind of your professional story for the audience’s benefit of kind of your background.

Les: Okay. Well I graduated from TCU in 94 with Brad. And by the way, Brad, it’s really actually interesting to hear your radio voice Brad because I know a bunch of different voices, not radio.

Michael: I do too, we should start a podcast on Brad.

Les: So you know, I kind of was a little bit of an entrepreneur most of my life. Right before college, I had a lawn mowing company and a buddy of mine, we’d go mow lawns. And, you know, in college I worked for Rent a Frog parking cars because I wanted a little extra money

Brad: By the way, Les got me into Rent a Frog.

Les: Yeah, I wanted to [00:07:00] park cars and have a little extra money so I could buy a little bit more quality beer or something like that.

Michael: Yes, exactly. Sounds reasonable.

Les: You know, everybody was drinking the Keystone lights, right? I wanted Miller light.

Brad: We were rich.

Les: I was lucky to get some good. Internships. I sort of feel like one of the keys to learning, really learning how to do businesses is experiential learning. You know, I didn’t set out that way, but I was guided to get internships so that you can actually talk about something relevant in your interviews. And so I’d worked down at Smith Barney one summer with a friend of mine named Mark Hart who owns a hedge fund in Fort Worth. And we worked for Smith Barney, I think it was like Smith, Barney, Shearson. It was like had a bunch of names. It like changed like three names while we were there over a summer. And you know, we just kind of worked with a trading group, learning finance, you know, learning trading, and [00:08:00] it was fantastic, but we didn’t get paid a dime. So, I mean, I had credit card debt like crazy after that summer. And then came back my senior year, had a really interesting situation where the CFO of a hedge fund that was started in Fort worth, stood up one day in one of the classes I was at in TCU, and he said we’re having an internship if anybody’s interested. So I got the job working for this hedge fund in Fort Worth called HBK investments. And I was working in the back office and just helping clear trades and do reconciliations where you literally get a fax every day.

Brad: Well, hold on, we might have to define what a fax is for our audience.

Les: It was a stack of papers that we said like, okay, well the bank, you know, this custodian knows you have this many shares. And then you looked at your portfolio management system and you say, okay, yeah, 2000 Shares of IBM check, check. You just did it by hand. Now it’s all automated, but literally you had to do that by hand. And [00:09:00] so that’s one of my first jobs working before I actually graduated, but I did not like working in the back office. And so I eventually worked my way out to the front office as they call it and then started working with the traders and kind of helping do things. And they liked what I did and offered me a job. I guess it was around February of my senior year in college and so I was just really blessed to have had that lined up. To not have to go through the interview process. I ended up working there for 11 years. Most of what I did was convertible bond arbitrage. Towards the end I was managing the global portfolio. So we traded in pretty much every market in the world, but we had offices in Tokyo and London and Dallas. The firm moved from [00:10:00] Fort Worth to Dallas in 98. I got a chance to go live in London with the firm and help another guy opened up a London office in 1997, and that was an amazing experience. But most of what I did was worked for a fund that I guess the value that a fund like that provides to the market is it provides liquidity to the overall financial markets. And so we would get paid and most of what we did were arbitrage type strategies.

Michael: I think Brad needs to spell arbitrage.

Brad: No way, not happening.

Michael: That sounds really fancy. When I say fancy, I mean, that’s pretty sophisticated stuff right out of school for 11 years. And so talk to us about the jumping off point from that. And I guess you went on your own at that point, right?

Les: Yeah I did, I kind of got to the point where I just had kind of hit the glass ceiling [00:11:00] at HBK and, you know, HBK was at a wonderful place. And my aspirations were maybe a little bit greater than what the opportunity was for me at the time. And so I made the very difficult decision to leave and give that up for the unknown. And it is jumping off, I mean it was, it was a very big risk. I really had no idea what I was doing and I kind of switched from public markets to private markets. And I just, they’re similar, but so different. Right. And I just had no idea what I was doing. So I spent a lot of years, you know, making a lot of mistakes, trying to figure out how to do this private side. And Brad and I actually worked together. I think Brad actually did the formation docs for Steelhead Capital. So I spent a bunch of years trying to figure out how to do the private side of the business. I went and saw a mentor as in this process [00:12:00] who kind of guided me towards being in the oil and gas business. At the time this was 2005, so at the time there was something going on in the energy business and it was sitting right underneath us. Discovered how to do the slick water frack process in the Barnett Shale. And so I started doing a bunch of stuff in and around the Barnett Shale oil and gas, and made a lot of mistakes in that area, but got involved in various companies in various different roles from, you know, never really being a CEO, but helping operate these businesses to being just a capital partner in some way. And just trying to feel my way through it. I got the opportunity to start up an angel network in Fort Worth and this was 2012 with several other people. And in that process there was one other woman there, [00:13:00] she was working at Alcon for 25 years and kind of took early retirement and didn’t really want to quit working. Her name is Dr. Stella Robertson and she was part of this group that formed Cowtown Angels. And so we noticed that there was just a bunch of Biotech companies that were coming through the angel networks that were too small for big venture capital firms, but they were too complicated for the angel investor. Right, you know, the angel investors were like me. They’re typically finance guys that don’t know anything about science and you just don’t really always invest in things that you don’t understand. And you look at a pharma deal and that kind of tech is really complicated, but complicated creates opportunity. And that’s something that I learned in working for the hedge fund is we did mostly derivatives arbitrage. So you just take the complicated security and figure out how to take advantage of the mispricing that go along with that complication. So in this particular case, we saw a bunch of biotech firms come through. And so [00:14:00] Stella and I started, you know, kind of working together on one or several, and we found another person that was really interested. And we sort of started doing these little club deals where we would find an interesting opportunity that came through Cowtown Angels, they needed a lot more money than what that angel group would do, and so, we would provide that. You know, a little bit more of an institutional process into the investing side of it. And that turned into being a good thing. And we probably raised about $15 million doing these little club deals. And one of the deals that we did was a deal that was an eye drop company or a company that made an eye drops that solved presbyopia, which is the inability to see near objects.

Brad: It’s what requires all 50 year olds to have readers.

Michael: Yeah, speak for yourself. Of course I’m blind the other way, but we won’t talk about that. They have a drop for that?

Les: They [00:15:00] have a drop for everything. These drops help with eyesight and they actually had really good clinical success. And so we were able to then turn around and sell that to Novartis in 2017, and then that gave us the ability to kind of launch a real fund that was kind of a blind pool fund, and so we did that and deployed it. I think it was like a $25 million fund and it actually was a $25 million fund and we were taking advantage of the qualified small business stock exemption because we had basically, I think it was 60 days to basically redeploy the capital that we had originally invested in Encore Vision, because you get basically the greater of 10 times your investment or $10 million tax-free using qualified small business stock exemption. But if you [00:16:00] don’t eclipse five years on the investment, then you’ve got to roll that into something within 60 days. So there’s a, I think it’s called a 1031 exchange, not 1031, that’s a real estate. It’s like a 1065 or something like that. But we had to basically deploy that capital, you know, and we ended up redeploying about $25 million into seven companies in 60 days. Now we knew, you know, four of them were companies that we already had been working on an invested in, and then there was three that we had been working with, but it was seven companies that we closed on in 60 days. It was pretty crazy. So we did that fund, then that gave us the ability to sort of launch another fund and we raised and deployed $50 million in fund two. And then we’re in the middle deploying fund three right now and it’s $150 million commitment fund. And so we’re about halfway through [00:17:00] that. And I guess if you add up the side cars and everything, Bios Partners, which is the name of this firm is around 350 million.

Brad: Wow, awesome.

Les: Yeah. Turned into a real deal.

Brad: So you started off at HBK. Actually, it sounds like almost opening the mail because you’re reading the faxes. So we want to ask you about what you learned besides paper cuts there, but you know, when you worked at HPK, you’re working on some really big public ventures, and then you move over and you start your own venture firm, which is more on the private side. What are some of these common themes that you started noticing that you learned from HBK that you can also actually apply at your new firm?

Les: Well, I mean, you know that was one of the prep questions so I knew in advance and had been thinking about this. And it’s something that became very clear as I was thinking through this, and you know, we talked earlier about when I left HBK, I was leaping off a cliff and it was crazy because I had a good job and basically gave that up.[00:18:00] I didn’t know what I knew. Right. What I didn’t know was that I was working with some of the smartest, most efficient people in business. And we would sit around and debate what cell phone was the best, you know, and you were just working with some really smart people. And so everything was all about getting to the truth and getting there efficiently. Right. And so I think what I really learned that I didn’t know that I learned was how to be an entrepreneur. Because it was all about solving problems, right. Being an entrepreneur honestly, is about solving problems. So you go, if you go to like an incubator, right, an incubator is going to, you know, is there to teach entrepreneurs. Right. But they’re there to teach entrepreneurs because nobody knows how to do all the business school disciplines, accounting, finance, marketing management, you know, maybe IT right. Nobody knows how to do all of that really well. So you go to an incubator to figure out how to [00:19:00] do a marketing plan, to go pitch and raise money, or how to put a budget together, you know, so you can not lose money, you know, like that’s what an incubator does. And so like nobody knows how to be an entrepreneur but entrepreneurship is almost philosophical. You can’t teach it. You have to learn it through experiential learning. But it really is centered philosophically around problem solving. And so what I learned at HBK was how to solve problems efficiently, you know, like we would do running arbitrage. So you would be looking at a convertible bond and you would need to know, like it’s very specific, so you’d have to pull up the bond and go through it and find like exactly how the rules were for everything. Like if you converted the bonds, you’re going to receive stock, but contractually the company has to give you stock within a certain amount of time. And so you were figuring out maybe how to arbitrage a [00:20:00] situation where you bought a bond and you put it in for conversion and you got that back, but then you had to sell that stock and maybe you were selling it on a different exchange and they had different rules. So you had to create an ADR out of a foreign stock, you know, and what were the rules on that?

Brad: Makes my head spin.

Les: And it was literally an exercise in solving problems constantly. And I think that prepared me to be an entrepreneur investor. So when I went out, I mean, I made a lot of mistakes because I just, I didn’t know private equity very well, but I knew how to be more of an entrepreneur investor at that point. And I think that that’s what HBK taught me was you know how to be an entrepreneur. There’s certainly not a sign that says you’ll learn how to be an entrepreneur, but there’s no question that’s what I learned.

Brad: That’s funny because we had another entrepreneur on and one of the things he [00:21:00] said is similar was that, you know, the mistakes he made, now that he knows he made those mistakes. But I think that’s the deal is when you don’t know it, hopefully you, as I know you’ve said this before, you learn from them and you don’t make that mistake again. So let’s jump ahead because I know we brought you on here to talk about cryptocurrency and really talk about Bitcoin. I can remember having a lunch with you in Fort Worth, I don’t remember how many years ago now, and you’re like, hey, there’s this new thing called Bitcoin and you should invest some money in it. And audience, I will let you know, I did not invest nearly enough in it. But Les was a really big on it and if you hang out with Les long enough, I did buy some, but not enough.

Les: I think I told you to put a hundred dollars into it.

Brad: You did, and for the audience, I actually put more. I won’t share, but I just decided I wanted to have a little bit more teeth into it, which now I wish I put a lot more in.

Les: And I would say that if anybody is wanting to learn more about it, you have to put [00:22:00] some amount. My amount that I always tell somebody is a hundred dollars, because if you don’t do that, you won’t check the price on it regularly, and then you won’t be open to more information about it and it makes it the difference between the people that actually go out and put some skin in the game. And I’m talking about a little bit is night and day what they learn.

Brad: Les, tell the audience, what is Bitcoin?

Les: I think, you know, like this would be 10 podcast episodes. But I would say the easiest way that I can explain Bitcoin, is that what they have discovered is digital scarcity. So that’s what they’ve discovered. It is a discovery it’s, you know, like they’ve discovered a way to create digital scarcity that doesn’t require trust that like, what you have in your account is what you have. It’s trustless. Right? And so that’s the game changer is they’ve just created something that’s digitally scarce. And you look at it in a very [00:23:00] similar way that you might look at gold, right. Like, why is gold so important? Gold is important because we’ve used it as a society, you know, human society to communicate value. Okay so when you work, you get paid, right? And so you store that value that you get paid, which represents your time value. Right? You store that in something. And you know, it could be gold, it could be a currency, it could be bonds, whatever, but like you work and you create time value, your time value. And you’ve got to store that in some way so then you can use it to communicate something. Like you need chickens, right, so you give some money for chickens so you don’t have to basically trade cows for chickens basically. Right? So there’s a point too. Money is really about communication, so you know, gold has been what humans have kind of gone back to over and [00:24:00] over and over to restart an economy that basically blows itself up. Emperors and, you know, people that have controlled economies, they start off with gold or some gold backed system. And then they’re like, oh, but if we just put a little copper in it, then we don’t have to use as much gold and they dilute it. And that’s been done for millennia. And you always go back to gold because it is the most scarce asset on the planet that everybody values in a way and has consistently valued over time. So that’s why we’ve used gold in that way for a really long time. For anybody that would want to learn more about kind of this fundamental reason why Bitcoin is important and is like gold in that regard, I’d recommend you read the book The Bitcoin Standard and I’m going to mispronounce the author, he’s a Lebanese economist, Saifedean Ammous. And I know I’ve butchered his name.

Brad: Audience, what we’ll do is we’ll find it and we’ll drop it in the notes and link it so that they can find it.

Les: This book was the [00:25:00] epiphany for me, because he basically explained why gold has been so important to human involvement for so long. In terms of having this basis of value that we can communicate on, right. You may speak, you know, Italian and I speak French, but I can give you gold for your chickens. And we can agree that that is a good exchange, right. Is it’s just a way to communicate. So we live in a digital world now and so, you know, gold is not very portable. It’s not very divisible. There’s a lot of things that gold cannot do. If you wanted to store a certain amount of it, you have to centralize it and then somebody can come and seize that, you know, so there is a problem with that and in today’s modern age, right. And Bitcoin has the scarcity component similar to gold, but it’s got all these other properties. Like one Bitcoin is divisible into 100 [00:26:00] million units. So like, you know one 100000000th of a unit is much less than a penny. Right. And it’s that way because Bitcoin hopefully will appreciate, but you also want to be able to do micro-transactions with it. But go try to take a one ounce coin and shave a little bit off and buy something with it. Right. I mean, like you can see the limitations that you have in the digital world here. Right? So like the point of this is to say, it is important to have a hard money system. And gold has been a hard money monetary system, but we’re no longer in the analog world. We are in the digital world and we need a digital asset that can meet our digital needs. Gold can’t do that. It can in the sense that if you can centralize it at some bank and then they can issue deposit receipts for it, but then it still can be co-opted [00:27:00] right. So that’s what Bitcoin is representing. It represents sort of the new, modern hard money system that we may need to go to in the world where we live in, you know, 350%, 400% debt to GDP.

Michael: That’s amazing. And I’ll say this, it was very humbling listening to you. I’m used to being the smartest man in the room when I’m with Brad. And I am definitely not that today, but I’m happy to hear a little bit of Texan come out and you did talk about chickens. I picked up on that. Chicken and cows.

Brad: Yes, everybody he’s from Fort Worth, Texas.

Michael: Yeah, exactly. Well, this has been fascinating as always, and we’re so grateful to have you on. It flew by like that. I feel like we could talk for another hour easily. And so what we’ll do next is we’ll say goodbye, and then we’ll come [00:28:00] back on the other side and do a little quick little wrap up.

Brad: Yeah. Well Les, this was awesome. As you said, we probably could do a 10 part series of Bitcoin itself, getting into all the other pieces, but thank you so much for coming out today.

Les: Yeah it’s my pleasure. That was a lot of fun.

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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my cohost Michael Byrd. Now, Michael, this season we’re searching for this common ground. Our theme is The Universal Language – Business [00:29:00] and we just had Les Kreis in here who has his own VC firm and he talked about, I mean, so many fascinating aspects of running a business. And obviously we got into Bitcoin, but one of the things I thought that Les said was so smart is being an entrepreneur is really understanding what you know and understanding what you don’t know. And maybe you can jump in on that thought.

Michael: Yeah. I mean, if you think about it, all of our audience, all of our clients are entrepreneurs. Whether they think they are or not. I mean, we think we are, so we always say it, but we are. I mean if you’re starting and running a business as a small business owner, you’re an entrepreneur. And what Les said was so smart. He talked about these incubators and learning the different disciplines of running a business. The thing about a small businesses is that you by definition are usually having one or two owners in the business, and you have certain things, everyone has certain things that are strong skill sets and things that there are weaknesses. [00:30:00] And Les mentioned building a team and I think just from observation and representing our clients, those that do well are the ones who identify areas where they need to bring outside team members in. It could be a marketing team, it could be legal, it could be accounting or finance, et cetera. I mean, Les clearly is a financial wizard and so he’s got that covered, but he’s going to need help perhaps in some of the other disciplines. And so I think a lot of entrepreneurs fall into the trap of trying to be everything for the business and they end up doing nothing well.

Brad: And that’s it. And I think we’ve talked about this on another episode about scaling. You can’t scale if it’s just you and you can’t duplicate just you, unless of course you clone yourself, which we’d have to do a whole new show on that. But Michael, I think that’s it for the day, but again, [00:31:00] audience next Wednesday we have another awesome guest. This is another guest who has been with us in the past. Tim Sawyer is going to show up and he’s going to talk about something awesome that happened in his life since the last time he was on our show.

Outro: Thanks again for joining us today. And remember, if you liked this episode, please subscribe. Make sure to give us a five- star rating and share with your friends. You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com. ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. [00:32:00] The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.

ByrdAdatto founding partner Michael Byrd

Michael S. Byrd

ByrdAdatto founding partner Brad Adatto

Bradford E. Adatto