From Wall Street To Blockchain With Dan Hannum

NTE 71 | Blockchain Venture Capital

 

Dan Hannum’s background was in traditional finance, but since he discovered Bitcoin, he was hooked. Now Dan is the Founder of Hannum Capital Management, a capital management company focused on digital and blockchain-based assets exclusively on the blockchain technology sector. Though he could have made a fortune staying in Wall Street, he was able to marry his passion for Bitcoin with his education and experience in portfolio management. Now he helps clients immerse themselves in the world of Bitcoin. Tune in to today’s episode and join Monika Proffitt and Dan as he shares his journey from Wall Street to crypto-focused venture capital.

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From Wall Street To Blockchain With Dan Hannum

I’m here with Dan Hannum of Hannum Capital Management. Dan, thanks for joining us.

Thanks for having me on. It’s a pleasure.

I want to talk a little bit about your background here as the Founder and CIO of Hannum Capital Management. To have a venture capital management firm sounds like such a stuffy old white guy thing to do. I don’t know you that well but you don’t seem like a very stuffy old white guy. Can you tell me a little bit about how on Earth you got into this?

My background is largely in traditional finance. I went to the University of South Carolina for my undergrad and then also my MBA. I had an idea of getting into finance, being a stockbroker, getting in investment banking. I ended up going from South Carolina up to New York. I started working at Goldman Sachs, then at Morgan Stanley. That was the entry into investment banking, into traditional finance. Once you get into the industry, people then start opening their eyes that there’s a lot that you can do within investment banking or finance. I was trying to narrow in on where can I have the most impact or where can I add the most value in, and what can I get the most value from? I kept gravitating towards the venture and seeing these amazing entrepreneurs from all over the world that had these amazing ideas and lacks funding or support to go chase their dreams. I got connected with some amazing VCs who were willing to let a young kid tag along and be a fly on the wall and see how it works. That’s how the migration from traditional finance into the capital venture.

That is crazy. That’s kind of leap after a leap. I want to back up a little bit because the first leap I hear is you went to the University of South Carolina. I have nothing against South Carolina at all, but that’s not the school that I’ve heard a lot about. I also went to a school that people haven’t heard a whole lot about like Evergreen State College. Pedigree is not a part of it. I don’t mean to bunch you in with my lack of pedigree, but it does sound like you may have the same different alternative background. I didn’t even know that Goldman Sachs hired people that didn’t have an Ivy League degree.

I understand going to school for what you’re passionate about, what you know about, and what you like. Any school is a fair game, but how did you end up thinking to yourself, “I’m going to go and get into Wall Street. I’m going to take this?” We all know that pedigree matters. How did you overcome the intimidating part of it? Did you end up with the right connections that you felt like that opened up the world to you? Wall Street is not exactly an open door policy. Can you tell me a little bit about how you made that leap internally and externally?

I’m a big proponent of sharing success and also a failure. To backtrack a little bit, I had the privilege and honor of being expelled from my high school. That started the fun path of not caring about credentials and not caring about rules. That’s what sparked the I don’t care attitude. When it was time to go look at colleges, some of the Ivy League ones were off the table and that’s due to my own actions and my own childish stupidity. I had to go through it to be the man I am now, but that eliminated a lot of the opportunities or potential schools that I could go to. Before I went to the University of South Carolina, I went to a small school called the Indiana University of Pennsylvania. It’s in the middle of nowhere in the middle of Pennsylvania. They were the only ones that were like, “We’ll give you a shot.” It’s probably out of state. I was paying three times as much as the people that were in a state. They were like, “We’ll let this guy in and see if he has the ability to learn.”

“We will take a misfit as long as he pays three times as much as our local good old boys.”

Out-of-state was $20,000 a year and instate was $4,000. They were willing to give a couple of people from out-of-state an opportunity. The good thing is I had some friends from high school that were going there. That transition was easy. My sister has been in venture for quite some time and was early on in her career when I was still in college. I originally went to college for Criminal Justice. I had no idea what I even want. I knew I was good at numbers. I was good at math, but I didn’t think of investment banking or finance or Wall Street. She was building her career and having some good success early on and opened up a lot of doors and a lot of opportunities.

I went to visit her in New York when I was still in school. She lined up a nice little roadmap for the week of, “We’re going to meet with these 5 or 6 companies. They’re all hiring for interns.” She was instrumental in helping me get my foot in the door. For me, I always knew once I got my foot in the door that I would outwork, work longer and harder, do what I needed to do to win. It’s definitely a credential after a pedigree lies the world, but the good thing is if you have the ability to break into that world, sometimes that credential or that pedigree is a detriment, whether it’s with work ethic, hustle, or grind.

My advantage was I was willing to spend 15 to 20 hours at the office, do whatever I needed to do. Some of the other guys that were in my internship class were 9 to 5. As soon as the 9:00 happened, they’re in the door and when 5:00 happened, they’re out. That’s something that I’m looking to build for myself and my family. I want to make sure that my kids have opportunities and that type of stuff. I guess that was the difference. I was a little hungrier and I had some help getting my foot in the door. Once I got that foot in the door, I knew that I would be able to go make a couple of things happen. That’s a little bit of background and trajectory of how I got in.

It’s better to have regrets than what-ifs. Click To Tweet

Where was your first internship? Do you remember what it was like when you showed up on that first day and you were like, “I’m swimming in the deep end now?” Do you remember what it was like when you first got that?

For better or worse, I’ve always had a little bit of cockiness or confidence in me. As much as the companies were looking at the credentials and the resumes, I wasn’t. It was just lined them up and I’ll knock them down. It is the same thing with sports and whatever I do in life. For me, it wasn’t like, “I’m swimming in the big leagues. I am stepping into something that I don’t feel comfortable with.” It was like, “I have an opportunity to go show that kids that didn’t go to Harvard, Yale, and Princeton have value.” The first internship was actually at Goldman Sachs. That was super helpful because it allowed me to get my foot in the door.

My first internship didn’t do much other than to get a lot of your credentials. In order to be efficient in investment banking, you have to go through either series, which is a series 7, 63, or 65, then you get into your CPA or CFP or all these types of certifications or verification. In order to get “on the floor” with Goldman Sachs or Morgan Stanley, you need to go and get certified or sponsored. That’s something that I didn’t realize at the time either is you can’t go and take a series 7. You need to be confirmed like, “They’re part of our club.” That’s another subject of the story that should be changed.

That was the first internship. We sat in a room for twelve hours a day and studied and went through series 7 books, pamphlets, questionnaires, and stuff. That was an internship. I don’t know when colleges, maybe 2 or 3 months, it was like, “Go study, go learn, get credentials. If you’re good and if you made enough connections, we’ll probably invite you back to start.” I was like, “That was all I was asking for is to give me an opportunity.” I went into the internship, no place better than a lot of the people in my class. As far as getting the scores that we got and then was invited back to start. The nice thing is I went back to school for senior year and was able to have something lined up and chase my passion. That was in investment banking and finance at the time. That opened up doors into a venture and other things, but the experience with internship and what we spent doing. Once we got the full-time role, you started climbing up the corporate ladder a little bit.

Did you have a similar internship first foray into venture as well? What were your first venture connection and experience like and who was it with?

It was with Blockchain Capital. That’s the transition from traditional finance into crypto. It started off as more of an outside analyst role than a full-time hire. I was at Morgan Stanley in 2015 and got fascinated with Bitcoin and blockchain. I invested back in 2013 when I was still in school but didn’t grasp what I was investing in. In 2015, I came back around. In New York, there was a big circle of people that were getting interested in crypto having meetups and connections. I started spending a ton of my nights and my weekends on crypto and thought back. I was like, “What do I want out of my life? How can I go get that?” There is one path which is to sit at Goldman or Morgan or another investment bank for 40 to 50 years and hope you become a partner. That’s a cushioned life, a productive life, and not the path that I wanted.

I wanted to go follow my passion and that was crypto. At the time, there wasn’t the same infrastructure as there is now. It was a little bit of a risk, but the way I looked at it was I had a decent school, internship, and items on my resume so I felt comfortable that I could go take a risk, follow my passion in crypto. If it didn’t work out, I could always go back and get a job at Goldman, Morgan Stanley, TD Ameritrade, whoever. I got introduced to a few people that were starting a couple of funds. They’re all trying to figure out a ton of different stuff. It was a new thing at the time that they need people that were like, “Here’s a topic, go research this and get us everything that you can on this and then bring it back to us so that we can figure that out.”

One of the first things I do is figure out wallet management like hot storage, cold storage, hardware wallets, and paper wallets. The custody ecosystem in crypto have evolved over the last years, but essentially that was the first foray was chase my passion into crypto, find people that were willing to pay me to go research what I love doing, and then that expanded. Once you do 20 or 30 analysts type letters, they go, “You should go meet with Joe who’s a junior associate at whatever,” it builds up and you earn trust and you earn a little bit.

Did you start out with an internship in venture or were you hired to be an external analyst in venture at the time?

It was an analyst role. There is no internship. It wasn’t an internship or an EIR. It wasn’t even official at the time. It was like, “We’ll pay you $50 an hour and go figure it out.” It was like, “Forget wallet management, figure out what’s the best place to structure a fund. Is it in the US? Is it in a big exploration of getting things out of the US at the time?” That’s how it started. I wanted to get into crypto. They didn’t have the budget or the funds to offer a comparable salary to Wall Street. I was willing to take that risk and do that $250 project that took me the weekend. “We’ll pay you $5,000 or 3 Bitcoin to go do that.” The benefit is those 2, 3, 5, and 10 Bitcoins, you have all added up and appreciate it over the last years.

Is that how you ended up with enough capital to start your own capital management firm? Was its early investment in crypto?

Somewhat. The transition from Blockchain Capital into starting my own fund was being at the right place at the right time early on. In 2016 to 2017, I got involved in a big thing in crypto. That was ICO’s or Initial Coin Offerings. They popped up time and time again. One of these projects was a company that I ended up working with called Gear, which is a Green Energy And Renewables Token. We brought on a great staff of people. We brought on great advisors. We had Larry King on board, Stan Partee, who runs Chemical Bank in Manhattan, which is a multi-billion dollar merchant bank in Canada. We had Jim Rogers, who’s one of the legends of traditional finance. We had this powerhouse of people. Long story short, we got them involved in this project at fractions of a penny.

NTE 71 | Blockchain Venture Capital
Blockchain Venture Capital: People allow themselves to be put in neat little boxes. Our education system does that.

 

They all invested $1 million, $2 million, $5 million, $10 million. It sounds like a lot of money, but for those types of people, it’s nothing investing a dollar. In the span of 3 or 4 weeks, it went from $0.03 to $14 or something. They all came back and were like, “I made $20 million, $30 million, $50 million, or $60 million in two months.” One thing rich people like is getting richer. They were like, “How do I get involved?” It was back in 2016, early 2017, I was like, “Will I bring them into one of these funds that I’m working with? Do I use that as leverage?”

“Why don’t I just start my own and get something going?”

They had every other asset class checked off. They had someone managing the real estate investments. They had someone already managing traditional ventures for them, but more on the non-crypto side. That’s how our fund got started was it was specifically in ventures because they understood that model. That’s one of the calculated decisions that we made. We’re going to invest in ICO and liquid projects. I was in the right place at the right time with some wealthy people who wanted to get an allocation into crypto. I would go out and branch off and see if I could make something happen. If not, then I’d use my resume, my pedigree, and my connections and go someone else who would pay me to go work for him. That’s how it started.

How long has had on Hannum Capital been in existence?

The first day that we accepted outside capital was February 8th of 2017 and it’s November of 2020 already. We are around the corner for four years. It’s been a wild ride.

How large have you grown the fund to be?

The first capital that we raised was $25 million on our first fund. That was from four LPs and then myself. One of your early questions was how did the funds start, I was investing a little bit of my own capital and was able to be early enough in crypto that that capital expanded a little bit, but that was how I was able to convince some of these guys to like, “Take a chance on me. I’m putting my own money at risk and if I’m wrong, then I lose my money and I’m out.” I think that allowed them to have skin in the game. Larry put in the first $5 million. The great thing about having Larry King involved is he’s interviewed presidents, prime ministers, anyone who’s done anything. I grew up as a kid and my parents watched the Larry King Show. The most amazing thing is getting Larry on board. Larry started opening up his Rolodex and he has a lot of other friends who have a lot of money.

At the time, in 2017, crypto was everywhere. It was on CNBC, on the Wall Street Journal. Luckily, I had a lot of friends that were willing to give a kid a chance and invest a little bit of money. These are the types of people that have hundreds of millions, some of the LPs have billions of dollars. Investing $2 million or $3 million is nothing to them. They spend more on fueling up their jets and their cars. That sounds like a lot of money, but the great thing about us is since we’ve had the four LPs in both of our funds, it’s allowed us to have a great relationship with them. We had a five-year lock-up in our first one in seven-year and in our second fund. It allows me to sit back and calculated how we allocate relational ICOs, which was very anti-VC. No one wants to VC money for 1.5 years because they all wanted to cut the ICO route. It’s allowed us to sit back and be able to pick and choose the right teams, founders, and models. We’ve focused more on the picks, shovels, and infrastructure of crypto. That’s not allowed our community and ecosystem to expand.

You said you were focused on infrastructure within crypto. How do you go about deciding what subsection or what is your mandate in terms of venture in something as new and bizarre as blockchain and crypto?

The good thing with our mandate is it’s broad in the sense that it has to be crypto-related. We can’t invest in a FinTech company per se that doesn’t have a crypto element. The good thing is within crypto, there’s no set structure or set sector that we have to stick to it, which has been great. Back in 2015, 2016, there weren’t sectors at the time. We were still growing this stuff out. If I were raising a different fund now, I’m sure it’d be a little bit more focused, but for us, we saw that there was going to be a ton of value in crypto. We felt that investing in the infrastructure of this ecosystem would allow additional whether human capital, intellectual capital or real capital to flood into this space.

We’d have a rising tide lifts all boat type scenario, which is luckily worked out well. Within crypto, we’re not necessarily picking on what we’re looking at. We have investments in tax software companies. We have investments in mining companies. We have investments in financial product companies or financial investments in brokerages and more exchanges. It is how do we get people in? What are they going to need? How do they make sure that they’re compliant in the organization?

Chase your dreams and take risks, but don't burn bridges along the way. Click To Tweet

Have all of your investments been in tokens? Are they in equity? Are they like SAFTE which stands for Simple Agreement For Tokens or Equity? How does that work? You’re saying crypto so it makes me think you’ve got a bunch of tokens in some cold wallet sitting somewhere and you check in on it sometimes and make sure nobody breaks into the office and steals it. Is it more like you’ve also got a little more traditional, like convertible notes?

It’s more traditional. There have been times within crypto where being traditional VC has been looked at weirdly. At the end of 2017, when everyone went to the ICO route, no one wanted to venture capital. The pre-seed or CS, you’re looking at more of a traditional convertible note. On the seed series A side, depending on the valuation and the traction of the company and what they’re doing. You get into more of a priced equity round. That’s our bread and butter. We’ve seen more structures like the SAFTE. One thing that’s popping up is the CAFE. There are new models, instructors that you can invest funds and invest from. We’ve tried to stay more on the traditional side.

Going back to how we were able to get the fund off and running, I felt more comfortable going to our investors and saying, “Here’s the structure that we have.” They may not know crypto, but they know how venture works. They know because there are LPs in other funds. They know how that structure works. They know how decisions are made. They know where their money’s going. It was a lot easier than being like, “Give me $5 million. I’m going to invest in ABC token.” I don’t feel comfortable doing that. Other companies and other funds have been successful at that, but we’ve been more on the traditional venture side. That’s the differentiation that we need to make in crypto is VCs from a liquid funder or hedge fund managers. There are different models and different ways of viewing the ecosystem coming from allocating capital in different ways.

You mostly are doing things traditionally in a non-traditional space.

We thought that that was a workable model for our LPs. We felt that that’s how some of the companies in crypto would appreciate it. You looked at a Coinbase at the time who was raising capital at $10 million, $20 million, $30 million, $50 million valuations. They’re valued at $8 billion or $9 billion and that’s 3 or 4 years later. That’s a massive example, but we felt the same thing with a lot of these other companies, maybe not to that scale, but companies that would allow people to be onboarded into the ecosystem. Once they’re in, how do they interact? Once they’re interacting, how do they either come out and be compliant or put their funds elsewhere? That was the model for us was how do we find companies that we think will onboard the next hundred thousand or a million users? That’s been some of our philosophy in some of our investments more on the adoption side. We have a compliance side of our portfolio as well.

I guess I have to ask that because there are always those entrepreneurs that are like, “Venture capital, who’s that? How can I get in touch with them?” Are you guys still actively deploying or you’ve deployed, you’re done, you’ve locked up and you’re good for years? You’re going to roll up the carpet for a while. Are you still taking on new opportunities?

We’re still actively allocating. We raised a second fund after we allocated the first fund. Once again, the good thing for us is that we’ve had the same LPs on board for both funds. To roll a new fund is a pretty hard thing, especially with going off your first fund and in a venture, because a lot of your investments haven’t had the maturity to either go through MNA or IPO or have an acquisition. You’re going and raising the second fund off like paper return from the first fund. It’s a little bit of an interesting structure, but to answer the question specifically, we’re still allocating from fund two. We still have about $30 million or $40 million that we’re allocating from our typical check size is anywhere between $250,000 to $1.5 million. The largest check we’ve written is $2.2 million. That was the latest stage as well. That was the only series B investment we’ve made. Typically, that’s the sweet spot of either pre-seed seed or series A anywhere between $250,000 to $1.5 million. If you’re out there and you have a passion for crypto or you’re raising funds and already encrypted, we’d love to take a look.

I feel like that’s also what your motto has been, just jump in from the sidelines, don’t be afraid to get involved. You don’t have to be from the perfect background to do everything. You can be expelled from school and you can still go on and do whatever you want.

People allow themselves to be put in nice, neat little boxes. Our education system does that. It’s not people’s fault, but going through some of those hardships and experiences, has allowed me to realize that the biggest thing in my life at a time that was holding me back was myself. If I could get myself in the other way that I could go do whatever I wanted to do. That’s something that I’m okay to go in on my deathbed with. I regret doing that, but I don’t want to go and saying, “What if?” That’s been my life motto is like, “Go chase it, go do it.”

I guess in a position where I don’t have a wife or kids, depending on me, I can go the transition to the West Coast, sell all my stuff, throw the dog in the car and drive out here. I can go chase women. I may not be the Ivy League background, but I’ve had a strong enough pedigree and resume and strong enough connections over the last years of being out of school to go and have that safety net. The last thing is family. My mom is always like, “If things don’t work out, there’s the basement of the home.” That was the fear that I had is I never wanted to go back home and be in the basement. That’s something supportive for me is having family and friends that were like, “Go chase your dreams and we’ll support you.” My mom wasn’t happy at first when I was giving up a nice cushion D, six-figure finance job to go work in magic internet money,

To go work in magic internet money, that’s true.

NTE 71 | Blockchain Venture Capital
Blockchain Venture Capital: Relationships and connections will always be important.

 

She was not happy at all, like, “What are you doing? You’re throwing away your career.” Luckily, it’s worked out well.

You were like, “Mom, I got this deathbed theory. I got to work on it. I’m sorry, but I can’t keep doing this Goldman thing.”

Especially from where I’m from, which is right outside DC, Northern Virginia. It’s a very affluent area. It’s very structured. You’re supposed to go to school. You’re supposed to become a doctor, a lawyer, or whatever. There’s nothing wrong with that, but I wanted more out of my life. I wanted to go do things and try things and testings. I’d rather have regrets than what-ifs. There’s a lot of people out there that have gone the safe and sound route and see that the job that they’re not happy with, especially in finance. I got a lot of people in finance that are making, $200,000 to $300,000 a year but are miserable. They hate going to work. They hate the people they work with. At what point does money or happiness become important to you? For me, it was always that passion and crypto that passion. I knew if I followed my passion and use my experience and my work ethic, then I could go build something.

If your passion so happens to be all about money, then turns out you’re probably going to be able to check both boxes by the end of that day.

It worked out a little bit better than if I had a passion for being an artist or a musician. It’s a little bit more lucrative, but that’s the way I looked at it. I had a great support team and great people behind me. I was willing to go take the risk and it’s worked out. The other thing is I had a plan if that didn’t work.

A lot of support, you had a total bedrock behind you, which is great. People that can take a lot of huge risks when they know they’ve got a place to live, they’re always going to have a roof over their heads. They have supportive people that will not tell them they’re a piece of shit. They’re like, “This is amazing stuff.” Also, they like to have the best pedigree that they could possibly need to go back to a job they already know. There were a couple of leaps in there and once you have that foundation, you can go from anywhere. That’s fantastic to hear.

The only thing I would add to is relationships. That’s something that I’ve treated carefully in my life and I’ve seen people not do it in their lives. That was the safety net is I’ve built great relationships at my last companies. I have my last jobs. I left in the right way and on the right term. The other thing is like, “Go chase your dreams and go take those risks. Don’t burn bridges along the way.” Keep good eyes with people at your last organization and your last company because we’ve already seen this before. We’ve invested in projects from employees at our portfolio companies who were great employees, but I have this idea to go chase and they want to do that. That’s the only thing is to be careful of how you treat people. The ultimate thing is I’ve been able to assemble a great team behind me on the crypto side of people that act with integrity, do things the right way. That is what carries further than the pedigree is. Those relationships and those connections and that are something that has always been important to me.

That’s a great place to end. Take your risks and go for it, but make sure that you’re taking care of everybody around you as much as you can as well. It’s been cool to hear your approach and your path to getting to where you are with Hannum Capital Management. Thank you for making the time for this. Do you have anything else you want to add?

I think we covered it all. The opportunity for this episode is to give people the insight that you can go chase your dreams and go things. I don’t want to be like Gary Vee, but my point was I have a unique background that a lot of people haven’t had and been able to use that background to get into some interesting areas. I guess that’s my takeaway is, go chase your dreams. Go try to do some fun stuff. If you’re working in crypto, give us a call. We’d love to work with you.

That’s a great invitation to leave on. Thank you, Dan. It’s been a total pleasure. We’re going to sign off and we will catch you on the next episode.

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