By 2013, venture capitalist Fred Wilson had established himself as a preeminent investor in consumer tech, having made early and highly lucrative bets on Twitter, Zynga, Etsy and Tumblr. In May of that year, he took a slight sideways turn.
“We have been thinking about and looking to make an investment in the Bitcoin ecosystem for several years,” Wilson wrote on the site for his firm, Union Square Ventures. “Today, we are happy to be able to talk about our first investment in the sector.”
The deal was Coinbase. The round was Series A. The price tag was $5 million at 20 cents a share for a valuation of around $20 million.
Coinbase had recently graduated from the Y Combinator incubator program and only raised seed funding to that point. With Coinbase’s Nasdaq debut on Wednesday, Union Square’s wager on a web service that at the time had just over 100,000 members buying and storing bitcoin is now worth about $4.6 billion. His New York-based firm invested out of a $200 million fund.
An avid user of nascent tech products, Wilson indicated he was a happy customer before becoming an investor. “Coinbase is where I have purchased my Bitcoin and keep it,” he wrote.
Coinbase opened at $381 a share, giving the cryptocurrency exchange a market cap of around $100 billion, based on a fully-diluted share count. By the close, the stock had traded down to $328.28 for a valuation of $85.8 billion. That’s up more than 10-fold from the company’s last private fundraising in 2018 and over 4,000-fold from the Union Square-led round eight years ago.
Coinbase becomes the latest tech company to generate outsized returns for venture investors, thanks to mammoth valuations from the public markets and the accelerating growth of the digital economy. Following Roblox’s direct listing in March, Altos Ventures owns a stake in the gaming company worth over $9 billion. Snowflake’s IPO in September generated initial gains of over $12 billion for Sutter Hill Ventures.
Meanwhile, Sequoia has a combined stake of about $33 billion in Snowflake, Unity, DoorDash and Airbnb, which all went public last year. Those IPOs took place after the venture firm warned its portfolio companies in March that the coronavirus was a “black swan” event that would hurt business activity, disrupt supply chains and impede financings.
Andreessen Horowitz builds the biggest stake
While Union Square led Coinbase’s initial funding round, the firm isn’t the biggest outside investor. That distinction belongs to Andreessen Horowitz, which owns shares in the crypto exchange worth about $9.7 billion. (The ownership stakes are all based on information in the prospectus. Because it’s a direct listing, investors are able to sell right away and some have done so.)
The firm didn’t wait long after Union Square to jump into the game. Seven months after Coinbase’s Series A, the firm led a $25 million Series B, buying shares at $1 a piece. Investing out of a $1.5 billion fund raised in 2012 as well as a late-stage fund, Andreessen Horowitz continued to build its stake in Coinbase, even buying some shares from Union Square.
According to Coinbase’s prospectus, Andreessen Horowitz bought $57.1 million worth of shares in October 2019, from Union Square at $23 a piece. About a year later, Union Square sold another $30 million in Coinbase stock to Andreessen at $28.83 a share. In total Union Square divested about 28% of its stake in five separate transactions, and the 3.52 million shares it sold to Andreessen are now worth a combined $1.2 billion.
Ribbit Capital, a fintech-focused venture firm that co-led the Series A, is Coinbase’s third-biggest outside investor with 12 million shares, worth $3.9 billion. Tiger Global, Institutional Venture Partners and DFJ Growth are among the other backers.
Trading cash for crypto behind a convenience store
By the time Barry Schuler of DFJ Growth got into the mix in late 2014, crypto had broad enough acceptance that more traditional Sand Hill Road firms were taking a close look. Schuler, who’s best known for his days running AOL, said he made his first bitcoin purchase about a year before backing Coinbase. He found a guy on Reddit and agreed to meet him behind a convenience store. Schuler paid him $500.
“I handed him a lot of cash and he zapped some coin to my phone,” Schuler said in a video interview on Wednesday.
For his second bitcoin purchase, Schuler said he received instructions to wire money via Western Union to a bank account number. He called it a “leap of faith” that the money would land in his digital wallet.
“It became clear to me that this doesn’t go mainstream if this is the way to buy bitcoin,” Schuler said. “You have to have an onramp. By doing that early work and mucking around in the space, it became obvious what the value of a company like Coinbase would be.”
Schuler said he wanted to lead the Series C, but he needed to make sure that Wilson and Coinbase’s co-founders Brian Armstrong and Fred Ehrsam were ready to set up a board and get all the regulatory pieces in place to protect investors. Schuler had recently seen bitcoin exchange Mt. Gox file for bankruptcy after disclosing that hackers had invaded the site and stolen customers’ money.
“With all that weirdness in the early days, our legal teams had concerns about liability,” Schuler said. “We believed the team there was taking regulatory issues seriously. Ultimately everyone got their head around it.”
DFJ Growth ended up leading the $75 million round at $2.76 a share for a valuation of about $500 million. That investment is now up almost 120-fold. Schuler became the first board member, though he resigned as a director in August. Wilson and Marc Andreessen remain on the board.
For Union Square, Coinbase was the firm’s first crypto investment and there have been many to follow. The firm lists 15 crypto companies on its website that have joined the portfolio since Coinbase, including several specialized funds like Polychain Capital and MetaStable Capital.
Union Square and Andreessen Horowitz also backed NBA Top Shot creator Dapper Labs, which is helping pioneer non-fungible tokens, or NFTs. Before getting into basketball highlights, Dapper Labs was best known for the blockchain-based game CryptoKitties.
Below that sentence the blog shows a blue cartoon kitten with brown stripes.
“At USV, we think digital collectibles are one of many amazing things that blockchains enable that literally could not be done before this technology emerged,” Wilson wrote. “We don’t have much more to say about this investment right now. But we do have a lot more to say about it over time.”
Wilson didn’t respond to a request for comment.