A week after the cryptocurrency exchange Coinbase staged a direct listing, much of the focus remains on the wealth that the listing generated for executives at the company, its board members and its private investors. Citing data from Capital Market Laboratories, Cointelegraph on Monday noted, for example, that 12,965,079 shares worth close to $5 billion at the time had been sold by insiders by the close of stock market on Friday.
One early investor who sold some of those shares is Garry Tan of the venture firm Initialized Capital. Tan worked previously as a partner with Y Combinator, where he helped ensure that Coinbase was accepted into the program, and he remained the primary contact for founder and CEO Brian Armstrong, backing Armstrong three more times with seed checks after launching Initialized Capital with two other YC alums: Alexis Ohanian and Harjeet Taggar. Before the listing, Initialized still owned .8% of Coinbase, which currently boasts a market cap of $64 billion.
We talked with Tan late last week, who spoke candidly about the event and its impact on him personally. Tan also gave a fairly specific reason why he’s holding on to the “vast majority” of his stake for the foreseeable future. You can hear our longer conversation here; we’re also featuring excerpts from that discussion below.
TC: What year was it when you wrote that first check to Coinbase?
GT: It was 2012. I believe it would have been in April or May and then the batch started in June and I had just raised $7 million from Alex Bangash, who’s a great fund of funds operator. He does direct [investing] now, too. But he’d been trying to invest with Y Combinator for many years, and Jessica [Livingston] and Paul [Graham] said, ‘There’s probably not a way for you to do that. But here, you should meet Garry and Harj and Alexis, who are raising a very small $7 million fund.’ And he ended up giving us $5 million of the $7 million and Coinbase was one of our very first checks; we wrote a $50,000 check [with a] $9 million pre-money cap.
TC: Did that create any complications with Y Combinator as Coinbase started to take off? Did Initialized end up with a bigger stake in the company than Y Combinator?
GT: I think YC still ended up getting more. The other thing that was true back then was it was commonplace for YC partners to invest in YC companies. And it is true that we were quite successful. And we were asked to stop doing that, and we did. And that’s when I helped raise YC Continuity. And once that got up and running in 2015, that’s when I decided to spin out.
I love YC. It was in super great shape. And it’s more fun to be a pirate than to join the Navy. So I jumped ship and worked on our third $125 million seed fund back in 2016. But [we’re] still close friends with all of our friends back at YC and I think super fondly of my time back there.
TC: A lot of numbers have been published about who owns how much and how much it’s worth. If you detangle Initialized’s stake from YC’s, your stake [would be valued around] $800 million. Were you restricted in any way from selling?
TC: Nobody was?
GT: The company didn’t need to raise money. It’s a profitable company. That’s a super powerful thing to really know. This is not a speculative, cash-burning entity. This is a kind company with a durable moat and hyper profitability.
TC: Would you share what percentage of your stake you sold?
GT: I sold basically a fraction of my shares. As [with] many early employees, to be frank, this exit to me and my family is actually quite meaningful, just like it is for a lot of the other people who started off as engineers; I myself am an engineer [who] had credit card debt as recently as 2011 before I became an investor at Y Combinator and Initialized. We have to remember that Silicon Valley is where a lot of skilled builders are creating their own first wealth.
All that being said, like a lot of other people who are also long with the company, I’m holding the majority and vast majority [of my shares] because I’m super long on both crypto and Coinbase.
TC: How do you think about its valuation and whether it’s sustainable? So much of the company’s revenue derives from transaction fees and invariably, competition is going to drive those down to potentially zero. Robinhood already offers commission-free trades on crypto [and is also expected to go pubic soon].
GT: In the short term, you think about it as an exchange. In the long term, you need to think about it as what is a trusted on-ramp and user experience, and then [there’s] also the infrastructure.
We were actually the first seed investors and largest institutional holder of stock in Bison Trails [a firm that specializes in building blockchain infrastructure for banks and other companies] and was bought by Coinbase late last year [though the deal was announced in January for undisclosed terms]. This is a company that I think a lot of people should pay attention to even now, because all of crypto is switching from proof of work — [an energy-intensive process] that is how Bitcoin and Ethereum currently get to consensus — to [a new way of mining called] proof of stake, which is far more efficient and pretty much all of the newer blockchains are shifting to [and that rewards miners with transaction fees].
So this was a huge strategic buy for Coinbase and sets them up to be like a cloud infra company the way AWS is. And if you spend time with Amazon’s annual report, you realize that [infrastructure] is a massively profitable space. So that is the way to think about Coinbase.
TC: And Coinbase has customers of this cloud infrastructure service already?
GT: It’s already the preferred infra company for a great number of the top 100 new crypto blockchains.
Long term, Microsoft is not one revenue stream, it’s not a one-trick pony. They started with an OS. They used their advantage in operating systems to build applications, and then OS and applications together allowed them to also build server software.
[The best] companies stack durable advantages in multiple industries, and they do it on the back of hiring the best software engineers, the best designers and the best product people, and that is enabled by being extremely profitable, and then being a great place to work. And that’s the same for Coinbase as it is for Google, Facebook for Amazon — any of the big tech giants.
(A few things: The original version of this story accidentally listed Initialized’s holdings in Coinbase at the time of its direct listing as .08%, instead of .8%. As a reminder, you can check it out this chat in its entirety here. We’re also talking soon with Bison Trails CEO Joe Lallouz, so stay tuned for more on this front.)