Coinbase’s direct listing was a massive finance, startup and cryptocurrency event that impacted a host of public and private investors, early employees, and crypto-enthusiasts. Regardless of where one sits in the broader tech and venture world, Coinbase storming north of a $100 billion valuation during its first day of trading was the biggest startup happening of the year.
The transaction’s effects will be felt for some time in the public market, but also among the startups and capital that comprise the private market.
In the buildup to Coinbase’s flotation — and we’d argue especially after it released its blockbuster Q1 2021 results — there was a general expectation that the unicorn’s direct listing would provide a halo effect for other startups in the space. Anthemis’ Ruth Foxe Blader told The Exchange, for example, that “the Coinbase listing shows this great inflection point for crypto,” with another “wave” of startup work in the space coming up.
The widely held perspective raised two questions: Will the success of Coinbase’s direct listing bolster private investment in crypto-focused startups, and will that success help other areas of financially focused startup work garner more investor attention?
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Presuming that Coinbase’s listing will positively impact its niche and others around it is not a stretch. But to make sure we weren’t misreading sentiment, and to get deeper into the why of the concept, The Exchange reached out to venture capitalists who invest in the broader fintech world to get their take. We even roped in an analyst or two to round out our panel.
The answer is not a simple yes. There are several ways to approach investing in the cryptocurrency space — from buying coins themselves, to investing in mainstream-ish institutions like legal exchanges, to the more exotic, like supporting efforts on the forefront of the decentralized blockchain world. And while it is somewhat clear that most folks expect more capital to be available for crypto projects, it’s not clear where it may end up inside the market.
We’ll wrap by considering what impact Coinbase’s direct listing will have, if any, on non-crypto fintech venture capital investing.
After yesterday’s examination of how blazingly hot the venture capital market looked in the first quarter, we’re again trying to gauge the private market’s temperature. Let’s talk to some folks on the ground and hear what they are seeing.
Are crypto startups less risky now?
Coinbase’s direct listing floated a company that is worth more than all but two major blockchains, namely Ethereum and Bitcoin. Several other chains have aggregate coin values in the 11-figure range, but a 12-digit worth is still rare among crypto assets.
The scale of Coinbase’s valuation post-listing matters, according to Chainalysis Chief Economist Phillip Gradwell. Gradwell told The Exchange that “Coinbase’s $100 billion valuation today demonstrates that venture investors can make great returns from putting money into crypto companies, not just cryptocurrencies. That proof point is good for the entire ecosystem.”
More simply, it is now eminently reasonable to invest in the companies working in the crypto space instead of merely putting capital to work hard-buying coins themselves. The other way to consider the comment is to realize that Coinbase’s share price appreciation is steep enough since its 2012 founding to rival the returns of some coins over the same time frame.
Cleo Capital‘s Sarah Kunst expanded on the point, telling The Exchange in an email that “it’s now credible to say you’re a crypto startup and plan to IPO [versus] having acquisition or ICO be the only proven exit paths in the U.S.”
Kunst’s point implies that with more exit paths now proven for crypto-focused startups, they are effectively de-risked to some degree. Less risk with now-proven upside? Given the magnetic effect that strong liquidity events tend to have on capital, that sounds like the tune capital plays as it arrives in large chunks.
There’s more than just the Coinbase direct listing, or recent bitcoin price records that could help push more private capital into crypto-focused startups. According to Barbod Namini from HV Capital, Coinbase’s listing “alongside more recent regulatory as well as corporate backing of crypto” combined to provide a “tailwind to the space.” Namini said he “fully expect[s] to see continued VC interest in the space as cryptocurrencies become an asset class that is of interest to institutional clients and at the same time start appearing in consumers’ everyday lives.”
So, all things up and to the right for everybody in the crypto market? Not precisely.
Upside for exotic crypto startups
Coinbase’s direct listing was a win for the crypto space, but it is notable how pedestrian the company is in a sense: It’s an exchange. It makes money on fees. And it is somewhat regulated and reasonably connected to the broader financial world.
Not everyone expected the Coinbase experiment to work. The Exchange spoke with IVP’s Tom Loverro, who led Coinbase’s 2017 Series D, yesterday after Coinbase began to trade. Per Loverro, something that his firm got right and others got wrong was that equities were not a “perfect analog” for the cryptocurrency markets. Many expected that the fees that Coinbase generated from trading and similar activities would fall to equity-like levels. That did not happen. Today, Coinbase generates a far greater percentage of its asset base in fees each year thanks to what Loverro argues are services like storage and security; it’s an exchange, but one with a different economic profile than its predecessors.
But while Coinbase’s core business is largely understood by the most average investor, what’s next in the crypto space could prove even more exciting.
According to Barry Schuler of DFJ Growth, who led Coinbase’s 2015 Series C, “there are also a lot of edgy new ideas being experimented with on company structures and more distributed governance.” Those ideas will take time to mature, he added, but may prove to be “very disruptive.” Schuler joked at the end of his email that the influx of capital that he expects to flow into the crypto space in the wake of the Coinbase direct listing will not be put to work in a situation where risks are fully mitigated. He closed by noting that “venture is a very risky business!”
Indeed.
Coinbase, however, might wind up winning in many of those new spaces. And if it does, could it limit upside for other private investors backing upstart companies in the crypto market?
Chainalysis’ Gradwell told The Exchange that if a company is setting out to do something in the crypto market that Coinbase doesn’t do today, it won’t be easy. “Doing things that Coinbase does not do is hard,” he wrote. “Coinbase has the resources to do those things now! If they are not doing it then either the addressable market is small, it is risky, or it is an adjacent market.”
So while there is an ocean of bullish sentiment that the Coinbase listing will lead to rising venture capital investment into crypto startups, there’s also some caution to be had; how much of the growing market that Coinbase can capture and control is not yet clear, though IVP’s Loverro was very bullish during our interview about the company’s expanding feature set — things like staking Tezos, or buying Uniswap. Its backers think that Coinbase is well-positioned to absorb future market upside in its niche.
If Coinbase can continue to grow into the most lucrative areas of the expanding crypto market, it could limit the ability of some smaller players to bubble up to serve new use cases. And now that it is public, Coinbase can become aggressively acquisitive to avoid other companies from taking some of its future market share.
Having an incumbent in a market is not bearish; every major tech company today had to challenge or take down incumbents. Perhaps Coinbase will prove less than invincible, but many think that its head start and capital base will give it a lasting advantage over other players in its market.
Now let’s broaden our lens, and look at the possible impacts of Coinbase’s direct listing on non-crypto companies in the fintech market.
Potential impacts on fintech funding
Coinbase’s record valuation represents a major windfall for several VCs, which in turn could fund further investments, Texture Capital’s founder and CEO Richard Johnson noted: “A lot of early investors and employees are getting some big returns here, much of which could be reinvested into early-stage startups.”
Let’s take a moment to appreciate how huge these returns are. Three investors have made their debut on the Forbes 2021 Midas list thanks to Coinbase: Loverro, Micky Malka from Ribbit, and Koh Nakamura from Sozo Ventures.
As for VC Garry Tan, Forbes calculated that at market close yesterday, Initialized’s 0.8% share of Coinbase was worth 2,200x its invested capital — and 80x Initialized’s entire first fund. As others pointed out, that doesn’t even account for Y Combinator’s participation, in which Tan played a big part; as he noted on YouTube, the total $300,000 investment that Coinbase received from these two sources is now worth more than $2.4 billion.
This is obviously more money available for startups going into the hands of people who sign checks for a living, but where these will go beyond crypto is still unclear, even inside fintech. “I think it’s premature to predict the impact of Coinbase on more traditional fintech players like Robinhood,” Schuler told us. “Coinbase is getting a premium as the iconic category leader in a whole new market segment. So, it’s not entirely clear if the new rising crypto tide will lift non-crypto fintech players.”
However, it is worth keeping in mind that fintech as a category is already very strong, and this includes consumer fintech, as PitchBook’s senior analyst for emerging technology Robert Le reminded us. “VC investors have been bullish about consumer fintech companies for quite some time.” In this context, Coinbase serves as another data point for the segment: “Like Robinhood, it shows that there is big money to be made in retail fintech products, not just institutional,” venture investor Kunst noted.
In this sense, Coinbase serves as a reinforcement to existing tailwinds for B2C fintech: “This direct listing, as well as other public listings like Affirm, SoFi, MoneyLion and likely Robinhood this year, validates [VCs’ bullish] position. We expect venture investment into consumer fintechs to remain strong in 2021 and beyond,” Le forecasted.
Adding to this picture, Namini encouraged us to look beyond consumer fintech: “Coinbase’s IPO plays into a sustained positive market backdrop for fintech as a whole. While B2C models grabbed most of the headlines in the past few years, I expect a strong cohort of B2B infrastructure plays to further strengthen the narrative in the coming years,” he predicted.
In closing today, a comment from Passion Capital partner Eileen Burbidge, who wrote a piece for TechCrunch in the wake of Coinbase’s decision that political work done before 2020 was worth implementing, but that any future political issues outside of its narrow business remit were to be ignored. The ensuing furor cost the company staff members who did care about “broader societal issues.”
Burbidge wrote to The Exchange in the wake of the company’s direct listing, saying that the transaction was “a strong testament to crypto as an asset class,” and one that “hopefully paves the way for more and increased crypto legitimacy and trust — and over time crypto company cultures and values which have more alignment with broader social values.”
That we can agree with.
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