The
View from Initialized

Spotting the inflection point: How Initialized Helped Coinbase at the moment of product market fit

In 2013, I was helping Brian Armstrong get introductions to the Valley’s best investors. Here’s what I wrote.

Brian Armstrong and Fred Ehrsam in their office in SOMA in 2013.

Today Bitcoin’s market capitalization is worth hundreds of billions of dollars. Coinbase recently said it has more than 35 million verified users in more than 100 countries and more than $25 billion in assets on its platform.

Neither of those things were true in 2013 when I was their first check into their seed round at Demo Day, and early on helping them get their early inklings of product-market fit. During one set of office hours, it became clear they had reached it. Brian came in and said an odd thing was happening all week. They were out of working capital with SVB — sold out of Bitcoin by 9 a.m. I told him it was time to raise the Series A and started working on introductions. That’s one of the most important things we do for our startups: Help them scale capital.

Here’s one of the emails I sent to help them raise that round of funding.

March 3, 2013

Hi [Investor]—

I wanted to get Coinbase on your radar for Series A. They are the #1 most trustworthy payment platform for Bitcoin in the world. They’re the only one that has a direct relationship with an FDIC-insured United States bank and they are doing $X0,000 per day of transactions. On any given day, they represent 15% of the total transactions on the world’s largest Bitcoin marketplace, mtgox.com.

They’re not demand constrained. They are capital constrained and have hit their capital limits set by [their bank] every time they have raised them (4X in the last month). Obviously they are benefiting from being the only legitimate site that lets people acquire Bitcoin — but they’re also at the forefront of making this new cryptocurrency legitimate. They recently enabled Reddit (a top 50 site) take payments. Some of the largest and smartest hedge funds on the street like [redacted] are using Coinbase to take long positions on Bitcoin as a financial instrument.

I think they have the potential to fundamentally remake the two biggest forms of payment in the world:

  • Credit Cards — the Internet, which prides itself on taking out middlemen, relies on the credit card infrastructure that takes 2.5%+ of every transaction that goes across it. ACH is too slow. Bitcoin is poised to be the transfer currency of choice because it costs nothing to transfer it, and 1% to convert it to and from USD.
  • Overseas Remittance — Xoom IPO’ed today — but the same characteristics that make it perfect to disrupt credit card transactions also threaten international remittance. Bitcoin is actually its own international currency and people are using it today to pay for jobs they commission on sites like oDesk (USD to the Philippines, for instance).

All the Bitcoins in the world today are worth about $300M — and that has increased 400% in the last year. With the above two use cases nascent, and Coinbase at the forefront, I think this is one of the most disruptive opportunities I’ve ever seen.

Brian is a superb software engineer and also used to run the anti-fraud team at Airbnb, which is perfect for this space since Coinbase is a bank that you don’t protect with guns. This bank is protected by great hackers.

They’re talking to the usual suspects and I believe so thoroughly in them I wanted to make sure you had a chance to talk to them.

Best,
-Garry

“It sounds like a small thing, but at that time I really didn’t feel confident negotiating with investors,” said Coinbase CEO Brian Armstrong (Forbes) “Garry gave me the right words to make it happen.”

A month later, Coinbase of course did end up raising a $5M Series A from Fred Wilson at Union Square Ventures, with a quick follow-on $25M Series B from Chris Dixon at Andreessen Horowitz by the end of the very same year. 2013 was an eventful year for all of us. Initialized is proud to be early seed investors in Coinbase and to play a small role in a very big story as they head toward an initial public offering.

At Initialized Capital, we continue to look for the next 10-year overnight successes. Whenever we find them, our favorite later-stage investors will get e-mails like this when they break out.