Coinbase’s S-1 publicly dropped this morning, with a lot anticipation. My colleague Alex Wilhelm has the high-level details, however there was one main wrinkle for the crypto buying and selling darling: two of its early buyers appear to be chopping down their stakes pre-IPO.
Probably the most notable case is Union Sq. Ventures, the outstanding enterprise agency the place Fred Wilson co-led the Collection A spherical into the corporate again in 2013, which was the first investment made under the firm’s then newly christened blockchain thesis.
Over the previous two years — which is the extent of disclosures that Coinbase contains in its S-1 submitting — USV has been quickly promoting off its holdings within the firm throughout a number of transactions, largely promoting to different enterprise corporations across the cap desk. Since late 2019, the agency has bought off roughly 28% of its holdings in Coinbase.
USV presently owns about 7.3% of Coinbase’s excellent shares, or roughly 13.9 million of a complete of 191.3 million based mostly on Coinbase’s disclosed share depend. As the next desk signifies, USV has carried out 4 individually dated transactions to promote almost 5.5 million shares of its holdings in secondary transactions.
Fellow early-stage fintech investor Ribbit Capital, which joined USV within the Collection A, additionally carried out a smaller secondary transaction in November 2019, promoting a bit lower than 5% of its excellent shares (559,228 of 11,995,949 shares).
What’s fascinating isn’t just that USV particularly is promoting a big a part of its holdings, but additionally the value they had been prepared to promote at. Based on Coinbase’s submitting, USV bought 3.35 million shares at $23 per share in late 2019, and later bought about 2 million shares at $28.83 per share in mid-2020.
These costs are effectively beneath Coinbase’s Collection E worth per share of $36.19, which it obtained in late 2019. It’s additionally beneath the value set by the secondary transactions of Coinbase CEO and co-founder Brian Armstrong and Paradigm founder and Coinbase co-founder Fred Ehrsam, who obtained $32.57 for his or her shares in late 2018.
Now, there are a few nuances to think about right here. The secondary sale of most popular shares will usually convert to widespread (even when the sale is to a different most popular shareholder), which signifies that the shares bought would maintain fewer investor rights and provisions, and subsequently, are intrinsically value much less to buyers. This was the case with Coinbase because it disclosed in its submitting, and that will clarify at the very least a few of the hole within the worth.
The timing of USV’s funding can also be maybe notable. The majority of USV’s funding in Coinbase comes from its 2012 classic fund, which if it follows default business apply, has a focused 10-year shelf life. That signifies that the fund is designed to pay out its returns by 2022 — which was rapidly developing for the agency again in 2019 and 2020. There could have been some stress to promote at the very least a few of the agency’s stake early to make the agency’s LPs happier.
It’s additionally helpful to notice that USV and Ribbit largely bought to different, present buyers like a16z and Paradigm, which exhibits that different buyers deeply burrowed on the cap desk had been fairly excited to place extra money to work in Coinbase, even at a reasonably late stage.
Nonetheless, it’s uncommon for an formidable fund like USV to promote arguably its single-most vital funding of all time only a yr or two earlier than what could be one of many largest blockbuster IPOs of 2021. At a valuation of $100 billion let’s say (which is what Coinbase priced at a recent private market transaction), USV’s stake could be value about $7.3 billion. But, the shares it bought over the previous two years would have been value a number of billion at exit, and it bought them for about $140 million in money.
The thriller right here is maybe solved a bit. Fred Wilson, in a blog post from early 2018, talked about “taking cash off the desk” in earlier USV investments like Twitter, the place the agency “bought about 30% of our place in these two secondary transactions for about $250mm and returned 2x your entire fund to our buyers.” Then referring to crypto, he mentioned:
If you’re sitting on 20x, 50x, 100x your cash on a crypto funding, it will not be a mistake to promote 10%, 20% and even 30% of your place. Promoting 25% of your place on an funding that’s up 50x is reserving a 12.5x on your entire funding, whereas permitting you to maintain 75% of it going. I do know that many crypto holders assume that promoting something is a mistake. And it is likely to be. Or it won’t be. You simply don’t know.
Clearly, he took cash off the desk. It’s a financially-astute, risk-adjusted method, even when it left billions of returns behind. A16z and Paradigm are, I’m certain, fairly happy to have made the acquisition.