Coinbase Direct Listing: Insights from Early Investor Garry Tan

Following Coinbase’s direct listing on the stock market, considerable attention has been directed towards the financial gains realized by the company’s executives, board members, and initial investors. Data from Capital Market Laboratories, as reported by Cointelegraph, indicates that insiders sold 12,965,079 shares, totaling approximately $5 billion, by Friday’s market close.

Early Investment and Continued Support

Garry Tan, of the venture capital firm Initialized Capital, is among the early investors who capitalized on the listing by selling a portion of his shares. Previously a partner at Y Combinator, Tan played a key role in Coinbase’s acceptance into the program.

He subsequently provided ongoing support to founder and CEO Brian Armstrong, making three additional seed investments after establishing Initialized Capital alongside Alexis Ohanian and Harjeet Taggar. Prior to the listing, Initialized Capital maintained a .8% ownership stake in Coinbase, a company now valued at a market capitalization of $64 billion.

Conversation with Garry Tan

We recently spoke with Tan, who offered candid perspectives on the listing and its personal implications. He also articulated a specific rationale for retaining the “vast majority” of his investment for the foreseeable future. An extended version of our conversation is available here, with key excerpts presented below.

Early Days: The First Check

TC: In what year did you make your initial investment in Coinbase?

GT: The first check was written in 2012, likely in April or May, preceding the program’s start in June. I had just secured $7 million from Alex Bangash, a prominent fund of funds operator. Jessica [Livingston] and Paul [Graham] suggested we connect with Garry, Harj, and Alexis, who were raising a smaller $7 million fund. Bangash ultimately contributed $5 million of that $7 million, and Coinbase was among our earliest investments, receiving a $50,000 check with a $9 million pre-money valuation.

Navigating Y Combinator Relationships

TC: Did this investment create any conflicts with Y Combinator as Coinbase grew? Did Initialized ultimately acquire a larger stake than Y Combinator itself?

GT: Y Combinator ultimately held a larger stake. It was common practice for YC partners to invest in YC companies at that time. However, our success led to a request to cease this practice, which prompted my involvement in establishing YC Continuity. Once Continuity was operational in 2015, I decided to launch Initialized.

I deeply value my time at YC, and it was a thriving environment. However, I find it more appealing to operate independently than within a larger organization. I transitioned to working on our third $125 million seed fund in 2016, while maintaining strong relationships with colleagues at YC.

Financial Implications and Stake Management

TC: Reports have detailed ownership percentages and valuations. If Initialized’s stake is separated from YC’s, it’s estimated to be worth around $800 million. Were there any restrictions on selling shares?

GT: No restrictions were in place.

TC: Were any restrictions placed on anyone?

GT: The company did not require additional funding. Its profitability is a significant advantage. This isn’t a speculative venture reliant on continuous capital injections. It’s a company with a robust competitive advantage and substantial profitability.

Partial Sale and Long-Term Vision

TC: Could you disclose the percentage of your stake that you sold?

GT: I sold a small fraction of my shares. Like many early employees, this exit is personally significant for my family. It mirrors the experience of many engineers who built their initial wealth in Silicon Valley. I myself experienced credit card debt before becoming an investor at Y Combinator and Initialized in 2011.

However, I, along with many others invested in the company’s future, am holding onto the majority of my shares due to my strong belief in both the potential of cryptocurrency and Coinbase.

Valuation, Competition, and Future Growth

TC: How do you assess Coinbase’s valuation and its sustainability? A significant portion of its revenue comes from transaction fees, which competition could potentially drive down to zero. Robinhood already offers commission-free crypto trades and is also planning a public offering.

GT: In the short term, it’s appropriate to view Coinbase as an exchange. However, a long-term perspective requires recognizing its role as a trusted on-ramp, a superior user experience, and its underlying infrastructure.

We were the initial seed investors and largest institutional shareholder in Bison Trails, a firm specializing in blockchain infrastructure for banks and other institutions, which Coinbase acquired late last year (announced in January, terms undisclosed). This acquisition is crucial, as the crypto landscape is shifting from proof of work to proof of stake, a more efficient consensus mechanism.

Infrastructure as a Key Advantage

This strategic acquisition positions Coinbase as a cloud infrastructure provider, similar to Amazon Web Services (AWS). Examining Amazon’s annual report reveals the substantial profitability of the infrastructure space. This is how Coinbase should be viewed.

TC: Does Coinbase already have customers utilizing this cloud infrastructure service?

GT: Coinbase is already the preferred infrastructure provider for a significant number of the top 100 new crypto blockchains.

Microsoft isn’t defined by a single revenue stream; it’s a diversified entity. It leveraged its operating system dominance to develop applications, and then combined OS and applications to create server software.

Successful companies build lasting advantages across multiple industries by attracting top software engineers, designers, and product managers. This is enabled by strong profitability and a positive work environment, qualities shared by Coinbase, Google, Facebook, and Amazon.

(Note: The original article incorrectly stated Initialized’s Coinbase holdings as .08% instead of .8%. The full conversation is available here. We will also be featuring an interview with Bison Trails CEO Joe Lallouz soon.)