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 distinguished enterprise agency the place Fred Wilson co-led the Sequence 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 companies across the cap desk. Since late 2019, the agency has offered off roughly 28% of its holdings in Coinbase.
USV at present 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 rely. As the next desk signifies, USV has carried out 4 individually dated transactions to promote practically 5.5 million shares of its holdings in secondary transactions.
Fellow early-stage fintech investor Ribbit Capital, which joined USV within the Sequence 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 attention-grabbing is not only that USV particularly is promoting a big a part of its holdings, but additionally the worth they had been keen to promote at. In accordance with Coinbase’s submitting, USV offered 3.35 million shares at $23 per share in late 2019, and later offered about 2 million shares at $28.83 per share in mid-2020.
These costs are properly under Coinbase’s Sequence E value per share of $36.19, which it obtained in late 2019. It’s additionally under the worth 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 sometimes convert to widespread (even when the sale is to a different most popular shareholder), which signifies that the shares offered would maintain fewer investor rights and provisions, and due to this fact, are intrinsically value much less to buyers. This was the case with Coinbase because it disclosed in its submitting, and which will clarify a minimum of among the hole within the value.
The timing of USV’s funding can be maybe notable. The majority of USV’s funding in Coinbase comes from its 2012 classic fund, which if it follows default trade observe, has a focused 10-year shelf life. That signifies that the fund is designed to pay out its returns by 2022 — which was shortly arising for the agency again in 2019 and 2020. There might have been some strain to promote a minimum of among the agency’s stake early to make the agency’s LPs happier.
It’s additionally helpful to notice that USV and Ribbit largely offered to different, current 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 bold fund like USV to promote arguably its single-most vital funding of all time only a yr or two earlier than what might 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 can be value about $7.3 billion. But, the shares it offered over the previous two years would have been value a number of billion at exit, and it offered them for about $140 million in money.
The thriller right here is probably 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 “offered about 30% of our place in these two secondary transactions for about $250mm and returned 2x all the 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 all the funding, whereas permitting you to maintain 75% of it going. I do know that many crypto holders suppose that promoting something is a mistake. And it is perhaps. 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.
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