Coinbase (2013)(usv.com)
usv.com
Coinbase (2013)
https://www.usv.com/writing/2013/05/coinbase/
22 コメント
Fred motherfukin Wilson. from being a ball on Castaway to running a top vc fund and writing a clean essay with clear conviction with clear reasoning.
What a legend.
What a legend.
I wanted to look up Castaway but managed to have the “Oh” moment before looking at the first result
tough crowd
Original discussion: https://news.ycombinator.com/item?id=5671088
I wonder if he would have done better simply investing in Bitcoin. The price in May 2013 was about $115, so that would be a 400x+ return.
Of course if Coinbase never got funded, I doubt BTC would be worth what it's worth today.
Of course if Coinbase never got funded, I doubt BTC would be worth what it's worth today.
Given the estimates for their valuation at the time, this was probably a significantly better investment than even $100 BTC.
The adage holds true: The best position during a gold rush is still to be selling picks and shovels.
The adage holds true: The best position during a gold rush is still to be selling picks and shovels.
> The adage holds true: The best position during a gold rush is still to be selling picks and shovels.
That adage is false. I'm routinely amazed at how unchallenged it goes when it's so obviously and demonstrably false. People just won't stop repeating it.
You want to own the gold mine (ideally with plentiful reserves that you can extract at a competitive cost). You want to own the oil / oil rights.
The mining majors do dramatically better than the companies selling mining equipment, during a gold rush / commodity boom. The comparison isn't close.
The big oil companies do dramatically better than the oil equipment sellers/makers during an oil price boom.
When oil hits $120 it's not the equipment makers suddenly making the most money. It's Exxon, as they watch their annualized profit hit $50 or $60 billion, which is more than every oil industry equipment maker on the planet combined. And that's just Exxon, you've got a dozen other big oil companies rolling around in a similar profit explosion. And have you noticed the oil majors very rarely go bankrupt? They not only benefit the most during the gold rush, they tend to endure.
The so called pick & shovel makers / sellers are among the last to benefit during a boom, they have mediocre pricing power 99% of the time (except for a five minute peak during a commodity boom), and they're among the first to get smashed when the gold rush turns against them. They're left sitting on inventory they can't move, frequently go bankrupt because of it, and most of the time have mediocre margins (they're almost always selling a quasi commodity low-value product with numerous competitors). If you're going to sell a commodity, it's best to be selling a high-value, high-demand commodity and be a first tier position (meaning you own the commodity). It's also ideal if it's difficult to compete, meaning it costs a lot of money to bring new supply on-line (which is true in mining and oil extraction); and then if there are some cartels that help to regulate over-supply, that's a big bonus. You'll find pick and shovel makers / sellers have few protections, are far easier to compete with, and there are no juggernaut cartels (much less superpowers and major nation states) propping up their prices.
Most major industries have tiers of benefit, or pyramids of value. You want to be in the first / top tier, which is owning the gold mine or oil. The shovel makers are several value tiers down.
An example of how this works (and it's pretty similar in most industries): the alcohol beverage industry. The top tier is Anheuser-Busch InBev and other big makers, they have the strongest position, best margins, are able to dictate terms to the tiers below them in most cases, and pull the most profit out of the system. Next down you have agencies, that handle things like marketing, advertising and distribution. Then you have suppliers of low-value commodities, the pick & shovel makers, that provide eg cans, bottles, cardboard, and some manufacturing equipment. Depending on the industry, occasionally tiers swap a position (in some industries the equipment makers - eg in the semiconductor industry - may be more important than helper agencies, but they're never first tier regardless). Next down, at the bottom, you have retailers (whether Walmart or independent liquor stores), they get the final little itsy bitsy crumbs of margin, and are constantly under pressure every which way on pricing. Margins almost always weaken as you go down the tiers, and pricing power does as well.
The oil industry works that way. The mining industry works that way. The shovel makers are not anywhere near the top.
If you get to choose, you want to be in the position of Intel or TSMC, not Applied Materials or LAM. You want to be Apple, not Foxconn or the company selling lower value pieces of the phone. You want to be Visa, not the company manufacturing plastic card blanks for Visa; you want to be Coca Cola (own the brand), not the company selling aluminum cans to them. The first tiers in the pyramid extract far more value on average than the shovel makers.
That adage is false. I'm routinely amazed at how unchallenged it goes when it's so obviously and demonstrably false. People just won't stop repeating it.
You want to own the gold mine (ideally with plentiful reserves that you can extract at a competitive cost). You want to own the oil / oil rights.
The mining majors do dramatically better than the companies selling mining equipment, during a gold rush / commodity boom. The comparison isn't close.
The big oil companies do dramatically better than the oil equipment sellers/makers during an oil price boom.
When oil hits $120 it's not the equipment makers suddenly making the most money. It's Exxon, as they watch their annualized profit hit $50 or $60 billion, which is more than every oil industry equipment maker on the planet combined. And that's just Exxon, you've got a dozen other big oil companies rolling around in a similar profit explosion. And have you noticed the oil majors very rarely go bankrupt? They not only benefit the most during the gold rush, they tend to endure.
The so called pick & shovel makers / sellers are among the last to benefit during a boom, they have mediocre pricing power 99% of the time (except for a five minute peak during a commodity boom), and they're among the first to get smashed when the gold rush turns against them. They're left sitting on inventory they can't move, frequently go bankrupt because of it, and most of the time have mediocre margins (they're almost always selling a quasi commodity low-value product with numerous competitors). If you're going to sell a commodity, it's best to be selling a high-value, high-demand commodity and be a first tier position (meaning you own the commodity). It's also ideal if it's difficult to compete, meaning it costs a lot of money to bring new supply on-line (which is true in mining and oil extraction); and then if there are some cartels that help to regulate over-supply, that's a big bonus. You'll find pick and shovel makers / sellers have few protections, are far easier to compete with, and there are no juggernaut cartels (much less superpowers and major nation states) propping up their prices.
Most major industries have tiers of benefit, or pyramids of value. You want to be in the first / top tier, which is owning the gold mine or oil. The shovel makers are several value tiers down.
An example of how this works (and it's pretty similar in most industries): the alcohol beverage industry. The top tier is Anheuser-Busch InBev and other big makers, they have the strongest position, best margins, are able to dictate terms to the tiers below them in most cases, and pull the most profit out of the system. Next down you have agencies, that handle things like marketing, advertising and distribution. Then you have suppliers of low-value commodities, the pick & shovel makers, that provide eg cans, bottles, cardboard, and some manufacturing equipment. Depending on the industry, occasionally tiers swap a position (in some industries the equipment makers - eg in the semiconductor industry - may be more important than helper agencies, but they're never first tier regardless). Next down, at the bottom, you have retailers (whether Walmart or independent liquor stores), they get the final little itsy bitsy crumbs of margin, and are constantly under pressure every which way on pricing. Margins almost always weaken as you go down the tiers, and pricing power does as well.
The oil industry works that way. The mining industry works that way. The shovel makers are not anywhere near the top.
If you get to choose, you want to be in the position of Intel or TSMC, not Applied Materials or LAM. You want to be Apple, not Foxconn or the company selling lower value pieces of the phone. You want to be Visa, not the company manufacturing plastic card blanks for Visa; you want to be Coca Cola (own the brand), not the company selling aluminum cans to them. The first tiers in the pyramid extract far more value on average than the shovel makers.
The modern oil industry isn't a valid comparison to a gold rush. It's relatively mature, stable, and operating at a global scale that has been captured by a few dominant players.
The adage is specifically about the gold rush because it created a frenzy of people rushing into an industry looking to get rich quickly. Some of them did, but many of them lost more than they gained.
Meanwhile, the people selling the tools to everyone hoping to get rich on the gold rush made a lot of money no matter what.
> If you get to choose, you want to be in the position of Intel or TSMC, not Applied Materials or LAM.
Obviously, if we get to choose with the benefit of hindsight then we will choose the winners. This strategy will be perfect as soon as we have a time machine available.
It's not easy to choose the side of the winners ahead of time, though. That's the point.
The adage is specifically about the gold rush because it created a frenzy of people rushing into an industry looking to get rich quickly. Some of them did, but many of them lost more than they gained.
Meanwhile, the people selling the tools to everyone hoping to get rich on the gold rush made a lot of money no matter what.
> If you get to choose, you want to be in the position of Intel or TSMC, not Applied Materials or LAM.
Obviously, if we get to choose with the benefit of hindsight then we will choose the winners. This strategy will be perfect as soon as we have a time machine available.
It's not easy to choose the side of the winners ahead of time, though. That's the point.
> The modern oil industry isn't a valid comparison to a gold rush. It's relatively mature, stable, and operating at a global scale that has been captured by a few dominant players.
The oil industry continues to have its gold rush moments, typically every decade or so. At those times you want to own the commodity, the oil rights, you don't want to be the equipment supplier, if you're choosing positions. Every time the price gets high enough, a fever of gold rush mentality hits the industry just the same.
The equipment makers did not extract the most value out of the Permian during the gold rush there, the natural resource owners did (including the land owners).
> Obviously, if we get to choose with the benefit of hindsight then we will choose the winners.
It has nothing to do with hindsight. It's a repeating, predictable pattern. Intel is not primarily a semiconductor equipment maker like Applied Materials, and they sit higher in the pyramid of value than Applied Materials. Apple is not primarily a low value commodity maker down the pyramid of value, it's not difficult to predict who is going to make the most money off of an Apple product; it was not difficult to predict who was going to make the most money during the smartphone gold rush, Apple or the company making/selling lower value components inside of the phone. It's because of the tier that Apple occupies. It wasn't surprising that Microsoft extracted more value from the software gold rush than the company selling computer chairs or desks.
It doesn't take challenging guess work to figure out whether the aluminum can maker is going to do better than a first tier positioned company like Pepsi or Coca Cola. That's a trivial thing to figure out.
> It's not easy to choose the side of the winners ahead of time, though. That's the point.
It's easy to figure out what value tier a company is in. I never suggested it was automatic to figure out which company would be the biggest winner in a tier.
You already know who all the players are in a gold rush, you know who owns the mines and who makes the equipment. You can very easily narrow all of this down and research a given company. It's not blindly throwing darts.
In a gold rush the big winners among the shovel makers will do worse than the big winners in the resource owning tier (those that own the gold, mines, land or oil).
The oil industry continues to have its gold rush moments, typically every decade or so. At those times you want to own the commodity, the oil rights, you don't want to be the equipment supplier, if you're choosing positions. Every time the price gets high enough, a fever of gold rush mentality hits the industry just the same.
The equipment makers did not extract the most value out of the Permian during the gold rush there, the natural resource owners did (including the land owners).
> Obviously, if we get to choose with the benefit of hindsight then we will choose the winners.
It has nothing to do with hindsight. It's a repeating, predictable pattern. Intel is not primarily a semiconductor equipment maker like Applied Materials, and they sit higher in the pyramid of value than Applied Materials. Apple is not primarily a low value commodity maker down the pyramid of value, it's not difficult to predict who is going to make the most money off of an Apple product; it was not difficult to predict who was going to make the most money during the smartphone gold rush, Apple or the company making/selling lower value components inside of the phone. It's because of the tier that Apple occupies. It wasn't surprising that Microsoft extracted more value from the software gold rush than the company selling computer chairs or desks.
It doesn't take challenging guess work to figure out whether the aluminum can maker is going to do better than a first tier positioned company like Pepsi or Coca Cola. That's a trivial thing to figure out.
> It's not easy to choose the side of the winners ahead of time, though. That's the point.
It's easy to figure out what value tier a company is in. I never suggested it was automatic to figure out which company would be the biggest winner in a tier.
You already know who all the players are in a gold rush, you know who owns the mines and who makes the equipment. You can very easily narrow all of this down and research a given company. It's not blindly throwing darts.
In a gold rush the big winners among the shovel makers will do worse than the big winners in the resource owning tier (those that own the gold, mines, land or oil).
> In a gold rush the big winners among the shovel makers will do worse than the big winners in the resource owning tier (those that own the gold, mines, land or oil).
That's true, but what's the expected value for each? It's obviously better to be a big winner in the resource owning tier, but how likely is that outcome relative to being a big winner in the shovel maker tier? How does a moderate winner in the shovel making tier compare to the moderate winner in the resource tier?
And you're right that high tier positioned companies like Pepsi or Coca Cola are strictly better off than the aluminum can manufacturers, but how do you know without hindsight that Pepsi and/or Coca Cola would be the big 2 sugary drinks, when the game started in the late 1800s? The aluminum companies were going to succeed no matter who won the sugary drink race, but picking the winner of the sugary drink race is like picking the right race horse.
MySpace operated on a sufficiently high level on the pyramid value (and were the first movers), but it would have been foolish to bet everything on MySpace. Likewise, Bitcoin is one of hundreds of crypto tokens, and it wasn't obvious to a lot of people in 2010 that Bitcoin would even survive by 2021, much less grow to be the biggest.
That's true, but what's the expected value for each? It's obviously better to be a big winner in the resource owning tier, but how likely is that outcome relative to being a big winner in the shovel maker tier? How does a moderate winner in the shovel making tier compare to the moderate winner in the resource tier?
And you're right that high tier positioned companies like Pepsi or Coca Cola are strictly better off than the aluminum can manufacturers, but how do you know without hindsight that Pepsi and/or Coca Cola would be the big 2 sugary drinks, when the game started in the late 1800s? The aluminum companies were going to succeed no matter who won the sugary drink race, but picking the winner of the sugary drink race is like picking the right race horse.
MySpace operated on a sufficiently high level on the pyramid value (and were the first movers), but it would have been foolish to bet everything on MySpace. Likewise, Bitcoin is one of hundreds of crypto tokens, and it wasn't obvious to a lot of people in 2010 that Bitcoin would even survive by 2021, much less grow to be the biggest.
I agree with you that the best option is to own the mine/land/platform. I wonder if you would agree with the adage if it were reframed as picks and shovels being a better option than trying to find gold oneself, especially on someone else's land?
The difference is the risk/reward ratio. During the California gold rush, around 300,000 came to hunt for gold.
Approximately all of them needed shovels, while approximately nobody (<1%) struck it rich. As an individual, you are far more likely to make a profit selling shovels than digging for gold.
It's almost as if there's a parallel to Silicon Valley and the startup scene here...
It's almost as if there's a parallel to Silicon Valley and the startup scene here...
The biggest advantage is that shovels are not worth zero in the event the whole thing crashes (and in a gold rush there is a big chance of that happening, by definition). The idea is to take advantage of the upside (to some degree) but also have your downside limited. It's a risk averse investment advice, not necessarily one for maximizing returns in the best case scenario.
> The biggest advantage is that shovels are not worth zero in the event the whole thing crashes (and in a gold rush there is a big chance of that happening, by definition).
Gold is more valuable to sit on than shovels and that will always be true, because it's a higher value commodity than the shovels are and it's easier to compete in shovels than gold extraction/production (start-up costs in shovel making is far lower vs resource extraction, and gold mines are a scarcer resource than the shovels).
Those shovels are dead inventory if the whole thing crashes. You will struggle to sell them for pennies on the dollar. That inventory tries to drown the shovel maker in the downturn, as they live and die based on constantly turning over their product, inventory. They build up a huge supply to meet the ever greater boom demand, and then get crushed by it inevitably. You see it every time oil booms crash. Go to those oil boom towns and see what happens to the pick and shovel makers and sellers, watch as they start dumping their product at a loss to try to stave off bankruptcy.
And it's not that all oil / mine owners do well (much less at all times), it's that that economic tier always captures far more value than the shovel making tier. That's the point.
Gold is more valuable to sit on than shovels and that will always be true, because it's a higher value commodity than the shovels are and it's easier to compete in shovels than gold extraction/production (start-up costs in shovel making is far lower vs resource extraction, and gold mines are a scarcer resource than the shovels).
Those shovels are dead inventory if the whole thing crashes. You will struggle to sell them for pennies on the dollar. That inventory tries to drown the shovel maker in the downturn, as they live and die based on constantly turning over their product, inventory. They build up a huge supply to meet the ever greater boom demand, and then get crushed by it inevitably. You see it every time oil booms crash. Go to those oil boom towns and see what happens to the pick and shovel makers and sellers, watch as they start dumping their product at a loss to try to stave off bankruptcy.
And it's not that all oil / mine owners do well (much less at all times), it's that that economic tier always captures far more value than the shovel making tier. That's the point.
Conservatively the round here valued the company at $25m. Pre-dilution that's a 4000x return, likely 2000x-3000x post-dilution.
Should have taken that money and bought bitcoin, and then Tesla, and then bitcoin again, and then...
A universe where he invested in BTC rather than funding Coinbase may not have BTC at 50k. We can't compare outcomes without taking into account the probability distribution at the time of the investment.
> I wonder if he would have done better simply investing in Bitcoin.
Hindsight's 20-20. Especially when it comes to investment.
Hindsight's 20-20. Especially when it comes to investment.
FundersClub (YC S12) offered a chance to invest in seed rounds for itself and four other companies of the same YC batch, including CoinBase.
At that time I was itching to invest in tech startups, and was excited for FundersClub. I invested in FC itself, and another YC S12 company which has since shut down. At that time, I was working for $BIG_BANK, and BTC in my view seemed like it would be a compliance nightmare, so I avoided CoinBase.
Depending on the Series A, B, C dilution factors, a seed investment of a few $k into that seed round would have grown to about $1m post IPO! (Facepalm)