The Coinbase Implosion Timer
Thursday June 23, 2016
The early sphere of Bitcoin attracted harmful venture capitalists. When you look at the early drama timeline most individuals and “companies” that raised Bitcoin capital ended up losing it – an unacceptable liability. Coinbase was the first company to take a different approach, raising fiat capital as Bitcoin venture capital is a greater liability, than raising fiat capital. I mean what’s the worst that happens if you lose fiat capital? They just print more of it.
Coinbase was incubated in YCombinator the Summer of 2012, touted and advertised as the paypal of Bitcoin – a pitch that seemed to resonate with venture capitalists. Upon graduating from Kindergarten YCombinator, Coinbase raised $600,000 from close friends of the incubator. They marketed to their users about being “different” than other Bitcoin businesses, as they believed in security. At minimum 90% of all bitcoins held by Coinbase would be stored in cold wallets, and secured accordingly. Their service’s ease of use that the consumer has come to expect, required playing ball with existing regulators, as fully respecting Bitcoin’s sovereignty would be suicide for such inexperienced leadership as Fred Ehrsam and Brian Armstrong.
What started as a vision to become Bitcon’s Paypal led to the consumption of more and more fiat capital. Although the business saw customers, they had yet to see a profit, and gambled on the future throughput of Bitcoin. They placed that bet with venture capitalists, and raised $6,000,000 in their first round of funding April of 2013. During this period, Bitcoin was rapidly escalating in price from approximately $10 per coin the previous Christmas, to over 200 that April, the same time Mt. Gox broke due to being a victim of their own success. Unfortunately this round of venture capital fed an addiction greater than heroin – Coinbase still couldn’t manage a profit.
The following December rolls around, the price per bitcoin hits all time highs of over $1,000, in part due to Mt.Gox halting all Bitcoin withdrawals. Coinbase raises $25,000,000 this month in a second round. A profit is still not reported.
They survive on this money for about a year. In January of 2015 Coinbase raises $75,000,000 in a third round of funding. Their valuation balloons to a nominal $500mn, when the problems begin. Gavin began fighting TMSR on forking the blockchain. In response, Brian Armstrong became one of Gavin’s most vocal allies in increasing the blocksize. Even when Bitpay started having financial problems and slowly separated themselves from the blocksize issue, Armstrong continued to push even testing the zombie BitcoinXT on Coinbase production servers.
Coinbase has all the symptoms of a company with too high of a burn rate, and too great of promises of riches to investors. Glass Door reports the company has 50-200 employees, meaning they can spend as much as $19mn on salaries and benefits annually, given the median pay of a Coinbase employee is approximately $121,000. My father once told me, “Human resources accounts for almost half of your expenses as a business.” This can range from 22%-51% depending on the skill sets of the employees involved (doctors cost more than assembly line workers). We’ll be generous, and use 48% for our figures, this would place Coinbase’s expenses at approximately $40mn per year. The company reports revenues no higher than $20mn, which would place them at a $19mn dollar deficit, $9mn if we’re being extremely generous. If they have a majority of the total $106mn they’ve raised, which I doubt, they have approximately 4-6 years of capital until bankruptcy. Given they have likely spent most of this capital, (hence needing to raise more), it could be much sooner, (hence the desperation to pull ETH volume from Poloniex).
No venture capitalist would give this company a 4th round of funding until a definite profit can be projected, which I doubt will happen any time soon. Thus the countdown timer is on! Brian Armstrong backed himself into a corner by overspending, something Bitcoin is meant to limit. I still can’t believe it takes $106mn for a Stanford graduate to learn its better to save than spend money.
Soap Box
> No venture capitalist would give this company a 4th round of funding until a definite profit can be projected
Except, of course, In-Q-Tel.
… which is the answer to the apparent conundrum you highlight.
Sadly, they will be kept afloat.