The Golden Ticket

How Adam Draper & Garry Tan, two of Coinbase's earliest investors, struck crypto gold.

Adam Draper remembers ordering hot chocolate with whipped cream when he sat down with Coinbase CEO Brian Armstrong at Red Rock Coffee in Mountain View in 2012. Draper was 26. “Now I drink coffee,” an older and wiser 35-year-old Draper told me.

Draper first heard about Coinbase during Y Combinator’s Summer 2012 Demo Day. He didn’t watch the full presentation. “I think I might have caught a moment of his pitch,” Draper remembers. Instead, he reviewed the one-liners from a list of the startups presenting. Of the roughly 75 companies presenting that day, two or three companies stood out to him. Coinbase made that short list. He remembers briefly speaking to Armstrong at Demo Day. “I didn't really know what a digital currency was and I didn't realize there could be a marketplace for said digital currency.”

At 5:38 p.m. on August 21, 2012, as Demo Day was wrapping up, Draper emailed Armstrong asking to see the company’s slide deck. Armstrong replied the next day with the presentation he’d given the day before. The Bitcoin company CEO wrote, “We have $320k committed already and will close it at $1M for this round. What can I do to help you make a decision to invest in Coinbase? (happy to meet in person or chat by phone).”

The two arranged a meeting at Red Rock Coffee. Draper had “for all intents and purposes” worked at a “failed startup.” (And, of course, his father, grandfather, and great-grandfather were all venture capitalists.) The younger Draper hadn’t yet founded his venture firm, Boost VC.

One-on-one, Armstrong impressed Draper with his gumption. “He's the only founder who had ever said, ‘this could be a trillion dollar market,’” Draper remembers.

Draper didn’t agree to invest during that meeting. He needed to talk to some people in the Bitcoin world. Even after those conversations, he was on the fence.

Then he had a revelation.

“I was on the toilet, where all the greatest epiphanies are had, and I was skimming a magazine that had been next to my toilet,” Draper recalls. “It was Economist magazine. There was an article — it was talking about the bubble bursting of bitcoin.” The October 2011 article began, “BITCOIN, briefly the world's favorite cryptocurrency, is in trouble.”

But Draper came to a very different conclusion, reading the months-old piece that had been gathering dust in his bathroom. “It was honestly a pretty good article,” Draper says. “They thought it was over.” But now many months later, Bitcoin was still going. He thought to himself, “Somebody wants this thing to exist, this Bitcoin thing.”

“I called Brian. I don't think I was still on the toilet — I don't think he cared as much about me being on the toilet. I was like, ‘I’m in.’”

Even experts at picking potential startups had a lot of reasons to be skeptical about Coinbase.

“Brian applied to YC. We read the application, honestly, there was a lot of hair on it from our perspective. It had a lot of red flags,” remembers Harj Taggar, a partner at YC.

Armstrong had applied with founders that he’d met on the website Hacker News, Taggar says. He hadn’t even quit his job at Airbnb, according to Taggar. “None of us knew what Bitcoin really was — at the time it had mostly bad connotations.”

But Garry Tan, who was a Y Combinator partner at the time, “inf-ed” Coinbase’s application. YC co-founder Paul Graham had concocted a scoring system to decide whether applications made it through to interviews. Tan basically gave it a vote of infinity, so Armstrong sailed through to the next round.

During the interview, other partners started to get on board. “PG very quickly, in ten minutes, got it. This has a very small chance of succeeding but if it succeeds it’s going to be a gigantically huge company,” Taggar remembers.

Armstrong ended up doing Y Combinator without a co-founder. During YC, Armstrong thought through potential co-founders and talked design with Tan. Armstrong changed the company’s name from Bitbank to Coinbase in time for his presentation at Demo Day. During his time at YC, he worked to build a relationship with Silicon Valley Bank.

Coinbase wasn’t nearly the hottest company in YC’s Summer 2012 batch. Neither Coinbase, nor fellow batch member Instacart, were among TechCrunch’s ten favorite startups from the group. TechCrunch writers Josh Constine, Anthony Ha, Colleen Taylor, and Kim-Mai Cutler were more excited about Vastrm, which was described as a “Warby Parker for shirts.” FundersClub, another batch member that the writers were excited about, ended up investing in Coinbase’s seed round. The TechCrunch writers smartly ranked Zapier, another member of that batch, among their favorites.

Taggar doesn’t remember Armstrong’s pitch being particularly dynamic. “I would be lying if I was like ‘oh yeah it's very clear he was destined to be the biggest IPO ever from my interactions with him in YC,’” Taggar said. “The standout thing to me was just how unremarkable the early days of it were. It was just a truly intrinsically motivated guy who didn't try to get a ton of attention or the spotlight and just kept building for a long time.”

Together, Taggar, Tan, and Alexis Ohanian had formed a fund called Initialized to invest in promising YC startups. “We were the young, poor YC partners who ran out of personal money to invest,” Tan remembers. So the trio raised money from limited partners, including Alex Banghash, a prolific fund investor.

On Demo Day, Tan cut Coinbase a $50,000 check.

One source pegged Draper’s seed check at $25,000. Draper declined to say how much he’d invested.

YC’s Start Fund, which was backed by Ron Conway’s SV Angel and Yuri Milner, invested $150,000. Greg Kidd was also among Coinbase’s seed investors. Armstrong raised about $600,000 in that first fundraising round, not the $1 million he had hoped for. “He didn't get all the way there,” Tan remembers.

A few months later, in February 2013, Coinbase started selling out of Bitcoin, Tan says. Initialized wrote a second check of $200,000 that was uncapped with discount to the Series A round, Tan says.

Assuming a $100 billion valuation, Tan’s stake in Coinbase could run in the high nine digits.

Investors are eagerly awaiting today’s public listing to see what their stakes are worth.

“We were learning how to be venture capitalists way back then,” Tan reflects, wishing he’d invested even more in Coinbase at the time. Tan had conviction when so few others did. Firms like Union Square Ventures and Ribbit Capital amassed much larger positions in Coinbase by investing in the subsequent Series A round and beyond.

Tan says wistfully, “It’s punched my golden ticket to be in the same league.”

For his part, Draper feels incredibly fortunate. “My grandfather said something to me: ‘Life has a way of presenting you with luck, and it's those that identify and take it that end up being successful.’ I don't know why, but I was very, very lucky when I was 26 and then I kept being lucky.”

Newcomer update

You might have read in the New York Times that I’m teaming up with seven other newsletter writers to create a Discord server called Sidechannel.

This is going to be an experiment — but I’m really excited. In my dream world, it will be a place to overhear the sort of conversations that would have set your ears on fire at Coupa Café or at the Creamery. In our threads, we can debate desperate startup acquisitions, lofty funding rounds, and shady growth tactics.

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