A16z's Answer: Why VCs Are Rushing into Crypto

Author: 0x49, Block Rhythm

Original Title: 《Black Cat, White Cat》

With a market capitalization exceeding 2 trillion USD, the competition among top tech giants is fierce. Just a few days ago, Microsoft surpassed Apple in market value, becoming the most valuable tech company on the planet.

Whenever Microsoft's stock price hits a new high, a certain story always comes up.

In 1995, an asset management company named Cascade Investment was quietly established, hiring a professional team of nearly a hundred people. Over the course of more than 20 years, this asset management company has grown larger and larger, not only fully owning the Ritz-Carlton hotels and nearly half of the Four Seasons hotel shares, but also being the largest farmland owner in the United States, with farmland equivalent to the land area of Hong Kong. To this day, this private asset management company has total assets exceeding 70 billion USD.

At the same time, Cascade Investment's returns in the capital markets are also among the top tier. Under the leadership of its professional team, in the first ten years since its establishment, the compound annual return rate of stock investments was 17%, surpassing the average return of 6% for S&P 500 constituents during the same period; after twenty years, the compound annual return rate was still 11%. From 1996 to 2019, the compound annual growth rate of stock prices for Warren Buffett's company Berkshire Hathaway was only 10.76%. The capital return rate of this asset management company is on par with that of the investment guru.

Interestingly, the founder behind Cascade Investment, which boasts 70 billion in total assets, a compound annual return rate exceeding that of the investment guru after 20 years, and is the largest farmland holder in the U.S., is none other than former world’s richest man Bill Gates.

If we only look at these numbers, Bill Gates' achievements with Cascade Investment are already quite impressive. But what if I told you that the funds Bill Gates invested in Cascade Investment came from the Microsoft stocks he sold?

When Microsoft first went public, Bill Gates held about 45% of Microsoft shares, but now he only holds 1.37%.

If he hadn't sold his Microsoft shares to establish Cascade Investment, those shares would now be worth over a trillion dollars, five times the wealth of today's richest man, Elon Musk.

This story can lead to different conclusions from various perspectives, but one undeniable conclusion is: most investment opportunities in this world are mediocre.

If you could travel back to the year 2000, would you choose to invest in Coca-Cola or in Google and Apple?

You can also explain from many angles how consumer goods companies endure, how Coca-Cola has stood the test of time for a century, and even how Coca-Cola creates value for society.

Of course, I do not believe that sugary carbonated drinks create more value for society than Google and Apple, but that does not affect my belief that Coca-Cola is one of the greatest business companies in the world. Yet even such an investment opportunity is still mediocre compared to the investment returns of top tech companies.

And today, the same story is still playing out in the VC circle.

Returns equal absolute correctness

We are long-term, patient investors. We've been investing in crypto assets for 5+ years. We've never sold any of those investments, and don't plan to any time soon. We structured the a16z crypto fund to be able to hold investments for 10+ years.

(This means that as investors, we are long-term and patient. Our experience in investing in the crypto space has exceeded 5 years. We have never sold any investment and will not do so in the short term. The a16z crypto fund is designed to hold investments for over 10 years.)

This was written when A16Z established a venture fund specifically for the crypto industry, a16z crypto, in 2018. This is a venture capital firm with absolute renown in the internet technology field, with a portfolio full of top applications like Instagram and Oculus VR. They were also one of the first institutions to formally invest in the crypto space, establishing a 350 million USD second crypto fund and a 2.2 billion USD third crypto fund.

The cryptocurrency trading platform Coinbase, which once caused a stir in the internet industry when it went public, is one of A16Z's investments. As the first trading platform in the industry to be listed on NASDAQ, Coinbase holds a significant position.

A16Z first invested in Coinbase in 2013, with a purchase price of 1 USD per share. Subsequently, they participated in Series C and Series E funding rounds. In addition, A16Z also purchased Coinbase shares from Union Square Ventures multiple times in the over-the-counter market, acquiring approximately 3.52 million shares for about 87.1 million USD.

According to the documents disclosed during Coinbase's IPO, A16Z holds COIN stock valued at approximately 9.7 billion USD, and it is fully liquid. Public records show that A16Z sold over 6 million shares of COIN on May 21 and May 24, generating nearly 1.4 billion USD in cash. A16Z's official website indicates that it has completed its exit from Coinbase investments, which may mean A16Z has sold all the shares it held.

Of course, we cannot calculate A16Z's total purchase cost and sale range, but according to public information, A16Z's net profit from its investment in Coinbase will exceed 7 billion USD.

7 billion USD may not convey the horror of the crypto industry on its own. Over the past few years, A16Z has disclosed 38 investments in the crypto field on its official website. BlockBeats summarized these based on public information and found that these projects completed a total of 2.512 billion USD in financing in the rounds involving A16Z (excluding projects with undisclosed amounts).

This means that A16Z's investment returns from Coinbase alone are already enough to cover all investment costs in crypto.

As Bitcoin prices continue to hit new highs, the valuations of all projects are rising. In the crypto space, issuing tokens for financing is more common than equity financing; most crypto projects sell tokens to investment institutions, and token returns can surpass stock returns. Coinbase is the only crypto investment exit publicly disclosed by A16Z, which means A16Z's return rate is still increasing.

In September 2018, A16Z purchased 15 million USD worth of MKR, which is now valued at approximately 171 million USD, yielding a return of about 1040%. It is worth mentioning that this transaction came from publicly purchasing on the secondary market, rather than early investment. A16Z led the Series A and B rounds of the NFT trading platform OpenSea, which now has a daily trading volume exceeding 50 million USD and a daily net income exceeding 1.25 million USD. Converted annually, OpenSea's net profit will exceed 400 million USD. Currently, OpenSea has no plans to issue tokens or go public, but based on its profitability, A16Z's return on this investment will not be lower than that of Coinbase. Meanwhile, Dapper Labs, the team with the strongest brand power in the NFT space, has also received 6 rounds of investment from A16Z, with a current valuation of 7.5 billion USD. You might question whether these returns are exaggerated, but if you had bought Bitcoin in April 2019, you would have seen a return of 16.5 times by now.

For venture capitalists, returns equal absolute correctness.

Black Cat, White Cat

A week ago, top investment firm Sequoia Capital announced it would abandon the traditional 10-year cycle theory of venture capital and rebranded as the Sequoia Fund. Sequoia stated, "Like the excellent founders in the world, we hope to have a lasting impact on the world, not just limited to 10 years."

Behind Sequoia's narrative shift lies a more important detail, but few are paying attention. While announcing the abandonment of the 10-year cycle theory as an investment support, Sequoia applied to the U.S. Securities and Exchange Commission to transition to a registered investment advisor (RIA), allowing for more flexible investments and enabling more funds to be allocated to crypto, commodities, and other areas.

This means that Sequoia, as one of the top venture capital institutions globally, is also beginning to allocate more funds to the crypto space, which was once criticized as a useless innovation.

After top investment institutions have frantically pursued new consumption in noodle shops and tea drinks, it seems that consumer goods are the assets that can bring them huge returns. A bowl of noodles, a cup of tea—these things that can never change our lives have become the targets of VC pursuit. Since for VCs, return rates are the most valued metric, they are unaware that in the crypto space, which they look down upon, return rates have long surpassed those of other industries. A16Z's data and Sequoia's announcement say it all: investing in one Coinbase is equivalent to investing in 100 consumer goods.

As Chen Yuetian stated in his article "Spark Prophecy 2021": VC should be a very romantic and idealistic profession.

Once, we invested in companies that built chips from sand and shaped the future of humanity; once, we invested in companies that aimed to bring computers into every household; once, we invested in companies that enabled real-time communication across countries, skin colors, and languages.

VCs should be the ones preserving the possibilities of various changes in this world. Prometheus brought fire; VCs should be the ones passing on the fire.

Today, from any perspective—whether it’s investment returns or narrative—the crypto world is already different. Should we continue to stay in the centralized internet world, caught in a spiral among giants, where sharing a Taobao product link on WeChat requires using millennial Martian language, while MetaVerse arrives and Facebook is still thinking about taxing in the new world? Or should we actively embrace Web 3.0, encouraging innovations at various protocol layers, and the changes in NFT incentives for creators, ultimately achieving a truly interconnected new world?

A16Z has already given us the answer.