Coinbase is doing something completely new in the world of crypto: it’s going on an M&A shopping spree. The company has already acquired three companies this year, and is in talks for a fourth. Plus, it just hired Emilie Choi, LinkedIn’s top dealmaker, to help Coinbase step up its acquisition game.
Using a playbook perfected by Google, Coinbase wants to build its team with ambitious talent from the field and to fill its portfolio with cutting edge technology that will expand the world’s understanding of what crypto can mean and do.
The goal is to transform Coinbase into the one-stop shop that brings crypto to the masses and to ensure that its booming business can withstand the wild fluctuations in bitcoin prices that currently dictate its revenue stream.
But the strategy has put Coinbase at odds with the freewheeling leanings of the cryptocommunity, some of whom see its moves as a competition-crushing consolidation spree. And as Choi tries to make the case for Coinbase in the fast-changing crypto landscape, the effort will test Coinbase itself, which has until now been driven by the social connections of its well-regarded founder.
Here’s how the company plans to do it.
Coinbase’s secret weapon: a seasoned vet in tech M&A
Leading the charge is Choi, VP of corporate and business development and business operations at Coinbase, and a recent addition from LinkedIn.
Among her goals: to echo Google’s acquisition strategy in the early days of Web 2.0 by acquiring products and talent that are pushing the boundaries of what’s possible with the technology at hand. Think Google’s 2004 acquisition of Keyhole, which provided the foundation for Google Earth.
While Choi is new to cryptocurrency, she’s spent most of her career in corporate development. After two years at Yahoo, Choi got an MBA from the acclaimed Wharton School. From there, she joined the corporate development team at the Warner Bros. movie studio, before setting up camp for over eight years as head of corporate development at LinkedIn, where she oversaw more than 40 deals.
Choi told Business Insider that she is pursuing four types of acquisitions: acquihires and “tuck-ins”, which allow Coinbase to snap up talent and to get important product features; strategic acquisitions, which includes businesses that Coinbase wants in its portfolio; and fintech companies which have compliance experience in the financial space that Coinbase wants access too.
“There are people in the world working on things that we care deeply about,” Choi said. “If there are teams that have been thinking about these things and understand the edge cases, we want them working for us.”
While building out its portfolio internally is always an option, sources said that the company has been too burdened by its quick success to put the necessary internal resources toward research and development.
“Their growth last year has never happened in the history of Silicon Valley,” one insider said. “It was a breath-taking year and a real challenge to build the senior team quickly and get over the growing pains of service issues.”
Riding the wave of excitement that sent bitcoin’s price soaring toward $20,000, Coinbase’s core cryptocurrency exchange business boomed. The company saw $1 billion in revenue in 2017.
And it’s filled its coffers with venture capital. Last August, the company raised $100 million led by IVP at a $1.6 billion valuation. It has since privately touted a valuation of $8 billion in equity negotiations, according to Recode.
It’s unclear exactly how much moola is allocated to M&A. So far all of its deals have been on the small-side.
Coinbase reportedly paid around $100 million to acquire Earn, in its largest acquisition to date. But Choi said most of its tuck-ins are under the $20 million mark, and that acquihires are little more than employment offers, though sometimes they include a portion of money that goes back to investors.
Coinbase is acquiring talent and products to make crypto stick
Coinbase may not be the largest cryptocurrency exchange by volume, but it’s widely understood to be the most popular — especially with newcomers to the cryptocurrency market who are looking for a simple and direct way to trade digital coins.
Its mixed position between tech and finance means that the company has to keep its eyes open to two industries at once.
“We’re the ultimate mullet company: business in the front, party in the back,” Choi said, describing a metaphor used by her colleague CTO Balaji Srinivasan, who joined the company through its Earn.com acquisition.
“We have these incredibly strong core businesses that leverage the power of crypto and are crypto first, but they look like financial institutions. The back part is the bleeding-edge, crypto-first services that we invest in because of the power of our core businesses,” she said.
As it stands, Coinbase’s portfolio includes its core cryptocurrency exchange; another exchange called GDAX, which is aimed at institutional traders; a cryptocurrency storage business called Coinbase Custody; and a unit called Toshi, which is an open-source browser for Ethereum developers.
But sources close to the company characterized it as being extremely dependent on its exchange business, which itself is impacted by the volatile prices of cryptocurrencies.
Choi said her sights are set on finding companies which can help Coinbase build out Custody and Toshi, as well adding new features that consumers find “delightful,” like tools that make it easier to do taxes within the platform.
Coinbase’s two most recent acquisitions reflect these goals.
In April, the company acquired Cipher Browser, an ethereum wallet developed by Pete Kim. Kim is now head of engineering for Toshi, Coinbase’s ethereum browser project and a key area of growth for the company.
Coinbase hopes that Toshi will improve the user experience when using applications built on the ethereum blockchain, and give customers more reasons to engage with cryptocurrencies in their day-to-day lives.
A few days after Cipher, Coinbase announced its acquisition of Earn.com, and made its CEO and co-founder Balaji Srinivasan Coinbase’s first ever chief technology officer.
Earn lets people, like marketers, send an email and pay its recipient in cryptocurrency if they reply or compete a specific task. Armstrong said in a blog post that he plans to double down on Earn “as they have built a paid email product that is arguably one of the earliest practical blockchain applications to achieve meaningful traction.” It will remain a separate service from the rest of Coinbase.
Joining the “Coinbase mafia” does have its downsides
While Choi runs the M&A operation, it’s not without ample input from Coinbase CEO Brian Armstrong.
Armstrong, who co-founded the company, uses his personal network to bolster the company’s recruiting efforts, sources said. So far, he’s had a hand in nearly all of the acquisitions and many of the deals have been with people he’s close with.
That may say more about the startup scene in San Francisco than it does about Coinbase’s strategy. Most cryptocurrency and blockchain startups are still extremely young, and many of the most successful people in the space have been working along side one another since the beginning.
“They clearly are supporting this notion of a Coinbase mafia and I don’t think that’s on accident,” said Spencer Bogart, partner at Coinbase investor Blockchain Capital, alluding to the successful group of tech founders known as the PayPal mafia.
Employees are encouraged to work on their own side projects, Bogart said, which sweetens the deal for founders worried about joining a larger company.
But for those who follow Coinbase, it’s not all rainbows and unicorns. As one of the most centralized companies in a digital community that’s obsessed with decentralization, Coinbase takes its share of criticism online. Some critics see its acquisitions as little more than a competition-crushing consolidation spree, though sources said there is little truth to this.
“Within our industry, Coinbase can take some heat because they’re the most bank like. They’re the most conservative in the industry,” said Bogart. “The crown always rests heavy.”
Plus, with most of Coinbase’s deals sitting under $20 million, venture capital firms aren’t getting a very big return on investment — at least for the time being.
“I would love to see them do something bigger. It’s hard to view them as a viable exit when they’re buying small chunks. That’s not an ideal outcome,” said Bogart, whose firm has had six exits since forming in 2013.
Broadly speaking, there have been few substantial acquisitions in cryptocurrency. In February, Poloniex was acquired by Circle Internet Financial for a reported $400 million.
There is one scenario, though, which Bogart said could justify the small purchase price: if a company is “facing competitive threats.”
“Taking 2x on the investment and de-risking it could be a positive opportunity,” he said.
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