An aggressive Bitcoin trade got crypto VC shop Paradigm flying out of the gate. But Fred Ehrsam and Matt Huang aim to do more than just generate outsized returns for their blue-blooded backers — they want to take alt-currencies into finance's mainstream.
On a secluded back patio of the luxe Ventana Big Sur hotel, several dozen of the world’s leading cryptocurrency experts are playing a special after-dinner game. It’s a brisk weeknight in November 2019, and the attendees congregate around tall heaters to sip wine and hot chocolate and quiz each other – a nerdy, real-life reimagining of a computer science concept called the Byzantine Generals Problem, which imagines a leader passing orders to lieutenants of unreliable loyalty.
Pooling their deductive skills, the participants successfully root out three players instructed to lie. They’ve illustrated, in low-tech form, the power of the blockchain, which combines vast amounts of processing power to create a dynamic, but effectively unbreakable, decentralized public ledger. It’s the technological innovation underpinning crypto currencies like Bitcoin and Ethereum.
The game is a clever ice breaker for a secretive, off-record conference meant to unite different factions of the highly opinionated and cantankerous crypto community. Away from the posturing and flame wars of Telegram chats and Twitter threads, Byzantium’s hosts, an investment firm called Paradigm, are looking to remind this elite group that they’re more similar than not – all united by a common goal, to see crypto become more mainstream.
“There are challenges they’re all facing,” says Paradigm cofounder Matt Huang, who launched the firm with Coinbase cofounder Fred Ehrsam in 2018. “A lot of these folks are building things that look totally different in shape than what’s down the fairway on Sand Hill Road,” Huang adds, invoking the tech world’s most famous fundraising street where he once worked at top-drawer firm Sequoia.
They might disagree about the merits of Bitcoin versus Ethereum, or the role of tech giants like Facebook in setting the agenda. But Paradigm’s point is simple: compared to an outside world full of crypto skeptics, these entrepreneurs, researchers and top university professors are more alike than not. “I think people will look back at this as one of those rare moments in history, where it’s like the Lockheed Martin skunkworks team, or Pixar, or the Apollo program,” raves Ehrsam’s close pal Brian Armstrong, Coinbase’s billionaire CEO. “Where a small group of people came together for a brief moment, did something pretty impactful, and then it had all these huge downstream effects.”
Paradigm moved its $400 million of initial capital into Bitcoin and Ethereum in 2018 at burst-bubble discount prices, converting it back into greenbacks when needed for individual investments.
Nearly a year later, that mission remains a work in progress. When the coronavirus sent global stock markets tumbling in March, crypto assets like Bitcoin plunged, too, despite defenders’ insistence that such coins were a safe haven operating independently of old-school financial trends. In a world facing more pressing concerns – a pandemic, a presidential election, lives disrupted by the sudden move to digital and remote work – crypto hasn’t emerged as a much of a unifier, at least yet. When Armstrong announced in September that Coinbase wouldn’t tolerate political discussion outside of its financial mission, five percent of his workforce left.
All the more fuel for Paradigm, a new-look investment firm that has quickly emerged as a leader in the crypto category but has grander ambitions than outsized financial returns. Combining mainstream pedigrees and pioneering crypto cred, Ehrsam, 32 and Huang, 31, convinced top institutional investors like Harvard and Stanford to give them $750 million to invest in a market they were too blue-blooded to touch directly. The vehicle was odd, an open-ended fund with no deadline to return it back. Then they did something even more unusual: they plowed it all into cryptocurrencies, mostly Bitcoin, at a time when prices languished in post-bubble lows. It was aggressive and it could have backfired badly. But it didn’t. Bitcoin has tripled in value since Paradigm’s investment, meaning aside from any other bets it’s made, Paradigm’s starting bankroll is already worth 3x.
Both were relieved when the Bitcoin bubble burst in early 2018. Out flowed the dabblers, day traders, and daily Bitcoin price updates on CNBC.
“They started their business at the exact right time. They convinced some of the smartest investors in the world to allow them to buy Bitcoin and Ethereum and get paid for it,” says Mike Novogratz, the ex-hedge fund manager and crypto personality. “Hats off to the team that they get paid fees on it.”
But investors in Paradigm expect more from Ehrsam and Huang than just another savvy crypto trading shop. With their firm in rapid-hiring mode, its first exit under its belt and some of its startups showing signs of breaking out, the Forbes Under 30 alumni duo insist they’re just ahead of a curve that will soon make you care about crypto and its worldwide potential, too. “We think there is leverage in pouring fuel on the fire,” Ehrsam says. “But we certainly didn’t create the fire.”
If Paradigm’s timing was perfect, it was anything but accidental. At the height of the Bitcoin mania of 2017, Ehrsam had already stepped down from his president role at Coinbase, the $8 billion-valuation cryptocurrency marketplace he’d cofounded with Armstrong five years before. Tall and lanky with an old-fashioned part to his brown hair, the Duke graduate and former competitive gamer – as well as, briefly, Goldman Sachs trader – anxiously paced his apartment, filling his days penning blog posts and angel investing in startups. As Bitcoin topped $19,000 in December 2017, up nearly 2,400% in just one year, crypto insiders were as baffled as everyone else. Even at Coinbase board meetings, where Ehrsam still serves as a director, insiders marveled at the price mania and asked: “why is this happening?”
It was a question Silicon Valley’s big VC firms were asking, too. At Sequoia, the firm known for investing in companies from Apple and Google to WhatsApp and Stripe, Huang was looking closely at the space. A former entrepreneur who took a social analytics business through startup accelerator Y Combinator and sold it to Twitter, Huang – black-haired with an understated “reluctant sneakerhead” style – had owned Bitcoin personally since 2012. But like Ehrsam, he was put off by “parabolic” prices and a wave of unknown companies issuing their own tradeable tokens via a dubiously legal listing called an “initial coin offering,” or ICO.
Both were relieved when the Bitcoin bubble burst in early 2018. Out flowed the dabblers, day traders, and daily Bitcoin price updates on CNBC. To Ehrsam and Huang, those who remained represented the more attractive long-term investments – people who would look smart and have built big businesses by the time the hype cycle swung around again. Ehrsam and Huang went to institutions with a contrarian pitch: it was time for them to invest in their new firm which would craft a crypto strategy that would win over the long run.
Coinbase CEO Brian Armstrong cofounded the company with Paradigm cofounder Fred Ehrsam.
The non-profit endowments of top universities represent the most powerful – and difficult – stamp of approval for new fund managers in venture capital. The “public commotion” of 2017 wasn’t lost on them, Huang says, but allocation managers were loath to touch crypto directly or trust its un-credentialed early investors. With Coinbase backed by top VC firms and Sequoia’s reputation well-known, Paradigm looked safer. “Crypto is sort of filled with these hothead personalities, and there’s a common thread between Fred and Matt where they’re really calm, cool and collected,” says Garry Tan, an early Coinbase investor and partner at Initialized, a San Francisco-based VC shop.
The pitch worked. By October 2018, three of the highest-profile endowments, Harvard, Stanford and Yale, had joined Sequoia in investing in the mysterious new firm, their first major forays into backing a crypto-focused fund. (All three declined to comment for this story.) But Paradigm was even more unusual as an “open-ended” fund, meaning its partners have no fixed date upon which to return investors their capital (a more typical structure is 10 to 12 years). And Paradigm would invest differently than a normal VC firm, too: about 60% in alternative assets like digital tokens and the currencies themselves, the remaining 40% in the usual startup equity stakes.
Then Paradigm quietly pulled off its boldest move. VC investors usually “call,” or request by wire, the money they’ve raised in batches as it’s needed, say, 10% at a time. Ehrsam and Huang called all $400 million of their first close up front, then put it all into Ethereum and Bitcoin, using one of their own startups, crypto-focused trading desk Tagomi, to identify the cheapest places to convert pieces back into fiat currency as needed when investments required old-fashioned dollars.
In one fell swoop, Paradigm had given the universities and other elite backers like Huang’s old firm Sequoia, limited by their own charters from buying too much crypto, much more exposure to Bitcoin at a price of under $4,000 (it trades for $11,400 today). And with Paradigm doing the holding, their supporters would maintain a degree of separation and deniability if the trade went wrong. It was a neat trick that made it easy for Paradigm to secretly raise another $350 million from the same investor pool last year as a top-off on its first fund.
“If it works, it has tremendous potential. If it doesn’t, it’s a manageable allocation such that it’s not the end of the world,” Ehrsam says.
Two years isn’t much time in which to judge a venture fund. Given its mix of investments, Paradigm functions closer to a trade on the health of the crypto market itself. On that count, Ehrsam and Huang sound jubilant when they reconnect with Forbes at the end of July over Zoom. Forget March’s dip in prices, they say – instead focus on Bitcoin’s run of 80 days above $10,000, an ongoing record. And look at the space’s unlikely new allies, they argue: billionaire Paul Tudor Jones, announced he was buying Bitcoin as a hedge against inflation in May; major institutions including J.P. Morgan, Mastercard and Visa, all of which announced crypto plans over the summer. And Square invested about $50 million into Bitcoin earlier this month.
All told, 13 of Paradigm’s 28 investments so far have already raised or circulated tokens at higher valuations.
“You saw us in a period where crypto was sort of still obscure, where it was a little bit of a down cycle,” Ehrsam says. “We’re feeling now, and it’s always hard to predict these things, but it feels like we’re at the beginning of another serious ramp period for crypto.”
Paradigm’s been busy, too, hiring a second researcher, a general counsel and, in October, a crypto security expert, bringing its team to 15. One of its first investments, Tagomi, the New York-based startup Paradigm uses to trade its coins, was acquired by Coinbase in June for more than $75 million (a courtship from which Ehrsam recused himself). Others have reached significant scale in just a short time, including lending platform Compound, which issued a digital token now trading at a market cap of $460 million. At Uniswap, which creates more efficient markets for buyers and sellers of digital assets from Ethereum to the rights to a pair of branded socks, total volume of promised capital on-site has swelled to $2.9 billion from $20 million a year ago.
All told, 13 of Paradigm’s 28 investments so far have already raised or circulated tokens at higher valuations. That’s helped the firm establish itself as an elite player alongside the likes of Pantera Capital and Andreessen Horowitz’s semi-independent crypto funds, where early Coinbase investor Chris Dixon says the scene feels similar to when collaborative early-stage VC firms fought their way into the establishment more than a decade ago.
But even in Silicon Valley, where investors have often profited personally off early bets on Bitcoin and its ilk, skepticism about long-term crypto specialists abounds. At storied VC shop Kleiner Perkins, principal Monica Desai used to work at a Coinbase competitor, Blockchain, but now counts herself a generalist investor. Firms like Paradigm have an edge when it comes to deeply technical and infrastructure-focused opportunities, she says. But traditional VC firms will still get a crack at the rest. “Every crypto company is also an enterprise, or consumer, healthcare or fintech company,” she says.
Ehrsam and Huang say crypto’s broad enough as its own new asset class to keep a firm busy with opportunities full-time. But will those opportunities be any good? At Founders Fund, investor Keith Rabois says he’s made seven crypto investments; his firm, founded by Peter Thiel, remains intrigued by crypto’s potential and owns some Bitcoin, he says. But the firm isn’t seeing the same quality of talent flowing into the space as several years ago. “Entrepreneurs are just more interested in other topics,” he says, including climate change and healthcare.
“If we had an easy job, then the opportunity wouldn’t be interesting.”
Paradigm’s betting crypto is still where “the smartest people are hacking on the weekends,” as Huang puts it, even in a pandemic. But among the uninitiated, Paradigm’s only scratched the surface when it comes to its mission of bringing the sector mainstream. At Harvard Business School, associate professor Marco Di Maggio, himself an advisor to a South Korean crypto startup, says his MBA students and executive trainees are in agreement: “They believe crypto is, as of now, a lot of hype.”
Paradigm’s founders are rock stars in the crypto world but for the sector to go mainstream, they may need to do more than guide financial institutions to profits behind the scenes.
In the face of COVID-19, a second cocktail hour game of Byzantium’s Generals is on pause for this year. But Ehrsam and Huang say they’re committed for the long haul. “We think it’s still a pretty non-consensus view that crypto will be a huge trend, but in our view, it’s the most important technological trend of the next 20 years,” Ehrsam says. “If we had an easy job, then the opportunity wouldn’t be interesting.”
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