William Leonard
Coinbase Ventures, the investment arm of Coinbase is one of the premier early-stage cryptocurrency in Web3 investment firms. Today on a podcast, I’m joined by Jonathan King, who was the Principal at Coinbase Ventures. We dive deep into the core thesis of the firm, how their domain expertise wins them deals and we also talk about the verticals Jonathan and team believe, have the ability to accelerate the adoption of Web3 technology. This was a fun episode to record as Jonathan is a Georgia Tech graduate and Metro Atlanta native, who also in this conversation shares his thoughts on the new and emerging crypto resources shaping Atlanta’s rapidly growing Web3 scene. Before we begin today’s episode, I want to reiterate how excited I am for the Valor VC Day Summit that is happening on December 15th at The Woodruff in Atlanta. And this is going to be a culmination of investors, founders in the ecosystem, and stakeholders who are shaping the future of capital in the south. And lastly, I really want to thank each and every one of you, all of who have listened, shared and reposted any of the podcast episodes from this year. Your support has been tremendous, and we’re looking forward to taking the podcast to new heights in 2023. Let’s jump right into today’s conversation. Jonathan, it is a pleasure to have you on today.
Jonathan King
Thanks for having me, sir. Super excited to dive in here and all things crypto, Web3, and VC.
William Leonard
Yes, sir. Let’s do it, man. I’m excited. You are obviously one of the top firms in this space. I know you have a lot of expertise and unique insight that you’ll bring to light in today’s conversation. But before we go down that path, I want our listeners to one, get a brief maybe a 30-second overview of Coinbase Ventures and then I want them to learn more about you, Jonathan King, as a person and as an investor in your journey of getting into venture capital now.
Jonathan King
Coinbase Ventures was started back in 2018. It was really a passion project by a few employees who still had full-time responsibilities across various corners of Coinbase. But essentially, the mission was to invest in exceptional founders that were advancing the crypto on the Web3 ecosystem as well as aligned with Coinbase as a mission for creating more economic freedom in the world. Today, we have approximately almost 400 companies in the portfolio. We’ve been one of the most active investors in the crypto and Web3 space, being more like an ecosystem fund investing at the earliest stages and indexing into certain categories. I would say some of our core investment practice areas include DeFi, and CeFi developer tooling, and I have the pleasure of leading that practice Web3 protocols and an NFT Metaverse. In terms of myself, I joined the Coinbase Ventures team about six months ago to lead our investment practice in Web3 infrastructure and developer tooling. Prior [to that] I worked at Microsoft. I was in a product role, building developer-facing products, and spent about eight years in the energy industry in various roles, cutting across product engineering and corporate strategy. I actually started my career as a software engineer. A little bit more on the technical side got exposed to crypto in late 2016 when Ethereum came on the scene and this whole promise of now being able to build applications on top of the blockchain and something that I’ve continued to follow since that point. I’m originally from New Orleans, Louisiana, so I’m a proud member of Who Dat Nation. I apologize to all of my Atlanta Falcons fans out there. Now, residing in the Atlanta area and really happy to be here.
William Leonard
I love that a lot. You have this technical background, you get introduced to crypto, I think you said in 2016 when Ethereum came on the scene? How did you get connected with the team over at Coinbase? Were you an active investor personally back in 2016?
Jonathan King
Back in 2016, personally, I was investing in various tokens and then over time started getting exposed to Angel investing as well, both within the crypto and Web3 space, as well as more traditional kinds of B2B SaaS and fintech companies. I say, given that most of my background has been in engineering and product, absolutely love product, I’m a product guy at heart. But I started thinking about, okay, what do I want to do for the next phase of my career? I had a quick stint while working for an oil and gas company out of Houston, Texas to do corporate strategy work. Part of my remit was to identify potential startups that the company could either acquire or establish a partnership with to accelerate the digital transformation journey. As I’m working with other corporate VCs in the space, I absolutely loved it. I was like, wow I get to meet all of these talented builders across a wide variety of different industry spectrums. I can see myself eventually moving over full-time into the VC space. With that kind of mission in mind, I would say moved back to Atlanta from Houston in late 2019, and decided to go get my MBA from the Georgia Tech Scheller College of Business, primarily focusing on venture finance as well as entrepreneurship. I really wanted to become a student of entrepreneurship if I wanted to be effective as a venture investor which led to several different VC internships. I had the pleasure of doing a fellowship with GoingVC and as I was graduating this past spring from Georgia Tech, had the opportunity to interview with Coinbase. They really wanted to hire someone that had a more operator, product focus background to lead investments and very technical areas as it relates to crypto infrastructure and developer tooling.
William Leonard
Now you’re at Coinbase Ventures, went to Georgia Tech, got your MBA, and today, I think you say at Coinbase Ventures has over 400 portfolio companies investing across early stages in many different sub-verticals under crypto. Tell us more about the stage you all are focused on, the types of startups you’re looking to back, and maybe some of the core value adds that you all are bringing to the companies you invest in. Obviously, serving as one of the biggest crypto players in the space, you have plenty of value as you’re bringing them. Kind of nail it down for us a bit and tell us more specifics there.
Jonathan King
Typically, I would say the majority of our investments, we think about like the concentration of our portfolio, has been from the pre-seed through Series A stage. Majority has probably pre-seed or seed stage investments. In some cases, companies could be pre-product, but it’s a really amazing idea that’s being kind of brought together by a very talented team that has seen some proof points of demand, whether that’s in the way of like signed partnerships or customer signal. In general, across different areas and my area in particular as it relates to crypto infrastructure and developer tooling, really looking at solutions and platforms that make it easier for developers to build on top of the blockchain. That can be things such as data infrastructure, new primitives such as node infrastructure, or cybersecurity tooling to make sure that we can reduce the number of vulnerabilities across the entire Web3 stack. I think across our five different practices which I mentioned DeFi or NFT Metaverse, we’re taking a very thematic approach. In some cases, we’ll index into a certain category just to get exposure, learn, and see how we can back some of the talented founders in those given spaces. And in another case, we would take a more concentrated approach, whether that’s doubling down into our existing portfolio into companies that we think might be category winners or companies that are showing very strong signs of product market fit. Obviously, that gives you the gambit across our typical approach as a fund in the crypto space.
William Leonard
It sounds like the approach is pretty varied, but also concentrated in the areas that you all are focusing on and thinking about your role, Jonathan, as a Principal. I’m sure you’re seeing a ton of deals and you mentioned that you’re personally focusing on platforms that are simplifying how developers can build on top of the blockchain. Tell us more about really what that entails. Some of the problems that exist in this space now and some of the opportunities that you’re seeing as a boots-on-the-ground investor in crypto and Web3.
Jonathan King
Obviously, our top line thesis for Web3 developer tools is, as Web3 gains momentum, there needs to be more robust developer tools and infrastructure in order for us to see that next stage of Web3 innovation, adoption, and ultimately growth. The blockchain is, obviously, relatively new. It’s still in its early stages and the primary use case was around trading different sets and tokens. Now, we’re starting to see different use cases emerge, whether that’s by way of like NFTs, decentralized autonomous organizations, or dowels on decentralized finance, and then everyone’s been hearing about metaverse and gaming. Just the emergence of consumer-facing applications, what’s going to be the next breakout consumer-facing applications that are really going to usher in that next wave of billions of users into crypto? When you zoom out and think about, okay, what needs to happen in terms of those apps to come to fruition? I’m taking a more picks and shovels approach to say, okay, what are the underlying infrastructure primitives that need to power on those applications? Typically, you think about a Web3 app or some people might say, like a DAP, right? Decentralized application. There are different premises, I would say, the front end between Web2 and Web3 is very similar, right? You’re using either JavaScript or some version to power your front end but where do you see significant differences? On the Web2 side, it’s very centralized. You have a centralized database, a server is deployed into one of the leading cloud providers. On Web3, in a decentralized context, you can’t connect directly to the blockchain to extract data. You have to use something that we call an RPC node, which is pretty much like a middleware type of processing layer that allows you to extract data from the blockchain, then you might need to add other primitives such as indexing and querying services, right? How do you pull these different data elements in a decentralized manner and decentralized storage of that data? Then, when it comes to the actual consumer-to-end-user wallets, we’re all very familiar with wallets for assigning and authorizing transactions. Across the board, as relates to the back-end infrastructure that powers these apps, there are various different primitives. Some of those primitives exist in Web2 today, but are augmented to fit certain use cases in Web3. We can take a kind of a broad approach, spending time studying how developer tooling DevOps evolved in the Web2 side, what’s applicable to Web3, and what could be new that’s only specific to Web3 that we might want to take a look at and invest in making the overall developer experience for Web3 very simple and onboard more developers to power that next wave of applications.
William Leonard
So you’re looking to find the infrastructure that is going to help drive innovation and greater adoption of these types of technologies at scale. This is just like a tangential question. Do you see Web3 adoption on the horizon within a corporate or enterprise setting? I’d be curious to hear your thoughts if that is something you see viable over the short to medium-term horizon. Or is that more of a longer-term horizon play?
Jonathan King
That’s a great question. I’ve been spending more time thinking about the enterprise use cases. For Web3, I remember back when I was working in the industrial space and it was all convergence of IoT and blockchain, and that was all at its height back in 2015/2016, but then it quickly fizzled. Now, we’re kind of seeing more sentiment from enterprises come into play. I think that in the short to medium term, you will see more enterprises approaching Web3 from a customer loyalty brand engagement perspective You may have seen the recent Starbucks NFT announcement, and what Reddit did recently with their avatars which essentially are NFT’s. That was absolutely phenomenal to see the growth there. I do see that and they’re certainly players in the dev tool space around building low code/no code platforms to make it easier for some of these enterprises to take advantage of Web3. Long term, I do think that we will have more adoption from enterprises really addressing much more complex use cases to support their business processes, but underlying, being powered by the blockchain.
William Leonard
I agree. I saw Chipotle also doing it. I think we’re starting to see it in more consumer-facing enterprises which are right in line with what you said. You’re writing this thesis and formulating a thesis around how these tools can be applied specifically to particular use cases. How are you writing this thesis? What are the actions that have to go into developing a thesis, building it out, and then sort of executing that thesis from your viewpoint?
Jonathan King
Part of my role is to produce one to two thematic research pieces on a quarterly basis, and right now, I’m focusing on Web3 security I’ll share some more details there, but ultimately I would say my starting point on writing a thesis is really just trying to understand the data of how it’s done today. We published our thesis on the broad Web3 developer stack back in September. The first step was looking at how many developers are actually in Web3 today. Electric Capital, another crypto VC that we work closely with, publish a report to say, hey, there are approximately 18,000 monthly active developers at the end of December 2021. I’m looking forward to seeing the latest report that comes out. From looking at that data, understanding what type of tools are used, getting that type of research, and might be a manner of just interviewing different developers. I remember I spent quite a bit of time on Twitter, reaching out to as many developers as I could, I also spoke to different engineers across our portfolio to understand what are the pain points that you’re trying to solve, how challenging is it to approach this certain use case, and what tools are you actually using. Once you kind of had that data plus the contacts from actual engineers, it pretty much comes together in terms of how you might piece together the overall landscape itself, right? Part of that landscape is trying to look at these different companies, seeing how they’re defining themselves, branding themselves, and what specific hero scenarios that they are addressing, then kind of mirroring that landscape to say, how does this match up with let’s say Web2 DevOps, for example, for different types of trends or signal that might inform where long term value accrual may happen within that landscape? Once we kind of answer those questions, then it’s more so like taking in certain categories we may want to take a more indexing approach, where we will invest into a wide variety of companies and in certain categories, which we think are mature, and eventually, we will see some category winners, take a more concentrated approach for the companies that are approaching product market fit.
William Leonard
That makes a lot of sense. It’s a thoughtful, curated process that I’m sure it’s refined every time you all are thinking about a thematic idea internally. I love how you broke that down for us, it makes a lot of sense. Shifting the conversation here a bit, Jonathan, I would love to hear your thoughts on what you’re seeing in the broader crypto markets right now from a macroeconomic perspective. And then off the back of that would love to hear your advice for founders building in crypto and Web3, how can they approach fundraising right now in this type of market today?
Jonathan King
Absolutely. Great question, William. Just kind of talking about, I guess, like the macroeconomic environment, at the end of Q3, CB Insights published a study looking at the total venture capital funding. You look at Q2 of this year to Q3 funding, overall was down approximately 35%. Likewise, crypto was also impacted. Funding was down approximately, I want to say, 34%, quarter over quarter. I think that’s a symptom that’s derived from a few reasons. One, founders aren’t raising in this environment, waiting for valuations to be a lot more friendly compared to what it was in 2021, where deals are being done every one to two days. That’s one reason. Two, I think VCs, especially crypto VCs, are taking a more pragmatic approach, taking a more thesis-driven approach, and really being more patient overall in terms of seeing how the market is going to evolve, spending some more time in terms of conducting due diligence, and really pressure testing some of the claims that they’re seeing in a given a segment or a given kind of category that they’re interested in. That’s what I’m seeing in an environment. Deal cycles, of course, are taking a long time. In terms of my advice for founders, one of the things that when I’m having these founder discussions that I spend more time on, is really just trying to understand, yes, you have a good idea, perhaps you might be kind of pre-revenue, but what are the proof points of demand? What are your North star metrics, how are you measuring those metrics, and what’s your performance to date? Those metrics can be in the form of the number of signed partnerships, these are the number of customers, and customer LOIs that we have so we can get into an MVP release. This is what we think will be the quantifiable ARR that can be generated by each of those accounts. I would say that’s one aspect, having an understanding of the customer’s pain point and how your solution is actually solving that pain point. The blockchain, it’s a very technical space, and we meet some of the most talented very technology-driven founders, but what is the customer pain, right? What is the actual use case that you’re going after? What is your solution that solves that use case and then gets into all of the technology nuances? I think it’s an important competitive landscape and really kind of selling your value proposition and differentiation. In certain ecosystems, let’s say, Ethereum, for example, we’re getting to a state where some of these companies are maturing or reaching product market fit. So if you’re building in that ecosystem, what makes you differentiated in that regard? I would say that that’s my top three things. Understanding the customer pain point and your overall value proposition relative to that pain point, being able to effectively communicate your proof points of demand, and then lastly, really emphasizing your overall unique differentiation and value add.
William Leonard
I love that you broke that down. I hope all the founders who are building in crypto and Web3 were listening. You broke it down into three things, how they can separate their pitch, harp on the customer pain point, demonstrate and talk about your proof points of demand, and talk about how you’re differentiated from a product perspective. I hear that all the time. “Oh, we’re different.” But it’s more like, we’re just quicker, we’re better, we’re faster. Better UI, better UX, but from a product perspective? What core problems are you solving that your customers cannot live without because you’re using your product? I think those are the things that I’m starting to see more of in pitches now. You have to pull for it sometimes but I think founders are taking heed and listening into that now. You mentioned this, crypto is such a fast-moving space in terms of new technologies coming into the market dying, and going out? How do you stay in touch with new technologies that are coming to the market? Are you following any subreddits? Any medium posts? What is the secret sauce for you in terms of staying up-to-date in the fast-moving crypto space?
Jonathan King
For me, especially joining the space six months ago, man, it was like drinking from a firehose. I was sitting there and there are so many different newsletters and people to follow on Twitter, how do I stay up to date so there are a couple of different newsletters that I probably read on a daily basis? I would say the majority of my time, I probably spend it on Twitter, and this is coming from a guy that used to be inside Twitter but I was not actively tweeting. But now kind of just in this role, I’ve actually been able to find a very valuable signal from Twitter, following some of the thought leaders within the crypto space, just using Twitter search as I’m doing this dramatic research and looking for a certain key phrase in terms of a company or companies building to address a certain pain point. That’s probably where I get the majority of my signal. Also, talking to other founders in our portfolio, I think I often find that speaking to our founders that we’ve backed, they’re a good source of referring other founders in the space that we should be talking to. That’s always helpful. And then also, of course, Coinbase. Coinbase has been around for some time. We have very, very talented expertise entirely. Being able to kind of tap into that expertise to drive some of our thinking in a given area has been invaluable to me.
William Leonard
I agree. 100%. Twitter has a lot of noise, but it has some beneficial signals. I think it’s about following the right people and putting them on your timeline, and I think Twitter has certain hashtags that you can follow and be a part of. That’s literally what 90% of your timeline may be. There are venture capital hashtags, there are crypto hashtags, so you can curate your timeline to be pretty specific in terms of interests or research that you’re looking to do. I appreciate that perspective a lot. As we’re wrapping up the conversation here, Jonathan, you’re here boots on the ground in Atlanta. I feel like there’s a wildly concerted effort right now in the city to immerse itself further in a crypto scene. We’re seeing a lot of the necessary infrastructure being built here like the Atlanta Blockchain Center just opened up earlier this year. Web3 ATL is a really fascinating organization. Your presence, obviously, is very meaningful. We’ve got later-stage companies here that are building in crypto, like Yellow Card. How do you see the crypto world in Atlanta becoming more prominent?
Jonathan King
Man, that’s something I’m super excited about. I continue to grow more and more bullish on what we call #cryptoAT. I think that’s for a couple of reasons. One, you have Marlon Williams over there that opened the Atlanta Blockchain Center in Buckhead back in June. I think Marlon has been able to get 100 people weekly, consistently, every Thursday, discussing various topics bringing in different kinds of like thought leaders into the space just to raise the level of awareness and with a focus on helping people from underrepresented communities participate in crypto and Web3. Definitely gotta give kudos there for doing a great job creating community. I have the pleasure of being a part of the immutable program, which is providing mentorship to various founders in the crypto and Web3 space through the Atlanta Blockchain Center. Secondly, let me talk about Web3 ATL. Web3 ATL surprisingly was a conference that was held back in October, hosted by the Georgia Tech undergraduate student blockchain center. In less than three months, they were able to get 200 plus participants and bring the community together. They had approximately, I want to say, 60 Plus speakers. For me having been able to speak at that event, but also to be able to network with so many crypto and Web3 enthusiast practitioners, builders, investors, etc. that’s just here locally in Atlanta. What was striking to me is Atlanta has such a strong presence in Web3, but what we need, it was just like that community to be formed. We needed awareness of each other. Very similar to how you and I connected just through different investor circles, and so very excited. Obviously, you have Art Basel happening this weekend. Miami continues to be the hub for crypto within the southeast, but I will say, don’t overlook Atlanta. I think we have a voice. I’m excited to see how the city evolves and begins to adapt to this new wave of innovation.
William Leonard
I think the city has a strong wave of women’s momentum behind it right now. You have a mayor who is bringing forth tech-forward initiatives to continue that momentum. That is so pivotal to the growth of that ecosystem here in Atlanta. Jonathan, as we wrap up the conversation, what’s ahead for you and the Coinbase Team in 2023? What are you most looking forward to?
Jonathan King
In my role, I’d say, and I mentioned this earlier, one of the things I’m really focused on is Web3 security tooling for developers. If you think back to 2020, we’ve had approximately $5 billion worth of cryptocurrency that’s been stolen by various hackers, individual hackers, and more advanced hacker groups. Now, of course, I have such a negative blight on the industry at large, however, one of the things that we do have the silver lining is that we’ve now kind of accumulated a good amount of data in terms of different attack types, lessons learned, etc. That data feeds into different threat intelligence models. On top of those threat intelligence models, you begin being able to build better consumer security in wallets. If you’re interacting with a smart contract, you get some type of flag to say, hey, this smart contract might be malicious or you can simulate what exactly that smart contract will do right before your expertise. We want to be able to protect consumers. I think there are things around wallets, private key management, identity, and access controls that are starting to emerge in the space. At a smart contract and protocol level, we think about different code vulnerabilities, better testing frameworks, and different, I would say, security vulnerability detection methods that are starting to emerge. And then lastly, for apps in production, how do you do operational security monitoring built on top of the data that we’ve accumulated blockchain forensics, for example? I think security at large is something that I’m going to be focusing on going into Q1, zooming out, of course, some of our areas that we’re exploring, and continuing to invest across different new emerging DeFi primitives as well. The last I would say is gaming. Personally, as a gamer, if you look at the initial set of blockchain games or Web3 games, the whole ethos was around plates being earned. But I would say a lot of those games were 80% blockchain, but 20% gaming, so for a hardcore game, that’s a no-go. I do believe in the next 12 to 18 months, we’ll see some very major breakout games built on top of the blockchain that is played to have fun first, and then perhaps sometimes earn. I’d say those are some of the areas that I’m excited about and then we’re actively exploring going forward.
William Leonard
Sounds like security is the big theme there and gaming as well. That is something that I’ve heard from multiple investors and gamers is that the game needs to be more intuitive. The potential is there, but they just need to become more player-centric. We’ll see. Hopefully, some great companies can lead the charge on that. Jonathan, this was fascinating and insightful. Our listeners are going to extract tons of value from the knowledge that you shared about the focus areas of Coinbase Ventures, your personal interests, and just broader knowledge about the crypto ecosystem. Especially here in Atlanta, there’s so much momentum, so many good things happening, and so many great people that are sparking these movements. Looking forward to seeing how this ecosystem continues to take shape over the next couple of years here. Jonathan, it was certainly a pleasure having you on.
Jonathan King
Thanks, William. I appreciate it.
William Leonard
Cheers. Take care.
Lisa Calhoun
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