Multicoin Capital Foundation: “Think Different”

Consider the Multicoin investment process from start to finish:

• Thesis Formation. Some funds act opportunistically by investing in great founders who identify new ideas. This is not Multicoin’s style.
• Search Opportunities. Once Multicoin has a thesis, it looks for projects with a similar world view. It needs to create some buzz to do this.
• Evaluation of investments. The fund funds only those ventures that it believes are “first-rate right.” Adherence to this rule has resulted in the omission of some winners.
• Identifying blind spots. To sharpen its thinking and get rid of weak arguments, Multicoin creates investment committees that operate in a debate format.
• Big bets. Once Multicoin has decided to invest in a company, it thinks about how to size its investment. Part of what has made it most effective is its willingness to make big bets.
• Adding value. With few exceptions, every investor tries to maintain their portfolio companies. Multicoin has a particularly deep regard for its founders and actively supports them.
• Aggressively doubles down on bets. Part of Multicoin’s approach is to support its best projects and invest extra in them. It does this even when other venture capitalists seem to be taking a step back.

Step 1: Form the thesis statement

Multicoin’s thesis formation begins with the question, “What’s right?”

They first identify a prospective market. This can start at a high level-for example, choosing something like “DAO” as a starting point-before moving on to a narrower topic.

Once the space is chosen, Multicoin begins trying to understand the “dimensions” and “designs” in the space. How can different teams use a relevant capability? Why might they use a certain tech stack instead of another? What choices and concessions will they have to make?

Once the plan is in place, Multicoin hones in on the most interesting elements of the design space, looking for places to make “big, targeted bets.”

For example, at the end of 2020, Multicoin published “Tradeoffs in the Decentralized FTX Space. The article described the possibility of a “decentralized FTX” and examined the pros and cons of different approaches.

Four months after Multicoin published this article, it announced an investment in Perpetual Protocol, one of the identified contenders.

In this respect, Multicoin seems to be perfecting a kind of “enterprise manifestation,” using its blog as a visualization board to call out the startups it wants to see. Discussions about decentralized storage turn into investments in Arweave, and thoughts about speed and scalability lead to Solana.

While the foundation prefers to work on a “learn first, implement later” basis, the foundation recognizes that there are times for more flexibility.

Approximately 10% of Multicoin investments fall into the second camp. One such example is Project Galaxy, a provider of digital credentials. Although Multicoin did not have a clear idea of how the market would evolve, Multicoin convinced Project Galaxy’s founder and felt that the Galaxy team had a viable strategy.

Step 2: Initial Capabilities

Once Multicoin comes up with a thesis, it looks for suitable companies. As with other funds, it relies on inbound and outbound interest.

Since its inception, much of Multicoin’s efforts have focused on growing inbound interest. From the beginning, Jane and Samani understood the power of building an audience, a recognition that helped their magazine create one of the best compilations of crypto-thinking in the space.

A relatively new source of potential inbound traffic has emerged thanks to the foundation’s close collaboration with Solana. As a brilliant marketing move, hackathons around the world are being promoted, and Multicoin maintains a presence in almost all of them. As the next generation of Solana developers is built, many, will gravitate to Multicoin.

A significant percentage of opportunities come through outgoing effort. This happens both passively and actively. Everyone at Multicoin is an omnivorous consumer of content, with Samani being particularly prolific

Multicoin also looks for prospects by talking to other investors and project founders. In the early days of the fund, both partners traveled extensively to expand their network and meet hopeful project founders. Samani noted that in both 2018 and 2019, he was on the road 120 days a year, attending conferences and hackathons from coast to coast, from continent to continent.

Step 3: Evaluation

Multicoin examines how the project fits its own view of the market. Does it have the benefits that Multicoin considers most important? How will this play out as the project evolves?

The goal is to make sure Multicoin has thought through the maturation of the investment and the potential second- and third-order consequences of initial success or failure. This assessment, more than anything else, is at the heart of the fund’s valuation, and it is central to the investment committee meetings.

Compared to a market assessment, Multicoin spends “shockingly little time on the team and product. This is partly due to the fact that project founders often do a poor job of explaining the novelty of their projects.

In addition to these factors, the team evaluates what systemic benefits the business might have. Samani and Jane cited network effects and psychological arbitrage as interesting lenses to evaluate.

Helium is an example of a business with profound network effects that may still be underestimated. A decentralized wireless network becomes increasingly powerful and productive as nodes join the system.

While not a Multicoin investment, PoolTogether as an example of psychological arbitrage. The protocol offers a gamified savings product: users get a chance to win a larger reward by contributing money. Because this reward is made through DeFi stealing, even those who don’t win get their money back, and they get their own pool of tokens for participating. The longer you keep your money in PoolTogether, the more POOL you earn, a mechanism that encourages savings.

Another way to consider projects is the approach that “the product in question does not make sense and in some respects is significantly flawed.” Multicoin pays increased attention to this approach.

The rigor with which Multicoin makes this decision has led to the omission of high-impact investments, including Uniswap and Yearn Finance. Multicoin is not afraid of missing out on a deal. Above all, it wants to make sure the companies and projects it backs make sense.

Step 4: Discussion

If an investment is deemed promising, it will eventually make it to one of Multicoin’s investment committees.

It all starts with a letter, which is “the most important thing in Multicoin. To start, a team member writes a memo in which he presents his point of view, focusing on the market and its development. Anyone can make a deal, whether they are an investor or not.

After the document is formed, the rest of the team is invited to read it and comment on it, looking for gaps in the arguments and offering different points of view. Asynchronous debates turn into synchronous meetings, which are often tense.

For Jane, the key to engaging in productive dialogue is to “often disagree and disagree correctly. You may wonder how to disagree correctly. For Multicoin, it boils down to two main factors.

First, “you have to deeply respect the other person,” believing that they have a valuable perspective to share.

Second, “you have to be curious.” In particular, Jane notes that “you have to be willing to keep asking, ‘What am I missing?’ until you get to the bottom of the question. You just have to keep diving in and diving out.”

Not every dispute is resolvable. In such cases, Multicoin looks for solutions in the form of persuasion rather than consensus. Ultimately, it comes down to whether the team believes the expected value of the position is positive and significant-or not. It is a simple construction that allows for doubt while still acknowledging conviction.

Of course, not all decisions require such careful consideration. Given Multicoin’s established relationship with founder Sam Bankman-Fried and deep understanding of the exchange market, it didn’t take long to decide to invest in an FTX US round.

Step 5: Winning

How does Multicoin win early rounds of investing over funds with larger teams and more capital to invest?

In part, he does this by picking “exotic fishing grounds” and identifying promising projects that other foundations have abandoned. Solana, Helium, and The Graph struggled to rise before becoming hits.

When Multicoin really plays in the red oceans, it relies on several weapons. First, it is its genuine interest and experience, especially in the markets in which the project operates.

Multicoin also recognizes that venture capital is a service business. To adjust to the pace, the fund makes itself available for all of its investments and strives to respond as quickly as possible.

To maximize potential, Multicoin strives to maintain pricing discipline.

There are examples where Multicoin throws off the rulebook. One such example was Serum, a decentralized exchange created by Sam Bankman-Fried using Solana. Given Bankman-Fried’s reputation, Serum was quickly appreciated-it was an investment worth deflecting for.

Step 6: Size

To compensate for Serum’s high valuation, the fund has “aggressively” valued its position. This becomes another important step in the Multicoin process: deciding how much to invest in this deal.

One of the reasons Multicoin has been so successful is because it has had the smarts to make concentrated investments. Depending on the type of investment, the money itself can come from a hedge fund or a Multicoin venture capital fund.

The peculiarity is that the hedge fund allows Multicoin to open short positions, although the fund does so less and less frequently. This approach presents reputational risks that matter now that Multicoin is running a venture capital fund.

Multicoin, is moving toward a long-only model-perhaps with few exceptions. This seems logical, given its tendency to push its venture capital instruments very long and very aggressively.

Step 7: Active Support

Multicoin is constantly and actively looking for ways to help its investments think and perform better. Efforts in this regard are varied, but they start by simply keeping the focus on portfolio companies.

In particular, through Adam Reed, the foundation provides powerful marketing and PR assistance. In the often confusing world of crypto, it is extremely valuable to have someone who understands the technology and can create a compelling message.

Another way Multicoin provides support is by helping projects expand into China. Multicoin’s ability to offer intercontinental support is a rare advantage. No other U.S. crypto fund has such a base in China. Meanwhile, the best-known Chinese funds, such as HashKey and Fenbushi, are still focused on Asia.

Step 8: Continue to be aggressive

Some decisions have to learn from their own bitter experiences. In 2019, Multicoin bought BNB, Binance’s own token, in advance. A short time later, the fund sold all of BNB’s tokens. BNB grew more than 6300% over the next 4 years. Multicoin missed an opportunity to profit.

By and large, Multicoin relies on its winners, not shortchanging them. Multicoin bought stakes in Solana from other investors early in the project’s existence, when many had lost faith in it.

Similarly invested in Helium, The Graph and several other companies. After buying the FTT token from FTX, the team followed Sam Bankman-Fried closely enough to help capitalize on Serum’s creation and participate in the FTX US round. When Multicoin feels it comes out a winner, even if other investors disagree, it doubles or triples its bets.