Coinbase Nabs $5M in Biggest Funding for Bitcoin Startup - Venture Capital Dispatch - WSJ

By Sarah E. Needleman

Eleven-month-old startup Coinbase announced Tuesday the largest funding round to date for a Bitcoin startup, a $5 million investment led by Union Square Ventures.

In an exclusive interview with The Wall Street Journal, Coinbase’s founders Fred Ehrsam and Brian Armstrong said the Series A deal–which followed a seed round in September 2012 of $600,000–will help the San Francisco company cover operating costs and hire engineers, designers and business-support staff.

“We need 10 people yesterday,” said Ehrsam, a 24-year-old former Goldman Sachs trader. Armstrong, 30, was previously a software engineer at peer-to-peer housing startup Airbnb.

Coinbase is an online platform that allows users to buy Bitcoin, the virtual currency taking the tech world by storm. Users can also store Bitcoin in a digital wallet and pay merchants for goods or services with it. About 300 merchants have signed up with Coinbase so far, including content-aggregation site Reddit.com and dating site OKCupid.com.

In April, Coinbase’s co-founders said the company claimed about 116,000 members who converted $15 million of real money into Bitcoin, up from $1 million in January. Ehrsam said the volume of dollars it’s converting to Bitcoin is increasing at a rate of about 15% a week, and its user base is growing at a weekly rate of about 12%.

Coinbase makes money by charging users a 1% fee to convert dollars into and out of Bitcoin. The company was developed last summer in the elite technology incubator Y Combinator, which is where Ehrsam and Armstrong met Union Square partner Fred Wilson. Y Combinator’s Paul Graham said Coinbase’s growth is “very, very rare.”

He added that he thinks Bitcoin is poised to be a true game-changer for the business world, and the tech community in particular. “Hackers are the animals that can detect a storm coming or an earthquake,” he said. “They just know, even though they don’t know why, and there are two big things hackers are excited about now and can’t articulate why–Bitcoin and 3D printing.”

Wilson said that Union Square has looked at about a dozen Bitcoin startups over the past two to three years but that Coinbase is its first investment in the space so far. “There is no magic bullet that they have,” he said. “They have competitors doing the same thing. We just really liked their approach to the business and the product they built.”

Coinbase’s founders, he added, are “very pragmatic, level-headed engineers.”

Wilson acknowledged that there’s much risk involved in backing a Bitcoin startup. The virtual currency has been plagued by extreme volatility, rising to a high of $266 in April of this year and now down to about $108 this month. There are also security concerns and the possibility that another virtual currency will steal Bitcoin’s thunder. Nine-month-old OpenCoin of San Francisco–which last month announced that it raised a seed round of more than $2 million–has developed one called Ripple that it’s trying to circulate.

But Wilson said that his firm’s investment in Coinbase “may be less risky” than others in its portfolio “because there is a lot of activity in Bitcoin going on right now.” Plus, he sees a potentially massive windfall.

“Digital currency and Bitcoin specifically is a very interesting area where if one were to get it right, the upside would be enormous,” he said. “If Bitcoin really becomes the global currency that every country and every business accepts, and Coinbase becomes the JP Morgan Chase of Bitcoin, that could be worth a lot of money.”

Micky Malka, founder of Ribbit Capital, one of Coinbase’s other Series A investors, said he likens Bitcoin and its skeptics to when the Internet started becoming popular in the early 1990s. Back then there were “a lot of articles about the Internet being a place for porn,” he said, similar to how early Bitcoin adopters have been allegedly using the currency for illicit purposes, such as to buy and sell illegal drugs.

“It’s very normal to see new disruptions start in places where there is a high friction,” Malka added. If Bitcoin becomes a legitimate currency, “people will forget what it was used for in the beginning.”

Still, the budding currency is far off from going mainstream. Investor Warren Buffettprofessed Saturday to knowing nothing about Bitcoin when asked about it during Berkshire Hathaway’s annual meeting.

“I’ll put it this way, of our $49 billion we haven’t moved any of it to Bitcoin,” he said.

Write to Sarah E. Needleman at sarah.needleman@wsj.com