Tim Laehy - Professionalizing Finance Departments
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Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This episode features Tim Laehy. Tim has got a super interesting background. He was brought into Coinbase in Q3 of 2017 and was there through Q3 2018. He was brought in specifically to build and manage their global financial operations and financial initiatives. While at Coinbase, Tim got to see a company go through rapid growth. His thoughts on that are really interesting. He's been brought in a number of times to get companies ready for going public. He's done a number of secondaries. Guy has a really interesting career and I enjoyed getting to know him.
Thrilled to be joined by Tim Laehy. Tim, how you doing today?
Tim: I'm doing great. Thanks.
Bill: Thank you for joining me.
Tim: Thank you for inviting me.
Bill: Introduced through Luis Sanchez, if I'm not mistaken, correct?
Tim: Yeah. Luis and I have actually never met in person, but we had a very lengthy call talking about Coinbase and I think that led to this conversation.
Bill: Indeed. Do you want to give people a little bit of your background, so that we level set where you're coming from?
Tim: Sure, sure. First of all, I'm based here in San Francisco and I've been CFO of multiple companies across a lot of different industries, including cryptocurrency and the related broker & exchange market. But also, SaaS companies, enterprise software, other services companies. I've got extensive experience with both public and private companies, and have fairly deep capital markets expertise. I've been CFO of nine companies now. And typically, my exposure to these companies, I'm the first CFO brought in, typically, later stage private looking to go public and my sweet spot is getting companies ready to be public companies and that's where the conversation in and of itself. But also, I've helped companies grow and go through the acquisition on the sell side, M&A side. And all three companies I've helped to grow and sell, all tech base, by the way, all VC backed, all based in the Bay Area. Three of them are acquired by Fortune 100 firms and typically stay on for a period of about six to eight months to help integrate, but that's a quick background. I can dive into how I got into the world of being a CFO, but I don't know if that's outside of the scope-- [crosstalk]
Bill: I would be fascinated by that. If memory serves me correctly, you've taken three companies public, seven secondaries, and now, three acquisitions?
Tim: Well, three sell side acquisitions are going through the selling process of the company, but I've actually led the finance effort and the corporate finance effort to acquire nine companies. The hard part there is not only finding the right company, but negotiating the deal, and then ultimately the hardest part is to integrate them to be a successful M&A. Yeah, so, I have a lot of deep domain expertise there.
Bill: Yeah, it sounds as though you really liked the due diligence process.
Tim: [laughs] Well, it's necessary-- [crosstalk]
Bill: And, road shows.
Tim: Necessary evil, I would say. I wouldn't say evil. It is fun. The role of a CFO is interesting. Obviously, it depends on what stage the company is. But if it's an early stage, private venture backed company looking to be public or looking to grow and be independent, the thing that we all have to do is we have an inward facing persona, as well as an outward facing persona, meaning, you're working with investors and in private companies, obviously, you're using them with private investors, and some of them are crossover investors. But as you get closer and closer to being a public company or actually having gone through the IPO process or the DPO process depending which we do a direct placement these days, dealing with institutional investors, the sell side analysts, the buyside analysts, those are all really detailed conversations and it's a whole different way to speak.
The inner or working operationally and leading the company internally and then there's the exterior outward facing activity, where that typically, the CEO and CFO are the typical point people. Yeah, it's a learned expertise. The first time around I remember the first presentation I gave as a CFO, IPO back, this is in the late 90s to a room of 200 people was terrifying. Now, it's not a big deal. Yeah, diligence is a big part of it. It would be remiss of me to avoid talking about the great teams of people behind the CFO and behind the company that do most of the work, and shoutout to all of them for doing such great work, and allowing me to do my job.
Bill: What does that look like when you're brought into a late-stage company that's getting ready to go public? What's the typical blueprint here? I assume you need to professionalize the finance arm a little bit.
Tim: Very much, so, yes. It all depends, it's a complex answer because all businesses are slightly different. The beauty of being a tech CFO is, our skills are fungible. We can move between industries. I would say, 80% of what we do is highly transferable and the other 20% is unique to that particular industry, or that type of revenue model, or business model. So, if I were to draw some common denominators, having come into so many companies as its first CFO, the typical scenario you find is the CFO is one of the last executive hires made. Companies, typically, they sprout up tech companies brought up with a great idea. They get incubated, they go through their seed round, they start building a product, focus on a product and engineering, then once they get a good product market fit, they start thinking about monetizing that business, which means they need a sales team or I go to market, a team, whether it's marketing driven sales channel or just straight account executive sales channel. But then marketing will support that effort.
And then ultimately, you get to the point where a lot of the focus is on growing the topline and all of those pesty, little control issues that no one thinks about that push them into the corner. All of a sudden, when people start their companies and investors want to put their companies in position to go public, you have to go through an IPO readiness process, which means you have to unpack everything. And typically, I've seen that administrative debt is-- There's always technical debt that tech companies go through, where they push things aside, and then have to go back, and backfill. But in the world of accounting, and finance, and legal, and HR, most of the administrative side of the business, there's a lot of built-up debt.
The first thing that I would do depending on how complex that is, is to get a game plan together to unwind that or to build the proper controls, and process, and discipline necessary to go through a Big Four audit with no material weaknesses, and no audit adjustments. That's pretty critical. I would say that that's a lot of heavy lifting. You can't do it by yourself. What I do is rely on third parties to come in and help to frame that process of establishing processes, controls, and systems to support those controls and that's done through people that do it five times a year versus people that do it once or twice in their career. I've typically leaned on outside resources to help structure that and then start hiring talent to backfill and to not necessarily build those controls and processes, but to use those controls and processes that are built, that are based on the systems that are needed to support the business.
What I'd like to do is hire talent that has been there before. It's always easier to work with somebody in a position like a chief accounting officer. I'm not an accountant, full disclosure. I'm not a CPA. I didn't come up the ranks through the accounting world. I came up through Treasury, corporate finance, and investment banking. I rely on a head of accounting to be the principal knowledge base of that discipline. And that also means that they would have to ultimately own the control environment and people that have been in the endzone before using a football analogy, they know what it's like to be in the endzone versus starting out on the one-yard line, and marching down the field for the first time, and how do you actually cross that goal line. That's something that's a learned behavior and it's always nice to work with people who have done it before, and I'd like to push that through the entire organization, that is the finance, accounting, and treasury, investor relations, all of the finance functions.
It's a skill that's learned over time. Like I said, it's my ninth CFO gig. I'm with a new company now. It's been almost a year actually. We just closed a series B financing. That was interesting. We can talk about that given the current venture climate. But I'm excited that we are kicking off. In fact, we just kicked off last month that whole process that I just described of identifying the processes, these are things like order to cash, or record to report, or procure to pay, or equity, or revenue, all of the detail that has to go behind that to make sure that it works and it works repeatedly, and you test it and you test it several times before you actually go live being a public company where you have to live and die by the ability to meet your guidance and forecasts.
Bill: I had a friend that was venture backed by a well-known firm and he said that he thought that it was a little bit of a misnomer that Wall Street is necessarily short-term focus, because he said, "My investors know everything that I'm doing almost on a week-to-week basis, but maybe with differences they have a slightly longer time horizon than the typical public investor." Do you think that's an accurate statement or have you found that once your public, it's a little bit shorter term in nature?
Tim: Yeah, it's interesting. Well, I encourage the CEOs that I work with and the boards that I inherit, typically, to take advantage of being private as long as you can. It's no joyride being a public company. There're a lot of reasons to go public, but it comes with its downside also, which is you go from looking at the two, three-year horizon to looking at the three-month horizon and making decisions that will not disturb the guidance that you give the street. To be a public company, it requires a number of things. Obviously, you've got to have certainty in your business, I have maturity in the business, repeatability. But the ability to forecast the future, and forecast it accurately, and do it over and over and over. Look at Microsoft. They grew at 50% a year for 15 years straight and never missed earnings guidance and look at what happens to their market cap.
You don't need to be the highest growth company. You need to be predictable, forecastable. And then when you give guidance as a CFO, any earnings call transcript that you review, you'll see that the CFO is giving not only revenue guidance, but earnings per share guidance, not only for the next quarter, but potentially for that full year. There's this concept called a beat and raise model that good investor relations teams are able to guide the CEO and CFO to be able to beat the number that you give the Wall Street analysts who are giving guidance on the stock selection and then be able to not only meet it or beat it and then be able to raise your numbers. It's a flywheel that really works well. It takes a lot of discipline, but also takes an underlying business that's predictable. So, I think the first thing people need to think about before they even think about going public is, is this a predictable business that is repeatable?
Obviously, you have to have an industry that's growing, you have to have a management team that knows what they're doing. They can execute, you have to have the right financial sponsorship, you have to have the right growth rate and need in the market. There's a laundry list of about 10, 12 items that need to exist. But IPOs and being a public company are not for everybody. I don't want to go down a rabbit hole here, but we can see that whole craze on SPACs over the last couple of years that really led to a lot of companies that entered the public market before they were really able to and before were they able to have that control environment build, and have that predictability of the revenue and earnings streams.
Again, it's not for the faint of heart. Remember, one time I was sitting in front of, I think it must have been seven different fidelity mutual fund managers, several trillion dollars under management in front of me, grilling me because the CEO was late as the plane got delayed. It's can be a very difficult time.
Bill: When you're talking about predictability, I think about what Coinbase or really any of the trading firms went through 2020 and 2021. If you're trying to forecast off of, I mean, don't care if it's streaming software or whatever. With COVID, how as a CFO would you be thinking about like, "How am I going to guide here?" Because the trading volume exploded, right? So, it makes the forecasting of the future very, very difficult.
Tim: Yeah, it's interesting, I subscribed to Seeking Alpha and every morning, my cup of coffee and I read a few of my news feeds. This morning there was a great article about, "Is the pandemic profit party over?" There're a lot of companies that really benefited from people working from home, or building materials, or whatnot that were in short supply. I think it was really a two-edged sword. Well, worse than that and my heart goes on-- [crosstalk]
Bill: [crosstalk] talking about finance. Yeah.
Tim: Yeah. But anyway, on the finance side, I would say that it really did put a wrinkle in a lot of companies and their ability to manage themselves, just because they didn't have that face-to-face interaction with their employees, their potential, their customer bases were disturbed, and it did change the ability for companies to really predict themselves. The best companies figured it out pretty quickly. And then those that actually benefited from that uncertainty really rose to the surface. And then there were a lot of casualties, too. When you bring volatility and changes to a predictable future into the mix, all kinds of things can happen. But I think the best run companies were able to navigate those waters and it's interesting to see.
The company I'm with now is, it's somewhere between a B2B playing a B2C play, because the customers are one or two seats. It's a software platform. We really need to address the needs of those customers in that changing world, where information now is taken on a whole new meeting. Yeah, a tough question to answer, I don't think there's any one right answer. It's something that we talk about in board meetings pretty extensively. And then obviously, this war in Ukraine impacts a lot of us. Company I'm with now has several of our software developers based in Eastern Europe and that whole-- Their lives have been disturbed and then the development of our software obviously is being disturbed. Business continuity, disaster recovery, all of that takes on new meaning, especially in the days of a lot of these phishing and cyberattacks. So, yeah, it's an interesting time to be in business.
Bill: Yeah. Do you want to mention what company you're with right now?
Tim: Oh, sure. Company's name is Crexi. It stands for Commercial Real Estate Exchange, Inc. It's a think of us as Zillow for commercial. It's not really like Zillow, but it's a marketplace for users to be able to buy, or sell, or lease commercial real estate. It's a huge, huge market. What attracted me to it is, if you think about global wealth, this could take a couple of minutes, but it's really interesting-- [crosstalk]
Bill: No. I'd love it. Just go on and you can talk as long as you want.
Tim: Oh, sure. The thing about global wealth, roughly estimated to be $380 trillion. Of that 380 trillion, three quarters of that $280 trillion is wrapped up in real estate. Humans put a lot of value in real estate. They store value in real estate, they pass it along generation to generation. Within that $280 trillion, it's about $70 trillion plus or minus $100 billion, which is big rounding error but $70 trillion is commercial, meaning it's not a single family residence. It's a piece of property that was purchased to get a return. People aren't worried about the school district, or number of bathrooms, or what the street front looks like. These are commercial properties. They could be any type of property, they could be vacant land, they could be--
Interestingly enough, office buildings is one of the smallest asset classes within this large asset class. Self-storage units, assisted living centers, mobile home parks, you name it, you just drive down any major street in any major city, 90% of the buildings you see are commercial buildings. By the way, that's global. $70 trillion business is global. $16, $17 trillion is estimated in US alone. It's one of the world's largest asset classes and it's currently illiquid, it's underserved, and it's not digitized. Crexi is a new age marketplace for commercial real estate. There's no MLS for commercial. We hope to be that. In fact, we just launched property records, which we now have property records on every single commercial property in the country. We give and get access to information which not only talks about what the current state of that property is, but historically, how that properties behaved. Well, least rates were what, vacancy rates what, mortgages level, any history of default, sunny days, foot traffic, automobile traffic, pretty much any data you want around that commercial property can lead to market intelligence.
Our platform serves both the sales and lease market. It provides market intelligence and forecasts for buyers and sellers, and it improves speed, efficiency, and liquidity for transactions that are completed on the platform. Over time, our platform is going to allow investors to buy real estate as easily as investing in the stock market today. I'm old enough to know what it used to be like to invest in the stock market when you call up your broker over the phone, they place the order manually, it went to the New York Stock Exchange, they traded paper, they sent you a paper-based stock certificate, it took weeks or longer to execute the trade to finalize the trade through clearing and settlement. And now, you can go on TD Ameritrade, or Schwab, or Robinhood for almost $0, you can instantly own your asset, own your stock. I think that's where this is going with real estate, which means that things are going to have to change. There's going to have to be best in class tools built for market intelligence for predictive analytics, for instant on platform transaction processing. It's game changing when compared to the analog version of commercial real estate has been used today that maybe my grandpa used to do.
It's bringing software to an old school problem. You don't find asset classes this large that are not digitized. And so, it's going to be a long process of transformation. But coming out of the blog chain world and we can talk about my time at Coinbase. But I believe that this real asset, these commercial properties that are in existence for returns on investment, they are just screaming for a technology like blockchain to be the source of truth, the place where data is stored. And ultimately, with fractionalization or tokenization of properties, now, we can get into where individuals, these are small investors could own a piece of a building or a piece of a portfolio of multiple buildings. This is my own personal belief, but I think this whole commercial real estate sector is ripe for change, and just like in any disruptive business, there's going to be billions of dollars to be made. There's no reason why we can't be that one.
Bill: When you say that you have all the data, is that proprietary input or is Costar a data provider and you're using their data, and then you're going to build your platform on top of that? I'm just trying to figure out how you're different from them.
Tim: Sure. Well, first of all, we have multiple revenue streams. One revenue stream allows buyers and sellers or landlords and tenants to find each other. It's the marketplace. The other revenue stream-- People, typically listing agents pay for that and they get all kinds of market intelligence as well as just the place to find real estate. Another project we have as another recurring revenue stream is our market intelligence product, and that provides that predictive analytics and a lot of first party data augmented with third party data, and we apply machine learning to that to be able to give more insights than what's currently available. I'm a newcomer, too. It's only 10 months on the job so far, but I'm a newcomer to commercial real estate. But most people buy commercial real estate on cap rates and comps, and that's all driving and looking in the rearview mirror. It's all looking backwards. What we're trying to do is augment first party and third-party data through machine learning to be able to draw predictions. That is again another subscription service.
And then the third current revenue stream there could be more in the future is to run transactions directly over our platform where more of a white glove service, where if somebody wants to sell their property, we will market it for them and we'll take it all the way through escrow and close. Although we're not an escrow company or a title company, those are relationships that we currently have. Who's to say if ultimately down the road some time we don't take on that role also. But you mentioned Costar. Costar is a competitor. They're the largest competitor. They have multiple revenue streams also. We do not use any Costar data. In fact, we make it anti-Costar. We make it very easy for our users to list properties. We don't charge them on a per listing basis. There're a lot of benefits you get with Crexi. It's much less expensive, it's much faster. We're a new age company. Costar has been around since the beginning of the internet and their website looks like the beginning of the internet. But again, I don't want to talk about Costar. What we do is, we get first party data which is generated by either the listing agents or property owners uploading information through an offering memorandum which is digitized and we also have other first party data that we learn from the listing agents or from the sellers. And then we also have first party data from potential buyers, because on the demand side, there's literally a 20x increase of users on the demand side, because that supply side is really just the owners of the property and they're associated brokers or agents. On the demand side, you not only have principles and transactions, current owners, prospective new investors, all the escrow companies and title companies and appraisers, fire extinguisher management companies, property managers, you name it, there're all kinds of users on the demand side that want to learn more and more about these commercial properties. The way that we've structured our data, really will be the sole source of all data or all properties domestically. Ultimately, there is an opportunity for international expansion, but that's down the road.
Bill: We're going to a world where there's tokenized ownership in these buildings or what not like, say, I sign on and I'm looking to purchase a fraction of a building, do I get access to a data room or something like that and how do I know that the data that I'm relying on is accurate?
Tim: Sure. Absolutely. It's a great question. There's no defined answer. We're quite ways away from that. You haven't seen digitization or fractionalization of real estate working yet. There've been a few companies that have tried. They've raised a ton of venture money, but nothing's really come of it. It's really early days for that. As far as how you get your diligence, how you get your information, it'd be I would say-- Again, I don't have the answer, but I think the way that you get access to a diversified pool of commercial real estate today with any liquidity is through a REIT. You pay up for that, you'd probably give up 30, 40 basis points just to get access to that liquidity but you'll be getting the same type of information that you would be getting through a REIT.
But then again it could be much, much more. It's like, "What information are you getting today if you bought an NFT or if you were to buy any digital currency or digital asset?" You'll have to do a lot of the background diligence on your own. But then again, given Crexi has the ability to build products based on all this data. We can package it in such a way to give you dashboards and indicators of future value. Again, we're not investment advisors. I'm talking about something that's-- [crosstalk]
Bill: We're just talking about the vision of it.
Tim: Yeah. But it's yet to be defined and that's the beauty. I think there's going to be a lot of venture money going into prop tech, especially commercial prop tech. You see a lot on the residential side already. Redfin, Homes.com, you name it, there're dozens of them. In aggregate, it's $100 billion of value. I'm making that up, but it's a large number. This is being developed. What we've done is taken a broker friendly approach. We know that we're smarter or at least the CEO is smart enough to know that you don't want to go in and disrupt the whole market, and put brokers out of business. There are customers. Eventually, just in the days of stockbrokers, there's no more EF Hutton or Dean Witter brokers, at least that I know of. There are still stockbrokers, but it's a whole different job these days. They make their money differently, there's lower fees, but a lot more volume.
Yeah, this is a new asset class on the verge of transforming. That's why I joined. It wasn't because I'm a big, huge commercial real estate guy, but I think I can take my knowledge that's transferable from other tech industries into Crexi and help get it ready to be public, and riding this huge market shift that's taking place, it's exciting. It's super exciting. The interesting thing is there're not a lot of competitors, there're a few, but we have multiple revenue streams and there's different competitors in each one of those revenue streams. But as far as anybody doing everything that we do, we're still small. We do a lot. I think we're just approaching 300 employees, we're nationwide, we've got offices around the country. It's interesting with the remote work. The last couple of years of people working from home or not in the office, that's changing. We just took on a new space and the company is based in Los Angeles. I'm the only Bay Area employee, but we're just moved into or-- moving into a new location to absorb the size and the growth of the business and Playa Vista but we're expecting people to be in the office.
Of course, there's going to be some people that don't come in the office for whatever reason. Two years of hiring remotely, people might have a two, three-hour commute if they were expected to come to the office every day. But going forward, we're going to be really encouraging people to come into the office and it's changing the way that businesses run. But we have offices in other parts of the country, also, and looking to grow these centers of excellence that might be focused on customer support, or sales, or engineering, or technology depending on which location and what the center of talent is. So, it's fun. It's fun growing, being involved in another earlier stage company, and growing it, and getting it ready to be a standalone independent, potentially public company, but that's down the road.
Bill: Yeah, that sounds cool. You had mentioned that you just raised a series B and then you mentioned the current venture climate. What's the current venture climate like?
Tim: Well, it's public knowledge. Q1 was difficult. There were coming off of a banner year 2021, especially, in prop tech. But across the spectrum, it was a really frothy year and then Q1 was pulled back. The good news is we were far enough into our series B, and had term sheets, and documentation was already starting to be drafted that the investors that came in were all in. We were fortunate enough to be able to close our series B pretty much unscathed. But I think for others that are looking to raise early-stage money, I think that's going to be a lot harder. I've been fortunate enough to been through a lot of boom-bust cycles. I think there's been four of them that I can name. But they seem to recover, seem to always recover, and they seem to come back more stronger and with more energy than the prior one. So, who knows?
Five years ago, no was talking about the Metaverse, no one was talking about NFT's, no one was talking about crypto at this level. Now, we're talking about is almost standard. What's going to happen in the next five to seven years? There's just new technology that's popping up and it's exciting. But yeah, the fundraising climate is tough. I mentioned SPACs and that's the blooms off the rose there. You can see the IPO window has been shut for a while now and it's just reopening. I just read there're several IPOs that are on the horizon, including Steinway doing their I-Piano-O [chuckles] whatever they call it.
Bill: [laughs]
Tim: But it's pretty interesting times.
Bill: Yeah, I actually was just talking with somebody yesterday that said that it looks like the IPO window is going to open, because I guess there has been a fair amount of secondaries that have come out here in the not too distant past. He is investment banker. So, he was happy to see it.
Tim: Yeah. And just getting access to that first influx of public equity is one thing, but public companies, as you know, they go out and do secondary offerings. You mentioned earlier in my background, I've participated in multiple secondary offerings in pretty much all forms of capital, whether it's high yield debt, or bank debt, or private equity, or public equity. But it's a never-ending cycle. As long as you can prove that you have good use of funds for those proceeds and you could take advantage of low interest rates, I think every well-run company is going to have some level of debt. It's an interesting time, obviously, with inflation and the risk-free rate of return increasing, it's gone up 100 basis points in 12 months, that's I think going to increase more. Yeah, it's an interesting time to be in the fundraising business and I think when the IPO window reopens, it'll reinvigorate the venture world to continue to make their bets on future IPOs or future M&A candidates.
Bill: Yeah, that makes sense. When did you get interested in Coinbase, because you strike me as a very forward-looking person?
Tim: Yeah. It's been a while. I was at Coinbase back in 2018. The time has ticked on, but I become a just a huge fan of the company as well as the industry. I got a call in late 17 by a recruiter and asking me, "If I had ever heard of Coinbase? I said, "No." They said, "Well, do you know anything about crypto currency?" I said, "No." "Do you know anything about Bitcoin?" "Well, I've heard of it, but don't know much." "Do you know anything about running an exchange or brokerage operation?" The answer was no. Obviously, I was the right candidate for the job.
Bill: [laughs]
Tim: [chuckles] I got fascinated. I became a sponge and I wanted to learn more. They got me in touch with their head of operations, who was a fairly young person and I can go through that. The exact team when I was there is completely gone, except for the CEO. It's a fast-moving organization. But I had a phone interview with the then head of operations, who took a liking to me. He introduced me to their chief legal counsel, who was the head of compliance also, who really was the more mature person on the executive team, who really noted that they needed to bring in someone to help the finance function, because it was not built yet. And ultimately, that interview went well and then I got an opportunity to meet with the CEO, Brian Armstrong. I live in the South Bay. On a day with moderate traffic driving from Los Altos where I live to San Francisco is about a 90-minute drive. I gave myself two hours and it turned out there was a massive accident near the ballpark. I had to take all kinds of detours, I'm late for the meeting. I thought, "That's it." Meeting with the CEO, I'm late-
Bill: That is terrible. [laughs]
Tim: -I'm never going to get that job. I don't know the city that well. I know it well enough. One Front Street, I parked on 400 Front Street, so four blocks away. Ran to the office, got on the elevator 31 flights up, out of breath, sweating, and there's Brian waiting in the lotus position with his computer in the waiting room and said, "Come on in, no problem." We sat. I was out of breath. I couldn't even put two words together.
Bill: I've been that guy before.
Tim: At the end of the conversation, I think I gained my breath about a half an hour into the meeting after drinking some water and was able then to hear what Brian had to say, and what he was thinking of doing with the company. And ultimately, Brian's a guy, who really likes people. And not honestly wouldn't say judged, but values communication and the way people communicate really, really, that's very, very important for him and it's funny. At the end of this hour meeting, he said, "I really liked the way we communicate." [laughs] Probably, because I wasn't talking.
Bill: [laughs]
Tim: But it led to hiring me. I joined and was there about a year. I was brought in to specifically build and manage their global financial operations and financial initiatives. And interestingly, when I was there, the top line grew over 60x from $17 million in net revenue. That's basically the commissions people pay on their trades to nearly a billion dollars over that one-year period. It was really an exceptional time. I helped the leadership team, who were going through this for the first time. Helped them scale the business, I helped transform the company, and its control environment from a startup to a well-run and mature organization capable of continued profitable growth, and getting them ready for an IPO, which was something that they had their mind on, but it was pretty early in the process. When I arrived there, the finance department was virtually nonexistent. It wasn't really three people and a dog, literally.
Bill: [laughs]
Tim: I think there was a dog that ran around. But they were underqualified for the role, there were a lot of issues. I don't want to get into any specifics, but there were a lot of issues that were lacking controls. I helped them organize and develop a robust accounting control environment and the capabilities in the accounting side. For example, breaking their platform accounting separately from operational accounting, which I had not done before. Also grew their international tax function, which we had international operations. We didn't have any tax function domestically or internationally. Built that, establish a global Treasury function. We had billions of dollars of Fiat that needed to be invested and banks didn't want to work with us. Literally, we were working with shopping mall banks. No large money centered banks would touch us.
Bill: Why was that?
Tim: They didn't know how to deal with crypto. It was a whole AML, KYC compliance review. While there, I significantly enhanced their global banking relationships having, at the time, built three global banking relationships with three global banks. Because I was working on that plus insurance, because we were ensuring not only people's Fiat balances, but their crypto balances and the hot wallet, we can get into what a hot wallet is in a minute. But that really allowed me because I was working with these financial institutions that allowed me to gain significant knowledge with respect to crypto compliance, crypto security, and the regulatory climate. It really gave me a very unique way to understand the business while growing it and putting its IPO readiness plan together, and really allowed me to have a perspective that a lot of people don't have. So, that led me to doing several calls with hedge fund managers, and money managers, who doesn't really-- They didn't know how crypto work, didn't know how exchanges work, but how the regulatory climate works, but the competitive threats are, how pricing works, what are the different products, and how they interact. But I've done quite a few of those coaching sessions and that's how this introduction took place.
Bill: Yeah.
Tim: Anyway, so, yeah, it was a really interesting and fascinating time.
Bill: When you started to research crypto, what was going through your mind? What was the biggest maybe positive surprise that you found as you got into the research process?
Tim: Great question. I became just a student of crypto. I want to learn as much as I could. I read the Satoshi white paper and Bitcoin. I really tried to learn, and read, and listen to podcasts or whatever I could do to learn. Everything about what a digital currency is, why it exists, and what it could be, and how meaningful it is. I think the thing that I think was most surprising to me was the size and scale of the market given its infancy. It dominated dinner table conversations. I got to the point where my wife made it a rule not to talk about crypto at dinner.
[laughter]
Tim: It was and it continues to be highly speculative. When we get into talking about valuation, and not only valuation of underlying assets, but valuation of the exchanges, I think the volatility and the speculative nature of the assets being traded are really the thing that's propping up Coinbase's value right now. They've taken quite a hit from their all-time high but there is a speculative nature that will need to go away if this is going to become mainstream. The more mainstream cryptocurrencies become, meaning you can actually conduct commerce with crypto. You can go out and buy a car, or a TV set, or Starbucks coffee with crypto. When it becomes mainstream and not volatile, then pricing pressure steps in. And you'll see that's happening with Coinbase now.
Before I get into the competitive threats, and that climate, going back to your question, I think the most surprising was the amount of interest in the sector and with the underlying risks that were dramatic, because they're thinking about, they're all-- There's digital assets of the big class and then within that there's cryptocurrencies is one type of digital asset. NFTs and others are other. But the entire value of all cryptocurrencies worldwide globally is two and a half trillion dollars. By the way, $70 trillion in commercial real estate puts it in perspective. These are global assets and there's no global regulations. You see what's going on in the last couple of years, even Coinbase has done an about face. When I was there, they were talking about no need to change the regulatory framework and that the current regulatory structure should be able to adapt to support the regulation of cryptocurrencies. Now, they're actually saying no, Coinbase is behind the move to actually build a more centralized governance function that's outside of the CFTC, the SEC, the IRS or NASD, or any regulatory function."
By the way, the accountants of ASB, they still haven't figured it out. There's a lot that needs to be sorted out still. I think the regulatory side is the biggest uncertainty and the biggest unknown, especially when you start thinking about how are these countries around the world, how are they going to govern cryptocurrencies and look at what they're doing? Shutting down, like, China shutting down all digital currency trading, except for their own. And then the same is taking place in India, same will take place in multiple countries. Look at authoritarian governments. Well, how are they going to use cryptocurrencies? How are they going to track spending behavior? It's going to become social credit scores. There're so many unknowns right now and these are global assets that are globally regulated. So, I think it's going to be a country by country move at first.
By the way, in the United States, it's a state-by-state move. I don't know if people realize, but Coinbase is a money transmitter, and they need to have a money transmitting license, and that's done on a state level. So, New York DFS is the most restrictive of all states to get a BitLicense and other states really follow their lead. At least, they have historically. I don't know if that's still true. But I think the regulatory climate is really the big wildcard.
Bill: Yeah. It seems to me that the natural question that I had when I started paying any attention to crypto projects was, it seems to skirt a lot of accredited investor rules, which arguably is a good thing. I don't know that those rules should exist, but I also don't know that they shouldn't. I don't know that I have a strong opinion that's well thought out on that. But I had thought a lot. I was like, "This is-- I guess, it's the goal, right, democratizing access to certain projects, at least in ways.
Tim: Oh, absolutely. Coinbase's original mission was to create a global-- I forgot the exact mission, but I believe it was built on a credit an open financial system for the world. That's a big, big, big hairy goal, right? How do you do that? There're a lot of countries where people are-- they're non banked. They just don't have the wealth to be banked. With the advent of the smartphone and a digital asset in the trading platform, all of a sudden, introducing commercial applications for these cryptocurrencies takes form. This is not certain. I don't know if you're an NBA fan, but I'm a Golden State Warrior fan, and watching some of the playoffs, Steph Curry is on every commercial, it seems like.
Bill: Yeah.
Tim: One of them is for FTX, which is a one of the largest trading platforms in the world. It's becoming more and more mainstream or at least people are thinking about it. But I think it's still uncertain. You can't really enter into commercial transactions with crypto, but it's changing. I'm fascinated by the sector. I stay in touch with it. I'm an active trader, I have a portfolio and I'm learning more. I played golf with my son this weekend and he told me that he just bought this token, that was called like step or something and actually he had to pay for the token. But then they pay him for every step he takes. I think over the course of playing 18 holes, he made $170, which was amazing on how they make money. But there're so many things that it's fascinating what's going on in the sector.
Bill: Why do you think the volatility exists like it does and how long do you think that--? This is an impossible question to answer by the way. But how long do you think it'll take till it starts to smooth out and maybe trade like a more regular asset?
Tim: I think that saying--
Bill: Or, asset class is probably better.
Tim: Sure. Well, think about who trades. There're the consumers, retail investors that typically don't know, they're not technical, they don't do a lot of diligence, they're working off of either rumors or what they read off of Reddit or whatnot. Then there's the day traders. They're a step toward more of a professional investor and then there're the institutions. The large institutional traders are becoming more and more pervasive. There's more of them and it took things like Coinbase building their prime offering, which includes a custody product to get these institutions comfortable that not only will the assets be safe under custody, but they can be traded. There're liquidity pools that they get access to, there're prime brokerage operations available to them.
But at the end of the day, I think the underlying compliance name that if there's banking and banking fully accepts crypto as an asset class that they're willing to allow to be traded. Right now, when I was at Coinbase, the large credit card companies wouldn't work with us. In fact, they prohibited any crypto from being purchased using a credit card. And now, you can. I think Visa even has a relationship with Coinbase, as well as supporting crypto on their own. I think they've made some investments in crypto companies. But on the banking side, just the large banks being able to onboard and off board. Fiat to crypto and crypto back to Fiat. That takes a really deep compliance operation. Things like transaction monitoring, automating the monitoring of fiat currency transactions in deposits and withdrawals into and out of your wallet, your digital wallet, whether it's on Coinbase or anywhere else, risk scoring on a consumer level, very similar to how consumers would be risk scored in a commercial credit card setting. So, making sure that all customers act within their risk tolerances.
Cue logic, understanding the cues of identity management, unusual activity, red flags, and various topologies teller to the various crypto exchanges, business models, all of this needs oversight policies, training, processes and controls to deal with things like transaction monitoring or investigations. There's OFAC and sanctions screening. There's just a lot that has to be built from a compliance perspective to look and feel like just a traditional financial institution that has evolved over hundreds of years in the United States and other countries. The regulatory climate, like I mentioned, it's up in the air. Think about the regulatory climate. Right now, the regulatory framework has been patchwork, it's been fragmented. Coinbase always played nice with regulators. I think that's what gave them a leg up, because they were US based. They weren't based in Malta or some other country that you didn't have to process if you were an investor and something went wrong.
But Coinbase always played nice with regulators and they built those relationships that allowed them to get their licenses like the BitLicenses in New York and it's paid off. It gave them a competitive moat. When you think about how are US digital currency exchanges treated? They're in the same regulatory category as a traditional AML gatekeeper, any financial solution or money transmitter. They have to apply the same regulations. This is under the amendment to the 2021 BSA, the Bank Secrecy Act. So, cryptocurrency exchanges, the United States fall under that governance. So, there's FinCEN involved. FinCEN does not consider cryptocurrencies to be legal tenders. So, enter the IRS. How do they view it? They view crypto as property and it's taxable. Meanwhile, the SEC indicates that cryptocurrencies could be considered securities. In fact, that's one of the reasons why Coinbase started its prime brokerage operation, so it didn't get shut down. If in fact the SEC deemed that we were trading securities that need to be registered.
Then the CFTC, even though, they adopted a friendlier do no harm approach, they recognize these assets as commodities. And then FASB, they don't know what to do. They haven't actually come out with any guidance. Most people if you look at any institution, even Coinbase holding cryptocurrencies on their balance sheet, they consider them an intangible asset with an indefinite life. For those non-accountants out there, you can only impair an intangible asset. You can't write it up.
Bill: Yeah, interesting.
Tim: Take Tesla. They bought what was it? A billion and a half dollars' worth of crypto. There was Bitcoin. If that were to have traded down to a billion dollars at the end of a quarter, they would have to impair it. Unless, they traded up to $2 billion or $3 billion, they couldn't write it up. They'd have a $3 billion asset on their balance sheet recorded at a billion and a half or a billion. It's not there yet. You asked me what the actual question was, but some of the risks of this becoming widely adopted this-- The things that are holding it back is, I think the regulatory climate.
Bill: Yeah. It'd almost be better if they were treated as trading securities from an accounting perspective because then you could write them up. But then your income statement would be quite a bit more volatile, I think or do I think that wrong?
Tim: Yeah. It's interesting. I'm not saying anything that's not publicly available. But if you were to look and this is one of the things that you look back at some of the surprises, I had in my days, early Coinbase, I actually kept a list of shock of the day and it's a long list. Someday, when I write my book, I'll reveal some of the shocks. But one of them was that because there's such volatility in these underlying assets and the way that Coinbase really started itself is when you bought crypto, let's say, use Bitcoin, as an example. If you bought one Bitcoin from Coinbase, you bought it from Coinbase. You bought it out of their treasury. When you sold one Bitcoin on the Coinbase platform, you sold it back to Coinbase. Coinbase had hundreds of millions of transactions that had a gain or a loss on that digital asset sale. I don't want to get into the details, but even though none of the Big Four audit us, they all did something for us as far as building the control environment of Coinbase. They were willing to act as advisors, but again they couldn't audit us. Not now, I believe the Big Four has figured it out.
The main reason was they didn't know how to track the gain or sell on these assets. When you look at the Coinbase income statement, there is actually a line, it might be other, but it's revenue or it's a gain or loss on those transactions, which is fascinating. And then there're all kinds of others issues that make it even more complex. I don't know if you know what a hard fork is or an airdrop, but there's the creation of these new assets out of thin air and they're associated with other digital assets. Who owns those assets? If you're custody in the asset for somebody, and there was an airdrop in the middle of that, and who's the recipient of that new asset? So, anyway, I'm going to take it down the wrong path-- [crosstalk]
Bill: No, I like this. I actually like where you're going with this because that's interesting. It's like, if you bought my inventory and then while you were holding it, there's an airdrop. I assume that you're the one that owns it. But if you're trading it like is there an argument to made that I'm actually the owner of the asset and you're like-- I talk to my buddies that trade oil and I guess, I think they have 65% of their gains are long term, because they're deemed always in the market participants, which is different than I would have often thought. I just wonder if there's issues like that, that pop up. What if somebody's trading it, but Coinbase is always the one that's inventorying something, that's an interesting issue.
Tim: Yeah, so, interesting. Enter the conversation of principle versus agency trading, principle trading is when the brokerage completes the customer's trade using their own inventory and your agency would involve brokerage finding a counterparty to the customer's trade, which can include customers at the same brokerage or another brokerage. Principle trading allows brokers to also profit from the bid-ask spread, which Coinbase benefits from. They benefit from a lot of things. I think the risk and volatility of the underlying asset although, at least, ostensibly, they would like there to be more certainty and for crypto to become more mainstream. When that happens, their spreads are going to decrease and revenues going to follow. But also, they make money off the bid-ask spread.
An agency training, which by the way, Coinbase does offer on their OTC product. The brokers finding a willing buyer or seller of a security at the same price as the counterparty. So, Coinbase participates in both. But on the agency side only under their Coinbase prime offering on their OTC trading desk. I don’t know if I answered your question.
Bill: Yeah. No, you did. Do you want to talk a little bit about hot wallets and cold wallets?
Tim: Oh, sure, sure. I think the easiest way to think about it is when you own a digital asset, there's a private key and a public key. The public key is on the blockchain for all to see. Hundreds of thousands if not millions of nodes worldwide will have access to the public key. Unlike popular culture that thinks that crypto and trading crypto is a place for the dark web and for criminals to behave, it's actually the wrong place to hide, because all the transactions are traceable. The private key is something that you can either keep on your own on a flash drive, or write it down on a piece of paper, or have a custodian track it for you, like, setting up a wallet service like Coinbase. That's where I keep mine. Interesting enough, Coinbase doesn't charge for their wallet service, although, there're tens of millions of customers that use that service for free, which is good for them, because ultimately, when they trade, they're going to take it out of their wallet, they take their capital out their wallet and put it to work on Coinbase, hopefully.
But going back to hot wallet and cold storage, so, typically, think of the hot wallet as a bank teller's drawer, where they have access to a small amount of cash and the cold storage as the vault in the basement that no one gets in. It's opened once every two weeks or whatever. The cold storage is where 98% of all Coinbase's crypto is held or at least that was the percentage couple of years ago, I doubt it's changed. The hot wallet is what moves in and out as what's traded. Remember that Coinbase just like most exchanges. Most exchanges, by the way, don't have the ability to onboard and off board Fiat to crypto and crypto back to Fiat. Coinbase is one of the few and that's where the money transmitter business comes in. There are several brokerage operation exchanges that only allow transfers in and transfers out. When you transfer, let's say, you transfer a Bitcoin in, now, you have one Bitcoin at Binance, call it, in Malta and now you can trade that on the Binance platform for Polkadot or Solana or whatever. When you want to move it off of their platform, you can trade it back into Bitcoin and then transfer that back in your Coinbase wallet if you want. It's very complex and trying to track cost basis, it's really, really meaningful.
But going back to the hot wallet or cold storage, when I was at Coinbase or hot wallet, by the way, that hot wallet was insured. We told all of our customers that not only have we not been hacked-- You might remember the Mt. Gox hack, which was I think at that time $500 million or so and then there was a recent hack. I think it was four or five years ago by a couple in New York. I don't have all the facts in front of me, but I think they still have about $70 million of crypto and because of the crypto market just expanding at the velocity it did I think that value became 4$ or $5 billion, and then they ultimately got caught. But anyway, that's just some examples of getting hacked. Coinbase has never been hacked. I think it's due to the fact that security and compliance is core to their culture, and they put a lot of money in security, and are leading the least-- Again, I can't compare the details of Coinbase's--
I was prohibited to know the details of security, although, I had to know enough to explain it to bank regulators but when we went deep into that I was not included in those conversations. But we are offering insurance on our hot wallet balance. We reached out to the traditional insurance market. When I was there, I think the hot wallet, when I started, it was $20 million Fiat USD and then it quickly grew in the first month or so to $50 million, and then it got to the point, where we couldn't buy insurance. It just wasn't available. We tapped out the market, we actually had to build our own captive insurance company to ensure that hot wallet as it grew to hundreds of millions of dollars, just because the value of the underlying asset and the amount of activity. And so, 2% of a number that's growing just continues to grow itself.
The way that Coinbase really protects itself as to this ingrained culture of security and making sure that there's no one person actually has the keys. It's an incredibly complex part of their business. In fact, even though, Deloitte didn't audit us, Deloitte built our SOC 2 compliance around security, that was one of the projects that I was involved in when I was there, but security is paramount there.
Bill: Yeah, I wonder if it was you that was interviewed. But I also read that AML is very, very prioritized there. I don't know about relative to other people, but I do know that the transcript that I read had mentioned that. I guess, you have to have your AML airtight in order to operate that business, and go public, and have confidence you're going to be around.
Tim: Yeah, AML, KYC, KYCC know your customers customer. All of that is absolutely important. We talked a little bit earlier about some of the current controls, AML controls, transaction monitoring, that's another thing that-- We did not have a transaction monitoring tool for Fiat transactions and crypto transactions. We use the third party, which cost us a boatload. Now, at the time, Coinbase was printing money and they think they still are. They were doing the equivalent of series C financing every day about $25 million of free cashflow every single day coming in from bank. That was done by the way on the back of zero sales and marketing. Zero, $0.00. It was all word of mouth. When I joined, where some routine 10,000, 20,000 new customers per day, at our peak, I think it was over 400,000 new customers signed up for accounts in one day.
Bill: Oh, my goodness.
Tim: That was done with no growth marketing. Now, that's changed. Obviously, they're running Superbowl ads and you can't find an NBA channel without the Coinbase logo. Obviously, they branched out. Yeah, AML, KYC, it's critical. All the banks, any bank, whether it's a Tier-2 bank, they will put their compliance team on high alert, and they will come in, and do a full scrub of the AML, KYC processes under. There's a BSA team, the Bank Secrecy Act team at Coinbase. Yeah, it's a central part of their business.
Bill: Must have been a crazy time to be there with all that growth, just going to the office and seeing the whole market explode, right? Well, I guess, I didn't even know that you were at the office. I assume so.
Tim: Yeah, it was one Front Street, moved offices, I think three times when I was there. It just grew so quickly. But it was a crazy time. Literally, I felt elevated five feet off the ground between my house in the morning and getting to work. I had to force myself to leave at 8 o'clock every night, because the parking garage that I parked in was closing at 8 o'clock. [laughs] Yeah, it was extremely fascinating time. At the same time, kind of going back to what I was building. I was building an accounting organization, a finance organization. There was no budgeting process, there was no forecasting process, no treasury. That's another shock of the day. We had to move billions of dollars of Fiat on a daily and weekly basis. Again, I don't want to go into the details, but it was shocking. Who would take the money and who wouldn't take the money? Like I said, I'll write a book someday and this will be a couple chapters for sure.
Bill: Yeah. Well, it'd be fun to read. A question that I have to ask because a lot of the listeners are buyside, or investors, or whatnot. As a CFO, what were some of the questions that you used to hate to get and how can people talking to the CFO of a company make sure that it's the most productive use of time for both the CFO and the person that's asking the questions? Do you have any memorable sessions of people asking questions that you were like, "This person really knew their stuff and added some value here" versus the questions that bored you?
Tim: Yeah. I think that question transcends any one company. Clearly, for a company that's growing at 6,000% a year, that is different than a company that's growing at 50% or 100% a year. But really all depends on the stage of the company. One thing that you want to do as CFO is instill confidence in the investment community. How you do that is, number one, being attentive to detail, and being able to answer questions gracefully, and with enough detail that you're not giving away prior information, but also, you're giving accurate and timely information. The thing that I think is the most difficult to answer is, when you are at earlier stage, and you don't have all those controls and processes worked out, and you do give guidance that ultimately could change, because of the way that you may be made some accounting changes, or things that weren't recorded properly in the company's past that once you clean them up, there could be a dramatic change in how a transaction or a series of transactions are recorded.
To give a little bit more color and certainty around t that concept, early-stage companies, maybe they don't follow ASC 606 properly. They're not recording revenue and incurring costs the appropriate way, like deferring commissions over the life of the customer, for example, or stock-based compensation, or internally developed software. Those are all really big hairy beasts that need a lot of technical accounting oversight and earlier stage companies don't really have that. If you put out numbers, you have to be sure you call them preliminary and unaudited where a lot of early-stage companies just rely on the audit. If you get an audit at an early-stage company that might not put it through the same standard as you would if you're more mature. Your listeners know the difference, but there's really two levels of audit standards. One is AICPA and one is PCAOB. PCAOB is the public company standard. The level of detail is 10 times more. I'm just throwing that number out, but it's in incredibly a lot more detail. The sample sizes, the materiality standards, those types of things are much different.
But even if you're an AICPA standard, if you're a very early seed stage company, you might get a clean audit. When the reality is, you had a lot of material weaknesses that were really never called out, because the investors didn't really-- Those seed investors weren't really focused on that, then you get closer and closer to being scrutinized under PCAOB standards, which you have to be to go public, by the way, and have to go through a few of those cycles. Now, all of a sudden, aggregation of duties comes into play or your materiality of how you track something, or how do you account for debt? A lot of people don't know that companies are doing and you probably have heard of safe notes or like a convertible debt offering. The underlying accounting is dramatic and not many people do it accurately. When you actually go back and get your evaluation based on the optionality value of the underlying conversion feature that changes earnings. I'm just using a couple of examples of-- Things that people don't really focus on, but CFO needs to and how you represent them to investors is critical also.
The other thing that I think is the big change is how you communicate to your own employees and just what level of detail are you able to give your own employees. As you get closer and closer to me in public, there's this concept of Reg FD, that's fair disclosure. So, you make sure you have to say the same thing to everybody. And not different things to different investors or something to your employees and something different to an investor. It rubs in the face of the culture of startup communities or startup companies, but it's part of that evolution and change. I think the one thing that maybe is, I don't even call it frustrating, but something that I have to be temperate in is, how quickly do I push a company to behave more like a public company than a nimble reactive startup. That's a really fine balance. And the last thing you want to do is shut down innovation and a lot of people don't understand, especially, earlier stage companies don't understand process. They think it's process for process sake versus what is the real reason for it. Until you've been in a company, where there's a lot of movement and a lot of changes on how to treat the same exact behavior, it's really hard to understand just how difficult it is to navigate those waters.
Bill: Yeah, I would think that would be, because especially in the smaller companies, I would imagine the culture is, let's just run and get stuff done. If you're the guy that comes in and says, "Hey, we need some process here," that would be a bearer of bad news.
Tim: Yeah, absolutely. I think of the CFO like the goalkeeper on a soccer team. Same with the General Counsel. We're there to prevent goals from being scored against us. We're rarely the ones that are scoring goals, maybe in an M&A setting we would help acquire a company. But that's the role of marketing in sales and product. It's hard to get the company and investors know that you're there to protect them and to grow in such a way that you're protecting yourself from being scarred upon. Meaning, a lawsuit or any dramatic change in the way you are recording revenue or your financial statements, etc. Getting it done, getting it done right, it takes time. Maybe your listeners haven't talked to somebody who's taken a company from earlier stage through the IPO preparedness process through acting like a public company, and then actually going public, and working under Sarbanes-Oxley SOX environment. Each one of those steps is so different and it takes time. I would say, rule of thumb is somewhere between two and three years of effort and $3 to $5 million of cost just to get your controls documented systems designed and implemented.
There're certifications that the CEO and CFO of a public company didn't make under rule 302 and 404, which indicate and it tells investing in the investor community that the CEO and CFO have not only participated in the design and implementation of a functioning control environment, but they've tested it, and it works, and then you get third party at a station later. That's like a year or more after going public, you get your third-party auditor to say yep. The management team says, the controls are working, we tested it, and we certify that they are. Or, if they're not, they have to certify that they're not, talk about a big hit to your stock price. Again, it's not for the faint of heart. You live in a fish bowl when you are public, but there's a lot of reasons to go public. Not to say that Crexi wants to go public. What we're doing is building a company that's ready to go public. So, big, big difference there.
Bill: Yeah. What do you think some of the valid reasons to go public are?
Tim: Well, the easy ones are, it's a medium of exchange, it's a public currency, you can use it for acquisition purposes, you give liquidity to your investors and your employees if they own stock or stock options. It's a good way to provide liquidity for compensation for your employees. And not all companies provide stock options, but most tech companies do. And then there's the ability to show confidence to your customers and your potential customers that your financial information is accurate. It's been reviewed and scrutinized not only by an audit firm, but by the SEC. It's publicly available. There's more publicly available information that's verifiable and so it gives your customers confidence that you're going to be around for a while. There is a lot of transparency to how the company is run and operated. Third parties or people outside the company can get comfort that the company is operating effectively. I think there're multiple more reasons, but I think one of the biggest ones is access to capital. We talked about falling offerings or public debt offerings, you can get access to that much more easily than going through the private market and it's perfectly priced through market pricing. Yeah, there's a number of reasons to go public. d
By the way, the investors are the ones that make that call, not the management team, the people that own the stock. In venture-backed companies, the people that own the stock are typically the earlier investors and they're the ones that are looking for liquidity. Most of them are venture firms. They've invested out of a fund and that fund might have a finite life. At that end of that life, they would like to liquidate those investments and so to be able to provide returns back to their limited partners, which then allow them to raise the next one. So, that's at the root of venture-backed investing.
Bill: Yeah, it's very interesting. I have been trying to learn the art of looking at younger companies in these growth companies. There's a lot of I think expense revenue mismatches in the accounting and whatnot that makes it a little bit more complicated than mature companies, but that also creates the opportunity, I think.
Tim: Absolutely. Like we just talked about, you don't get perfect information out of a private company. You get very limited information, actually. The best way to get better information is make an investment in the company and get information rights and then you're able to get access to lots of data. But at the end of the day, earlier stage companies, it's really driven by boards and management team. There's a lot of speculation, by the way in venture-backed investing. But it's an interesting position to be in the CFO seat. Having raised approaching $4 billion in capital and multiple forms I've seen a lot. I've seen how the financial sponsors work, what motivates them, how boards and management team work. And there's this confluence of interest which is interesting. I made it up and I don't know if it's self-evident. But when a company is young, you've got a management team and you've got investors that are at the opposite end of the spectrum, as far as what you're looking to get out of that relationship. The investors obviously want to show growth really quickly, profitability, payback on their investment, and the management team wants to build a company for longevity, and make deeper investments, and not so focused on earnings and profit.
But as you get closer and closer to an IPO, there's a convergence of interest and at that moment that you go public it's perfectly aligned. The moment after you are public, they start diverging again. Three months after the IPO, all of your board members are gone, you got a new board, the original investors are out, they sold all their stock, and now, the management teams left to run the business. It's a fascinating walk through that process. Like I said, before people that have been in the endzone, kind of know what it feels like and what's important. So, that's why I think that it's so important for earlier stage companies to get that level of seniority and experience on their management teams.
Bill: The interesting thing, too, about what you said, "The moment you go public, the interests are perfectly aligned." And then after the board changes over, I assume the board probably is looking at the business through a slightly different time horizon like venture investors look at things different from public company, investors, and I'm sure the boards have different lenses, too. It's probably some of the reason that I think between that and incentives to juice growth before going public. That's probably some of the reason why coming public is a tough moment like the year after is a tough moment for a lot of companies.
Tim: Yeah. Obviously, there're other factors that private companies don't need to really focus on. Board independence, diversity and inclusion, making sure that there's a-- what, ESG, the environmental impact that company needs to disclose, there's so much more these days. As regulations continue to evolve, it becomes harder and harder to act in a public company. By the way, they're not technically attacks, but there's a cost of being public that a lot of companies don't really factor in. Aside from just the need for certain types of people to be hired and exist that aren't needed on your private like an investor relations team, or an SEC reporting team, or diversity and inclusion team, or ESG team, those don't really need to exist as a private company so much. But board independence too and getting independent board members, also, you'll notice what's going on with Twitter these days. Look at the board. They don't own shares. There's only a couple of board members that have more than 1% of the company.
How do you get alignment there? There're activist shareholders. Fortunately, I've never had to deal with activist shareholders. But as soon as you have an earnings glitch, if you missed your earnings guidance, and the stock drops, and you get class action lawsuits, all of a sudden, there's activist shareholders that are coming in, buying up stock, that take board positions, are stacking the board to their own benefit and start knocking the company for its cash or whatever. So, it's a bare-knuckle environment. Don't get me wrong. When Crexi is ready to be public, I'm looking forward to being their public company CFO. We got to be dialed and ready at that point.
Bill: Yeah, you got to be ready for the big leagues and then enter them, if you want to go prematurely. Well, I've really enjoyed getting to know you, and I have enjoyed talking to you, and I appreciate you coming on the show. It's been fun.
Tim: Well, I appreciate it, too. It's fun. I'm sorry, we didn't get a chance to-- We really just scratched the surface on Coinbase and it's such a fascinating company.
Bill: I'm good to keep going if you want. What's the most fascinating thing?
Tim: [chuckles] I think and I know we're running up against time here. But if you think about Coinbase today, they have a large number of retail users. I think it's 70 plus million, and sub 10,000 institutional customers, and the company participates pretty broadly in the crypto economy. I can get into what that means in a minute. But most of the revenue, call it about 85% of the revenue comes from transaction fees. And interestingly enough, Coinbase's institutional volume accounts for about 60% of its total transaction volume, but the greatest source of the revenues are in retail transactions. That's due to the fact that they're probably the most expensive platform out there for trading crypto, especially on the retail side. They have a blended average fee of about 140 basis points and that could get as high as 500 basis points depending on what type of account you have, how you onboard Fiat cash, if you're using credit cards or debit cards. There're all kinds of reasons why your fees may vary.
But retail investors, in a speculative climate don't care. If they think they're going to make 1,000% return on their investment, they don't really care there's been 5%. But that's changing and especially as I talked before as crypto becomes more mainstream, but even though, the greatest source of revenue is retail transactions, the greatest source of trading is on their institutional business, which is about a five-basis point fee, we can get into details on the fee, but that's super, super interesting. Now, what Coinbase is trying to do, and this is public, and you can read it in their transcripts of the last couple earnings calls. They're trying to branch out into more subscription services. There's recurring revenue. They need to get something going where they're not so dependent on transaction volume and the volatility of the underlying asset.
If you look at Schwab, or TD Ameritrade, or any publicly traded exchange, if you can identify the volatility of the underlying assets in the market cap of those underlying assets, now you've got the ability to forecast revenue. Until then, you can't. I think that's why Coinbase has really seen some difficulty and some volatility in their market cap and their price. Their stock price has dropped over time and I think what they're trying to do is build a repeatable revenue stream. If you think about how are they doing that. This has evolved over time. I think we can end the conversation after this because it'll take a few minutes.
Bill: Okay.
Tim: Coinbase, initially started by building their prime brokerage operations, consumer operations, their commerce operations, they have a lot of different products. They offered a USD coin, which is a stable coin. They've got a lot of different products that they've offered, but none of them really gained traction like their transaction business. What they've done is they built something called Coinbase Cloud. Why I think Coinbase Cloud is so interesting? It's a turnkey infrastructure that allows for their customers to get access to different types of services. What they want to be is really the OS of Web 3 and allowing the future builders of this crypto economy to thrive. They're building that through multiple offerings, including-- Their prime offering is for corporates and liquidity providers, they have an OTC trading desk, they have a custody product.
On the Cloud side, they give developers this on ramp to building crypto applications, and services, and speeds up their development timelines. Think of what AWS did for cloud computing. People don't need to run data centers anymore. The same is true with what Coinbase is trying to do. I think this is the most exciting thing and I wish them success. But it allows those development teams to focus on improving their products instead of managing a crypto infrastructure, which you can imagine is really, really complex and Coinbase is really good at it. So, they really-- [crosstalk]
Bill: Hmm. That's interesting. You'd become a developer platform, potentially.
Tim: Yeah, exactly. They have something called an exchange API, which developers can power high volume crypto trading with this exchange API, getting access to deep liquidity, managing accounts, getting market data. There's also a commerce API. This is what we talked about a little bit ago, where companies, commercial establishments want to accept crypto payments, and it requires the secure and reliable infrastructure that Coinbase can offer without developers like someone within Dell, or Tesla, or whatever. Samsung to have their own crypto infrastructure. There's also, you probably know this, but there're lots of different blockchains out there. And each blockchain has its own structure and its own coding. So, building cross chain products, if you're a company that wants to work with multiple blockchains, how do you do it? Well, Coinbase offers something-- [crosstalk]
Bill: Huh. They create the common language or something.
Tim: Exactly.
Bill: Interesting.
Tim: Each blockchain has a different set of rules, governing interactions, and Coinbase is an open-source project that these asset issuers can integrate their blockchains to any crypto product, so, that's as long as you're using this Coinbase product. There's also the Coinbase Wallet API, where developers can easily support or provide support to anybody that has a Coinbase Wallet making it simpler for users to onboard and transact on mobile or web. And then, I think, last is identity management. Signing in on Coinbase using Coinbase. Coinbase allows its developers to use these APIs to take these permissionless actions on behalf of their customers like buying, or selling, or depositing, or withdrawing crypto. It's really a seamless experience for customers.
When you look at Coinbase over time, pay attention to its Cloud business. I think if they become the OS for Web 3, they're going to really separate themselves. They could go from low teens percentage of their revenue, I'll say 13%, 14%, to mid-20s, to maybe 50-50 over time. It's really interesting. I think, to me, this all developed after I left. I think one thing that really separates Coinbase from others is its ability to make-- This competitive moat is so deep. They have so much capital that they can put to work. I think that they're in the driver's seat. But then again, as you start seeing pricing compression, it's going to be interesting time. I think their stock has maybe a little more bleeding to do before it levels off, but they are clearly the go to company on the block.
Bill: Well, a fair amount of stocks may have a little more bleeding to do, but there's been a lot of blood already all over. They're not unique in their stock going down verse many of the stocks that I would consider a peer said. When you said the moat is so deep, if you had to summarize why the moat is so deep, I know that you just went through what you said, but is there anything in addition-- [crosstalk]
Tim: Sure.
Bill: If you had to give elevator speech on why the moat so deep, what would you say?
Tim: Well, they're extremely well capitalized, number one. They even did a debt offering, because they took advantage of really low. I think it was a $2.1 billion debt offering last year, as well as their direct placement. The amount of free cashflow is ridiculous. They have high brand recognition and it's getting more and more putting dollars behind the growth marketing effort, but they're a household name. Compliance, I think we talked about earlier. They prioritize compliance and it's embedded into organizational culture. They're also a first mover on multiple fronts. Even on their direct placement, I think we're the first player to become in the sector. There's not a lot of the late-stage crypto companies as I can attest to, because when I left Coinbase, I was looking at other opportunities.
My expertise as a CFO is more in late-stage companies. I looked at a lot of the Andreessen Horowitz portfolio companies, they were all early stage and they just didn't need my expertise. Their first mover, they are late-stage, they have an extremely large customer base, I think it's larger than Schwab and Ameritrade combined. They've got multiple products and services and they continue to invest. They make it easy for customers to onboard and also easy for digital assets to onboard. It wasn't that easy when I was there. They only had four digital assets when I joined. Bitcoin, Ethereum, Litecoin, and Bitcoin Classic. And now, there's hundred or more. And the reason they were so slow is they were worried they were going to bring on securities versus tokens, and just how we test, and we can get into details later.
But anyway, so, they make it easy for assets to be on boarded. If you're interested or any of your listeners interested, go right on their website. There's a digital asset listing framework that I actually help craft in the early days. It's subsequently got much more involved. But that's the framework in which they bring on new assets. They also have a homegrown technology stack. It's going to be really hard to replicate. I think some of the bigger players like Morgan Stanley or others, JPMorgan that have really deep tech stacks. It can probably throw hundreds of millions of dollars at this and replicate it over time. But Coinbase has a head start on them.
Then I think just the popularity that they have as a safe harbor going to US backed crypto exchange when you've got uncertainty, Coinbase is really maniacally pursued their compliance and dealing with law enforcement and regulatory bodies in just being on the right side of the law. So, those are what I would consider to be the talking points of their competitive position.
Bill: Very cool. Well, thank you. Thank you for laying it out and sharing your thoughts.
Tim: Sure. Well, this has been fascinating and you can tell I'd love talking about it. It's a fascinating sector and I'm probably going to create a YouTube channel with multiple segments to talk about this in more detail. So, hopefully, your listeners will get access to that when it's done.
Bill: Yeah, for sure. Let me know, if you want me to ever mention it on the show or if you have a link now, I can drop it in the show notes, either way. Do you want people getting in touch with you, how should people follow you?
Tim: Well, yeah, I'm new to this game. They can certainly reach out to me just through my personal email. It's tim@laehy.com. L-A-E-H-Y. And if it's something that I can help them with, I would love to connect. But I think in the future, it'll be over a YouTube channel.
Bill: Okay. Well, when you want me to tell people where to find you on your YouTube channel, I will help you promote it and I appreciate you being a guest on the show.
Tim: Well, thank you, Bill and it's been a pleasure talking to you.
Bill: Thank you. I look forward to our golf game, sometime.
Tim: Absolutely. Me, too.
Bill: All right. Take care.
Tim: Good bye.
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