--:-- Steph Smith: Welcome back to the A16Z podcast. This is your host, Steph Smith. And this week, we have a very exciting crossover episode with our sister podcast, Web3 with A16Z. If you've been following basically any news over the last few weeks, you've probably heard of the recent FTX scandal. And while there's still much unknown, in this episode, we get the unique opportunity to hear from Brian Armstrong, co-founder and CEO of Coinbase, about what's top of mind for the crypto industry. That includes the impact of this current event on future regulation, how this crypto winter might be different from previous ones, founder psychology during downturns, the transparency that comes with being public, and much more. Brian is interviewed here by A16Z co-founder and general partner Ben Horowitz, who has the unique perspective of having invested in, built, and been on the board of numerous companies during the ups and the downs, also leading him to his well-known book, The Hard Thing About Hard Things. If you enjoyed this conversation as much as I did, be sure to subscribe to Web3 with A16Z wherever you get your podcasts.
--:-- [The episode begins with a fireside chat from the A16Z Crypto Founders Summit.]
--:-- Steph Smith: Today's all new guest hosted episode is based on a fireside chat that took place just this week at our inaugural A16Z Crypto Founders Summit. It's a conversation between A16Z co-founder Ben Horowitz, who authored the bestselling business books, The Hard Thing About Hard Things, and What You Do Is Who You Are on how to create your business culture, interviewing our special guest, Brian Armstrong, CEO and co-founder of Coinbase. As a reminder, none of the following should be taken as business, legal, tax, or investment advice. Please see A16Z.com slash disclosures for more important information, including a link to a list of our investments. The conversation goes into management, company culture, and much more on building and overcoming the hard things, but begins with what's top of mind for so many in the crypto industry and beyond and in the news right now.
--:-- Ben Horowitz: So, Brian, it's been a crazy couple of weeks with FTX. FTX collapses. SBF, for those of us who actually followed it, is emerging as like a super Bernie Madoff type character. And you, unusually for you, because you're not a spotlight type of guy, you're more of a behind-the-scenes type of guy, has been on TV and taken a leadership role and trying to explain to the world what this means. So what does this mean for the crypto industry?
--:-- Brian Armstrong: Yeah. Well, I think we were all pretty shocked to see the scope of the fraud that happened at FTX. And let's call it a fraud. We have to call it what it actually is. It's been pretty bizarre that mainstream media hasn't really come out and said, this guy's a criminal. Maybe they want to wait until he's actually indicted or something like that and in custody. But it seems very clear at this point that that's the case.
--:-- And we have to kind of come to terms as an industry with the fact that our industry is attracting a disproportionate share of fraudsters and scammers. And that's really unfortunate. It doesn't mean that that's the representative of the whole industry. There's a bunch of people here in the audience as one example, and Coinbase is another example of the hard work that's being done to legitimize this industry and build it. We want to bring the potential of this technology to people all over the world, and we're not going to cut any corners. We're not here to make a quick buck. We're in it for bigger ideals, freedom and decentralization and the power that bringing good financial infrastructure can be for everybody around the world.
--:-- So that's been part of my job is to get out there. And I don't normally like doing TV very much. I like building cool stuff with the team. But in this moment, it's important for me to get out there and say, look, there's a whole industry that's very different than what was happening with FTX. Coinbase is based right here in the US. We're a public company. You can go read our financial statements. They're audited by a third party. You don't have to trust us. All the customer funds are segregated. We don't invest any customer funds without their explicit direction. And we're not going to let one bad actor take down this whole industry. We're going to keep building for the future. So I think it's important for someone to go out there and say that message in this moment. And I'm trying to do my part to make that happen.
--:-- Ben Horowitz: Yeah, and it must be really weird for you because he was kind of right next to you while he was doing all this diabolical stuff. Did you ever suspect that he was like a criminal? Were you like, there's something wrong with this guy? Or were you just as shocked as everybody was?
--:-- Brian Armstrong: I was pretty shocked too. There was a weird thing that happened where they kind of came out of nowhere. And then suddenly he was at every conference that I was at, probably in a whole bunch of other ones. And there was a little part of me that was like, man, this guy's just speed running the whole thing. He's getting all these intros and relationships that I thought I was trying to work to get to. And he seemed to have done it in two years. So I was like, oh, that's probably just my ego talking. So ignore all that. And let's just get back to work.
--:-- I guess it turned out that he wasn't entirely being honest with people. And obviously, there was a lot of money changing hands behind the scenes with a lot of these people. The way I'm looking at it now is that basically there was reputation laundering happening. And this virtue signaling with all of these ideals, which apparently he came out and acknowledged was just fake. And he was making it up. So, I don't know. These people kind of come out of nowhere sometimes. And we've seen this with other companies in crypto. If you look back, Bitfinex and Mt. Gox and Bitmex and others, where they incorporate somewhere in the world, they're trying to avoid the rules, they rocket up.
--:-- Ben Horowitz: That's always a tell, isn't it?
--:-- Brian Armstrong: Yeah.
--:-- Ben Horowitz: I'm going to incorporate in the Bahamas.
--:-- Brian Armstrong: Yeah. For no reason other than I love the Bahamas. Right. I mean, look, we want crypto to be an international movement, so there should be people building companies everywhere. But if you're jurisdiction hopping and trying to avoid the rules, the thing tends to rocket up and then blow up, usually in spectacular fashion. And so we can't take any shortcuts. We've got to build this industry for the long term.
--:-- Ben Horowitz: And what do you think about the rest of the ecosystem? Because he did steal consumers' money and give it to other people. Interestingly, if you go back to Enron, they took investors' money, not consumers' money, but investors' money, and clearly had a bit of a Ponzi idea going with their mark-to-market accounting. But all the politicians who received money from Enron gave it back because it felt like stolen money. But in this case, not a lot of people are giving the money back. How do you think about that?
--:-- Brian Armstrong: I think they should. I mean, it's customer money that was stolen at this point. My hope is that as this becomes a little bit more clear... frankly, it's baffling to me why he's not in custody already. DOJ or somebody should be able to make, just based on his public statements, I think there's a very open and shut case for fraud. I'm not an expert on this, but the people I talk to seem to agree with that. And so it's unclear to me why he's not already in custody. Let's give benefit of the doubt and assume they're trying to piece the case together, there's some extradition thing happening behind the scenes. But the minute he actually gets indicted or maybe convicted, I think that should be a moment where any sensible person who took this money should think about giving it back. Some of it may have been already deployed in various ways, and there's a bankruptcy process for that. But if he just recently made a donation and the money's still there, people should do the right thing and give it back.
--:-- Ben Horowitz: Definitely agree. So we had a great panel last night on the regulatory environment. And one of the things that they said was, for sure, we're going to have to come out with some regulation now because this is too big a catalyst to ignore. And if we ignore it, then the regulators—and these were policymakers, congress people and senators—then the regulators are going to go outside of their scope and start regulating on existing laws or try and enforce things that shouldn't be enforced. So how do you think about what will be the impact of FTX on regulation? What should it be and what do you think it will be?
--:-- Brian Armstrong: Yeah. Well, I think there's kind of a level one, two, and three understanding that people have of this. The level one is just a very simple narrative: something bad happened in crypto, regulators should crack down. And we've seen some people come out and make that very simple narrative.
--:-- There's a level two understanding, which is more nuanced, which is that the companies based in the US are already regulated under financial services regulation. What we don't have is clarity about the crypto piece of the regulation. And there was a huge missed opportunity by the regulators to come in and create that clarity—like what's a security, what's not. Because that clarity wasn't there, a lot of the business moved offshore. And now we're seeing some of those things blow up. So yes, we should have more clear regulation here in the US, but the regulators bear some of the responsibility for what happened. It's not just on these crypto companies.
--:-- And then I think the level three understanding is that, great, let's get regulatory clarity for the centralized pieces of crypto and crypto-specific regulation. But actually, the real solution here is DeFi and self-custodial wallets. And crypto has the opportunity to create something that's much better than the current system long-term. It's a little bit like Uber had a star rating system instead of using the taxi medallions as your regulator. In DeFi, we can have transparency with smart contracts. We can have a decentralized reputation system baked into ENS. With self-custodial wallets, you can trust yourself and math instead of some third party. And that's the future that we're really building to. So I think the level one, two, and three narratives—most people are somewhere along that spectrum, and we need to help them get a little bit farther. So those are my high-level thoughts.
--:-- Ben Horowitz: So here you are running one of the biggest centralized exchanges in the world, arguing for decentralization. So tell me about how you reconcile that with the business that you're in.
--:-- Brian Armstrong: Yeah, well, Coinbase is going to do both. We have our centralized products, our exchange, custodian, etc. Those are going to be regulated. We're leaning into that. We're trying to help propel good regulation forward. But we also are building the self-custodial wallet. I think Coinbase Wallet is the most downloaded self-custodial wallet in the US now. We've gotten that product to be a lot better over the last year or so. If people haven't tried it recently, try it again. And we're working on some decentralized protocols. Some of our apps are more like Web 2.5, like our Coinbase NFT. But we're getting some that are more like truly Web 3. So I think we're going to do both.
--:-- The way I think of it is the centralized pieces need to help people get a bunch of fiat into crypto. But once they have crypto, they should really be playing in the decentralized crypto-to-crypto world. That's where the really innovative stuff, the freedom-preserving stuff, is going to be happening. And my hope is that in five years, actually, most of our revenue, most of our users are using Coinbase Wallet and not just our brokerage exchange product that's the more centralized piece today. That would tell me that we're really on the right path to creating this decentralized open financial system for the world.
--:-- Ben Horowitz: Yeah, no, really interesting. Let's take a step back and say, we're in a rough time for crypto over the last year. It's been not easy for Coinbase either. You've had layoffs, the stock price has gone down a lot. But this isn't your first crypto winter. And in fact, it's not your first set of layoffs or your first kind of crisis. In some ways, it's easier in that you have a lot more money now than you had then. So how is this crypto winter the same or different than the prior ones?
--:-- Brian Armstrong: Yeah. Well, I think in terms of people's psychology, it's similar. There's despair. There's some bad stuff happening. People get a little disillusioned. The people who are in it for a quick buck get distracted and go somewhere else. The part that's different is this time the broader macro economy obviously went down along with it. And that's created an environment where it's not so much about, is crypto going to still be a thing? That was the question everybody asked me in prior crypto cycles. I even had people come up to me at conferences and say, well, what are you going to do now that Bitcoin is dead? I'm like, well, that's clearly not the case.
--:-- Ben Horowitz: Bitcoin's died a few times.
--:-- Brian Armstrong: Yeah, it has. Nobody is really asking that at this point. It's just the broader macro environment is down. And FTX put a black eye on the industry, but I don't think that it's going to change anything long term. So the same thing that we have to do in past cycles, we're doing in this cycle, which is be really rigorous about costs. Make sure you don't die is the number one thing. If you're Lehman Brothers, you're dead. You don't get to play any of the next rounds of the game. If you're Goldman or JP Morgan, to use a 2008 financial crisis analogy, manage your costs, cut burn where you need to be really responsible. And then if you survive through it, you're going to thrive. You're going to be one of the top companies because you made it through this down period.
--:-- Any company that makes it through that is going to come out a lot stronger. There may be some good deals for companies that preserve cash along that way too. If this lasts another one or two years, which we think it probably will until we see some real signs of life, I think there will be some private valuations that come down or there'll be other opportunities to get really good talent. And so every company should be thinking about how this is not just surviving, but how do you turn it into an opportunity to actually come out even stronger.
--:-- Ben Horowitz: And when you think about that contrast in your business between being really careful with cash versus the opportunities, because psychologically, it's tricky. In the old world, everybody's psychology was we have to get market share. We have to go faster, faster, faster. Money is free. Let's just go. And now it's gone all the way to the opposite end. In retrospect, people would have been like, oh, maybe we should have saved some of that cash. And then how do you get yourself to make an investment in an environment like this at the same time that you're doing a layoff or battening down the hatches?
--:-- Brian Armstrong: Yeah, well, I think Coinbase, we did overhire in 2021. This was an example where I probably got caught up in it as well a little bit. I was like, okay, we have a huge line of customers out the door. We can't even onboard them fast enough.
--:-- Ben Horowitz: FTX is coming at you.
--:-- Brian Armstrong: Yeah, yeah. There was a new competitor getting a billion dollar valuation like every week. It was like, okay, we just got to hire, hire, hire. But of course, anytime you do that, a lot of efficiency breaks down in the organization. You have too many layers of management. Decision-making gets broken. Communication channels get broken. You have people who've barely been there hiring the next people. And so we ran into a lot of this where I'm now trying to get the company to operate like a startup again. If we have four layers of management to get somebody who's actually writing the code, we don't need that. Flatten the org. Let's divide these into different, almost like startups and give them more autonomy and cordon them off to get rid of these coordination headwinds.
--:-- I think every company can do that in its own way. In any company, there's a power law distribution of employees who are adding the most value. If you're going to cut 30% of employees, you don't have to do 30% less stuff. You may only go to 5% less stuff or you may even be 10% faster because there's less coordination headwind. This is not a pleasant thing to think about, but there are people adding disproportionately more value. If you can go in there and do the talent assessments and figure out who's building the stuff that's actually making the product better as opposed to making great internal presentations or whatever all the million other things that seem to grow up in these companies, if you cut all that out, you'll often have a better, healthier company that's moving faster. So that's what I'm doing right now and I think other companies in this down environment are using it as an opportunity to get healthier as a company.
--:-- Ben Horowitz: And when you think about the process for that, because you face this Heisenberg uncertainty principle of management. As soon as you go and look for who's not adding value, everything changes. People are aware that you're doing that. So how do you think about overcoming the politics, the gamesmanship, the things that go on in a company if you actually try and zoom in and go, okay, what do we really need to be doing? Who's really contributing?
--:-- Brian Armstrong: Yeah, well, I feel like I should ask you this question too. You're the expert on this. But actually, I don't think I've ever found a perfect solution to this. There's kind of two schools of thought. One school of thought is get data and instrument it. Obviously we have this performance review process, but most employees will tend to rate each other really highly for peer review. They don't really want to do the tough thing. Even a lot of managers, you have to really push them over and over again. It's like, I don't have anybody who's not great on my team. And it's like, well, no matter how great your team is, there's always somebody who's better than someone else, but you don't want to get into the stack ranking thing. So I think there's an opportunity to actually build some HR software in this space that does pull in data and does things like the Keeper test from Netflix, which tends to pull out better signals. So one school of thought is get more data.
--:-- The other school of thought is there's no substitute. You have to do it with humans. It's literally hand-to-hand combat. Go in with each of your managers, do a talent assessment, force them to do it. In most companies, until you get to be five or ten thousand people, you can take a small team of three or four folks that you really trust and go in and meet with every single person for 10 or 15 minutes and really get an understanding: what are you doing that's adding value to this company? Show me the work. Are you doing the actual work or are you somebody who's in the middle, relaying messages or managing? So you can do it with people, you can do it with humans, whatever is your preference, but you've got to find a way to go there and do it.
--:-- Ben Horowitz: Yeah, no, it's interesting. Elon, one of the things Elon did at Twitter is he looked at the GitHub logs and he's like, if you haven't checked in code in the last 30 days, that's a real problem. So that may target you, speaking of data.
--:-- [Discussion continues...]
--:-- Ben Horowitz: So one of the fallouts of the big boom period was that companies, employees decided that the work wasn't necessarily the thing that they should be about. They should be about the larger society and these political issues and so forth. And you kind of now famously took a stand and said, well, not here, we're not going to do politics. We've got a mission and that's the mission. And if your mission is anything from Roe v. Wade to the environment, you're just not going to do that here. So now it's been a year. How has it gone? Are you happy with how the culture has come out? Were there things that you would do differently? What would you recommend for the founders here?
--:-- Brian Armstrong: Yeah, so I think it turned out to be one of the most important and positive things that I ever did in the company. But obviously it really sucked to go through because at that time, I think everybody was trying to create these activist cultures inside companies. There were a handful of employees, especially in certain areas like the Bay Area and Brooklyn—it was really only in certain geographies—who were essentially trying to get hired at these companies, not with the intention of really working towards the mission, but actually to go in there and hold the company to account for some other broader societal issue that they were working on. I didn't really have any concept of why anybody would do that. It was this very odd thing.
--:-- I noticed this starting to happen inside the org. We were starting to get demands from the employee resource groups and people holding us hostage at the Q&A, grandstanding with the mic, putting us on the spot as the exec team was trying to answer questions. And it wasn't questions about the product or the business or competitors. It was about these totally unrelated issues. So we eventually had this walkout which catalyzed the whole thing. And I was like, okay, I got to do something here. So I reluctantly put this out. I knew it was going to be super controversial.
--:-- Ben Horowitz: Yeah, the New York Times hated it.
--:-- Brian Armstrong: Yeah, it didn't align with their worldview and their politics. And it showed me that there are media organizations out there who are totally willing to publish lies about a company if it doesn't fit their worldview. But I guess I realized at a certain point, there's worse things in life than getting negative articles written about you. If you have an activist employee, a lot of CEOs at that time were so afraid to fire any employee who was causing trouble inside the organization because they're like, oh, they're going to write this tell-all blog post or they're going to claim that we were discriminating and we have to pay some settlement to them. It turns out there are worse things than getting a negative news article or a blog post written about you when someone leaves. The worst thing is to have a company you just lost control of, that's not actually moving towards the mission that you created the company for. A company that you created that you don't even want to work at.
--:-- Ben Horowitz: Right. Yeah.
--:-- Brian Armstrong: And it really almost got to a place where I was like, is this the job of being a CEO in a tech company now? Where I just have to squirm on stage answering these awkward big societal questions? I don't know the answers to these things. So I think a lot of that movement started with some good premises and it got taken way too far. The good parts of it are basically, let's not discriminate against people in the hiring process. Let's treat everybody with respect. And there should be merit in the organization. I think this word meritocracy kind of became a bad word somehow during that whole time.
--:-- Ben Horowitz: Yeah, yeah. Well, they forgot that the meritocracy replaced the crazy weird hierarchy where executives had special parking spots and giant offices and limos to take them to work and all that.
--:-- Brian Armstrong: Yeah. So I mean, look, nobody wants to be hired because of or in spite of their race and their gender. First of all, it's illegal to hire somebody based on their race and gender. But it's also just unethical. And you're not doing a favor to that person. You're kind of undermining them the minute they come into the organization. So there were all these things people were like, well, we should have quotas around this. Well, okay, we don't do quotas, but we're going to have hiring targets, sourcing targets. Those aren't quotas. And I'm like, that sounds like a quota to me. So look, I think all that stuff is treat people fairly with respect. Hire the people who are most qualified for the job. Get rid of bias in your hiring process. And then get rid of all that other stuff. You shouldn't be hiring people with targets of diversity. Hire the people who are most qualified for the job that want to come in and do great work, support their colleagues to advance the mission. And if they have really strong opinions about other stuff in society, that's great. They just shouldn't be distracting people in the workplace with it. So I accidentally became sort of this representative of that thing, which I didn't really want to be, but I'm glad that it had somewhat of an impact. And I took a few arrows so that other people could then go do it.
--:-- Ben Horowitz: Yeah, more than a few. And is there anything that you would have done differently in retrospect in how you made the change? I mean, obviously, you like the company better now than you did before, so the culture is better, and people like working there more, so that all came out well. But was there anything procedurally that you would have gone, well, maybe I want to make the blog post differently or this or that?
--:-- Brian Armstrong: I think the thing that I messed up in hindsight was that I was not clear up front. I was sort of walking on eggshells because I had never encountered this before. So whenever somebody brought up something like this to me, I was like, okay, I just didn't know what to say. And what it did was it allowed a schism to develop inside the organization by just my lack of leadership and lack of clarity. So I think if I were to do it again, I would just be more clear up front with people that we're not going to have a political company. We're going to just focus on this mission. So try to put that in the hiring letters. Put it on the values of the company. Even today with Coinbase, when people join, we have them sign an offer letter. It describes all of the values, including this mission-first thing in there. So nobody can say, oh, I didn't know when I joined. So I would have just done it up front. And then there wouldn't have been this big drama when I later tried to clarify that we're all going to go in this direction.
--:-- Ben Horowitz: Yeah, it's interesting because that also does highlight an important thing that you did, which a lot of leaders are afraid to do, which is, look, it's better to be right than consistent. And you had to be inconsistent because you didn't say it up front, but having the courage to do that actually got you to where you needed to be, which is a great tribute to your leadership.
--:-- [Discussion continues...]
--:-- Ben Horowitz: Kind of moving right along. One of the things that you and I discussed, I think it was two crypto winters ago, but we were kind of going through, well, the ecosystem isn't there yet. And you're like, who's going to build storage? And who's going to build naming? And who's going to build this and so forth? And one of the things we talked about a lot was, well, you're Coinbase. You're going to have to fill in some of these gaps to move the whole industry forward as the leader of the industry. As the leader of the industry, what are you thinking about building next? What does Coinbase have to do next to move all of crypto forward?
--:-- Brian Armstrong: Yeah, well, I go back and forth on this. I don't think it's our responsibility to build everything. There are hundreds of companies in crypto now. And frankly, we can't even keep up with a tiny fraction of all the cool things being built. So in some ways, we're already a little bit like—we have a number of different products where we build for consumers, institutions, developers. And so I would hate to say that we need to make all the content as well. But long way of saying that I think within our products, there are the core things we want to focus on.
--:-- Brian Armstrong: You know, building our retail app and building more functionality in there around things like decentralized social. I think that's a really cool topic that's coming up. I know there are people working on it here—Farcaster and other protocols. I think that's an interesting one.
--:-- Brian Armstrong: I think DeFi gaming is an interesting one. I think DAOs are going to have another resurgence, new forms of governance and voting. Ideally, all that stuff should be built natively right into Coinbase's apps to make it easy for people to participate in on-chain governance situations.
--:-- Brian Armstrong: And there's a lot to be done with the financial services piece. Why don't we just make DeFi easier to use for the average person? They don't know how to transfer their funds to a Chrome extension and bridge their assets to another chain. All that stuff is just way too complicated. We need to get to a point where if you want to use something, you can just click a button and the coins and assets all move and work for you behind the scenes.
--:-- Brian Armstrong: That's where I think Coinbase can probably add the most value. With our venture bets, we're going to try to make some of the next killer apps. But I hope the community builds a lot of that stuff, and we can basically be people's primary financial account to access all of it. And then really enhance the ease of use and the safety aspects.
--:-- Ben Horowitz: Right, right. So, trusted leader. Okay, final question before we go to Q&A. Crypto is all about transparency. You took the step of becoming a public company, which in some ways is the ultimate in transparency. How has that gone? Would you recommend it for others? There's a lot of lore among private company CEOs about going public being the end—no more control of your destiny. How do you feel?
--:-- Brian Armstrong: Yeah, it's funny. When I was in the early stages of the company, I hoped one day we might have the chance to do this. But I always thought being a public company was where you lose control. I was pretty skeptical of it. As we got bigger, I started to do some research. I talked to a bunch of CEOs who had decided to stay private, some who brought in a professional CEO to take it public, and some who had actually gone public.
--:-- Brian Armstrong: There are pros and cons. The pros: it's a lot easier to raise money. In 2021, Coinbase raised $3 billion of debt with very favorable terms. I didn't do a single meeting. Our CFO did it. It took a week and the money was in our account. As a public company, you just have access. You can't do that as a private company.
--:-- Ben Horowitz: Yeah. Imagine the CEOs here in the room probably laugh. Imagine doing a $3 billion fundraiser without a single meeting. That's pretty cool.
--:-- Brian Armstrong: It also legitimized us as a company. It was great marketing. Fortune 500 companies suddenly started to take us seriously. We closed deals with BlackRock, the biggest asset manager in the world, and Meta and Google. All these people are integrating with Coinbase because we're a public company. We're in that league with them.
--:-- Ben Horowitz: You're blessed by the rabbi.
--:-- Brian Armstrong: Yeah, yeah. And there are serious drawbacks too. You get marked to market every day. As a private company, you can raise money and go through cycles, but it doesn't feel like you're getting marked down every day. Everybody can see our revenue multiples. Our stock is down quite a lot, like any high-growth tech stock in this environment.
--:-- Brian Armstrong: I was worried I'd have to spend 20, 30, 40% of my time speaking with public market investors. That turned out not to be the case. I do the earnings calls and spend time with public market investors a couple times a year. I've built good relationships with them. It hasn't been a huge time sink. Like anything, don't overdo it and leverage the people on your team who are even better at it, like our CFO and COO. I focus on the five or ten key relationships with our largest shareholders.
--:-- Brian Armstrong: The last thing I'll say is that dual-class stock is something people should learn about. You can have a different class of shares that allow you to maintain control so you're not dealing with activist investors constantly. For me, that was a good factor that allowed me to focus on what I'm good at. One piece of advice someone gave me: pigs get fat, hogs get slaughtered. Don't go too crazy with the dual-class stock. Do something reasonable.
--:-- Ben Horowitz: Yeah, don't attach it to your grandchildren's grandchildren.
--:-- Brian Armstrong: Yeah, yeah.
--:-- Ben Horowitz: Unless you're the New York Times.
--:-- Brian Armstrong: Unless you're the New York Times. True story.
--:-- Ben Horowitz: Okay, we'll take questions. Does anybody have anything they want to know? Yes, sir.
--:-- Audience Member 1: You talked about DeFi and self-custody as your next recommendations. How are you messaging to retail customers what self-custody means long-term, specifically around security?
--:-- Brian Armstrong: Everyone is a little divided right now. They're thinking, "I can't trust centralized exchanges, let me do self-custody." But people have lost a lot of money with self-custody too. It doesn't happen in a big blow-up all at once, but every week somebody loses money out there. It doesn't make headlines, but as a percentage it may be similar. I don't know—I've never run the data on it.
--:-- Brian Armstrong: As an industry, and this is something Coinbase is trying to help with, we can make self-custody—the UX and the security architecture—harder and harder for people to accidentally lose funds. MPC, or multi-party computation, is a big piece of this. We've invested a lot in that at Coinbase. We're trying to bring elements in where you have a quorum of keys. If you lose one or two, depending on how you architect it—maybe you lose your phone or forget your password—you can reassemble from various pieces. You can do that with social recovery. Vitalik is hot on that idea. The UX around that is an opportunity for innovation.
--:-- Brian Armstrong: Once you've created that great architecture underneath, how do you market it to the average person to help them understand it's better? Apple is an interesting example. I'm not super happy with Apple for other reasons—they've been blocking features in the App Store. But put that aside. What they did with Face ID was a good example of taking a really hard computer science problem. It used LiDAR and liveness detection—a lot of complicated tech. But it has a simple name: Face ID. As an average person, I intuitively know what that is from hearing it. And it was simple to use—I just looked at it and I was in.
--:-- Brian Armstrong: There's an opportunity to do something like that. Multi-party computation is not the right marketing term for the average person. I don't have a specific suggestion to share for the whole industry, but that's the direction we need to go.
--:-- Audience Member 2: Looking back at the other crypto winters you've been through, very uncertain times. Are there particular decisions you felt were really good for Coinbase, or traps or temptations founders might fall into at times like this?
--:-- Ben Horowitz: By the way, it's great to see Coinbase alumni here. There's a nice handful in the audience. Hopefully the Coinbase mafia is going strong.
--:-- Brian Armstrong: That's awesome to see. Traps that companies fall into in crypto cycles... The most common one I see is they don't cut costs soon enough. If you wait, you have to cut more. If you do it up front, you capture the savings earlier. Everybody should be thinking very closely about burn rate and runway. Assume the base case is that 2023 is probably a down year. 2024, maybe we'll see signs of life by the end. That's what I'm hoping. It could be sooner, it could be much worse. It could go through 2026. We could see a lost decade. Make sure you're not in a really bad situation one or two years from now.
--:-- Brian Armstrong: The other trick is to flip your mentality from pessimism, fear, and scarcity to "how is this actually an opportunity?" There is always an opportunity in every down market. There are books like Shackleton's Way about Ernest Shackleton—despair and one setback after another. The leadership lesson is don't allow pessimism to creep into your organization and have people recruit each other into a very negative mentality. History is clear: great companies have often been built in down markets. We'll all look back in three to five years and say, "That was the best time to build this company." There was no distraction. We had nowhere to go. We couldn't go much lower. Build back up from there, don't die, and you'll crush it coming out of this down cycle.
--:-- Ben Horowitz: They have to retain the optimism. When we were in the great dot-com crash, Andreessen used to always say to me, "Ben, don't worry. One day we'll look back at this, chuckle nervously, and change the subject."
--:-- Ben Horowitz: Yes, sir, over there.
--:-- Audience Member 3: As somebody who's built a very large company and probably gone through all the people issues you can have in scaling, how do you go through the phase of getting to 50 people with early execs you built the team with, and then needing to hire for a new function or bring in new senior leaders? How do you balance needing that function and getting it right? We took six months to hire because we wanted to make sure it was important to get right in the culture. But we also spent six months not doing it. I'm curious how you think about that problem as you scale from 50 to 5,000.
--:-- Brian Armstrong: This is always a tough call. When you're a smaller company, it's much harder to recruit. In the early days, we couldn't get good people to come in who were more senior. We couldn't find a CFO or head of finance. Our early stuff was messy and we couldn't find anyone to come clean it up—they were too risk averse. Or a really senior head of security. We had to start with the junior people we had. As you find product-market fit, you start thinking, "These people are over their skis. I need to bring in more management or people with more experience."
--:-- Brian Armstrong: The heart of your question is: do we wait, let the fires burn, and hold out for someone we're really excited about? Or do we compromise to get someone in the role? I'd say hold out and wait. That's what we did. We let the fires burn and tried to fill in the gaps where we could. We waited until we could find someone we were really excited about.
--:-- Brian Armstrong: Even with that, the failure rate of hiring executives is staggering. I remember Jeff Stump and the team came in to talk to us about this when Coinbase was growing. He said the failure rate—if you count success as the executive still being there 18 months later—is something like 50%. That was roughly true in my experience. Even if you wait and think, "This is the right person," 18 months later something may not work out. That's fine. Everyone will freak out. You need to part ways. Some of the Coinbase alumni here can tell you war stories of chaos at certain times. People got battlefield promotions to things they were totally out of their expertise in. That's startup life. Wait to find the right person. Even then, 50% won't work out within 18 months. Part ways and do it again. Some of our executive hires took 18 months when I was hoping for three. That's what it looks like to build a company.
--:-- Ben Horowitz: That's so true. You don't know what you're doing when you're hiring executives. You've never been a CFO or head of HR. You don't know what that job should be. If you find yourself at a much better percentage than 50% failure, you're probably not firing people at the right rate. You've probably got people destroying your company and you're not recognizing it. It just is what it is.
--:-- Audience Member 4: In the last few months, Coinbase has been a lot more active with protocol contributions and development. I think last week Vitalik gave you guys a shout-out for helping with the 4844 development. Do you have any particular aspirations or goals with that effort?
--:-- Brian Armstrong: Generally, we want to start building more protocols at Coinbase. It's clear that's an important way Web3 is going to get developed. There are a handful of areas where—our culture and the majority of our revenue still comes from relatively centralized things. It's been a big effort internally to create groups that can really be crypto-native, focus on decentralized apps, and free them up to not have a bunch of lawyers around shutting down every idea in its infancy. We need good feedback from lawyers at key moments, but we don't want it to destroy the innovation potential.
--:-- Brian Armstrong: Thanks for noticing. We're going to keep trying to do more and more of that as a truly crypto-forward company. Some people probably think of Coinbase as somewhat tradify because of our centralized products. But we also have a ton of really great crypto-forward talent. Many are very entrepreneurial. Some are here in the room. Some of that will get built inside Coinbase, some will go outside. We're happy to do both and help grow the whole ecosystem.
--:-- Ben Horowitz: All right. We are out of time. I'd like to thank Brian for joining us and sharing his voice. Thanks, everyone.
--:-- Sonal Toxie: Thank you for listening to Web3 with a16z. You can find show notes with links to resources, books, papers discussed, transcripts, and more at a16zcrypto.com. This episode was produced and edited by me, Sonal Toxie. This episode was technically edited by our audio editor, Seven Morris. Credit also to Moonshot Design for the art, and all thanks to support from a16z Crypto. To follow more of our work and get updates, resources from us and from others, be sure to subscribe to our Web3 weekly newsletter. You can find it on our website at a16zcrypto.com. Thank you for listening and for subscribing. Let's f***ing go. Thank you.
