Multicoin Capital: How to be a Contrarian

Hello friends,

Today’s piece seeks to answer one question: How do you become a contrarian investor?

The best answer is a simple one. A contrarian investor – or at least a good one – has a gift for being non-consensus and right.

But…how does that happen?

In Multicoin, we have a ready case study. If last week’s piece primarily focused on the firm’s origins and outrageous, groundbreaking performance, this edition digs into how such returns are produced.

What does the fund look for in its investments? How does it make its decisions? When does Multicoin maintain its discipline and when does it bend its rules? To start to understand how the fund reaches conviction to make concentrated, non-consensus bets, jump in below. ​
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MULTICOIN CAPITAL: HOW TO BE A CONTRARIAN (PART 2)

Actionable insights

If you only have a couple of minutes to spare, here’s what investors, operators, and founders should know about how Multicoin Capital finds and makes its investments.

• Multicoin is thesis-driven. The firm spends considerable effort researching relevant markets and trends to determine which approach is likeliest to win. The majority of Multicoin’s investments have arisen through this process.
• Investments must be “first-order correct.” Multicoin’s founders Kyle Samani and Tushar Jain pride themselves on thinking from first principles. They expect every investment to fundamentally make sense. This might sound logical but is often at odds with speculative industries like crypto.
• Debate helps hone ideas. Multicoin’s investment committee meetings can be fierce, with employees passionately arguing different perspectives. The goal is to surface blind spots and ensure the creation of an “idea meritocracy.”
• Win through rigor. Multicoin’s team can be intense participants in a fundraising meeting by their own account. Above all, they push founders on how a given market might develop. When it comes time to secure allocation in a deal, that same intensity can prove an asset. Entrepreneurs want someone at the table that improves their thinking.
• Bridging the US and China offers unique value. Crypto is a global phenomenon, yet most of the sector’s investment firms focus on a single geography. Multicoin has taken a different approach. By establishing a presence in China, it can help its projects access new markets with on-the-ground support and expertise.

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Every venture capitalist hopes to be a contrarian. Many Medium posts and Twitter threads have been penned in bald pursuit of this coveted denomination. Such interest is not motivated by vanity alone – it is, after all, quite suave to cut an iconoclastic figure. Rather, that is where the money is.

As the saying goes, venture is a game of being “non-consensus and right.” It’s easier to understand the second of these: you do not make money if you are wrong. The importance of being non-consensus can be trickier for a newcomer to grasp. Because of venture capital’s skewed distributions, it is not enough to just be right – you must be right about something that everyone else ridicules or ignores. Only these opportunities produce enough value dislocation for monster returns. Accepted wisdom yields little alpha.

Multicoin Capital embodies this dictum. Not only has it been right (a lot), it has been right in the face of vociferous disbelievers. Few firms have been willing to look so foolish for so long in commitment to their convictions.

How does Multicoin do this? What does it mean to run a fund that is genuinely contrarian? Which factors allow the investment team to find and fund offbeat winners so reliably?

Based on my time spent with Multicoin, its limited partners (LPs), and portfolio founders, I’ve developed an understanding of how it answers these questions. In today’s piece, we’ll explore Multicoin’s investment process from start to finish, touching on:

• Thesis formation. Some funds operate opportunistically, investing in great founders that surface new ideas. That’s not Multicoin’s style.
• Sourcing opportunities. Once Multicoin has a thesis in mind, it searches for projects with a similar view of the world. Doing so involves making some noise.
• Evaluating investments. The partnership only funds businesses it believes are “first-order correct.” Adhering to this rule has involved missing some winners.
• Surfacing blindspots. To sharpen its thinking and disabuse itself of weak arguments, Multicoin runs investment committees that operate like debates.
• Sizing bets. Once Multicoin has decided to invest in a company, it thinks about how to size its investment. Part of what has made it most effective is its willingness to bet big.
• Adding value. With few exceptions, every investor tries to support its portfolio companies. Multicoin goes particularly deep with its founders and is proactive in providing support.
• Aggressively leveling up. Part of Multicoin’s approach is to follow its best bets with further investment. It does this even when other VCs seem to be taking a step back.

Let’s get to it.

IN A MEME
​​​​For the pictorially inclined, here's the whole piece — all 5,700 words of it — in a single meme.

PUZZLER
​​​All guesses are welcome and clues are given to anyone that would like one. Just respond to this email for a hint.

Who tops our winners circle this week? None other than Greg K who acted with impressive speed to secure his spot. He was followed by Rohit K, Austin V, Ali M, Tord N, Jerry L, Steven R, Robert H, Jean B, David W, S.N., Massimiliano B, Adeola O, Tamar L, Kas I, Blasa D.B, Jim W, Ian M.B., Partha B, H.I., Attison B, Aaron M, Mustafa N, Lyndon B, Luke M, Apoorv K, and Hari A. All of them saw through the chicanery of this previous puzzler:

The answer? A joke. A-ha! Well played to all the merry puzzling pranksters. See you all again next week and wishing my very best in the meantime.

Until then,

Mario