In-Depth Analysis of Multicoin Capital: Eight Methodologies to Become a Contrarian Investor

Original Author: Mario Gabriele (Founder of The Generalist)

Original Title: 《Multicoin Capital: How to be a Contrarian》

Translation: Linqi, Chain Catcher

Every venture capitalist hopes to be a contrarian investor. Many Medium articles and Twitter posts are written in pursuit of this coveted reputation. This interest is not merely vanity; after all, shaping a non-traditional image is quite appealing. As the saying goes, venture capital is a game of pursuing "non-consensus and correct." The second point is easier to understand: if you're wrong, you won't make money. For newcomers, the importance of non-consensus may be harder to grasp. Due to the uneven distribution of venture capital, merely having conviction is not enough; you must firmly believe you are right about things that others mock or ignore. Only these opportunities will create enough value misalignment to yield significant returns, as the wisdom that everyone shares will only produce a small amount of alpha.

Multicoin embraces this truth. It is not only correct (to some extent), but it is also correct amidst some opposition. Few companies are willing to steadfastly hold onto their beliefs over a long period.

How does Multicoin achieve this? What does it mean to run a truly contrarian investment fund? What factors enable the investment team to reliably find and invest in those "outlier" winners?

We will explore Multicoin's investment process from start to finish, covering:

Forming Investment Theory: Some funds do not have their own investment theory and lean more towards investing in great founders who can propose new ideas, but this is not Multicoin's style.

Finding Opportunities: This involves creating some noise. Once Multicoin has an investment theory, it will look for projects that share similar ideas. At the same time, it will create some "noise" to stir things up.

Evaluating Investments: Multicoin only funds companies it believes are "first-order correct," even if adhering to this rule means missing out on some projects.

Revealing Blind Spots: To sharpen team thinking and correct the inadequacies of its investment theory, Multicoin has established an investment committee that operates like a debate.

Scaling Bets: Once Multicoin decides to invest in a company, it considers how to determine the size of the investment.

Value Addition: With few exceptions, every investor tries to support the companies they invest in. Multicoin has particularly deep relationships with these founders and actively provides support.

Aggressive Doubling Down: Part of Multicoin's investment strategy is to reinvest in high-quality investment projects, even if other VCs are exiting.

Step 1: Forming Investment Theory

Among the various approaches to comparing venture capitalists, one of the most illustrative is placing them between "opportunistic" and "theory-driven."

Opportunists believe that fundamental innovations are unpredictable. Recognizing this ignorance, the best approach is to find visionary entrepreneurs. The most basic stance is reactive and accepting: you are eager to be surprised by originality and are happy to evaluate what comes before you. As Multicoin co-founder Tushar Jain describes, this is not much different from "swiping on Tinder."

Theory-driven investors take a different approach. By studying specific markets or trends, these investors commit to particular viewpoints they believe are predictive. Once formed, theory-driven capitalists will look for investment projects that match their mental models. Investors hope that by forming a viewpoint, they can better know where to start and which factors to prioritize.

There is a vast gray area between these two extremes: opportunistic financiers may prioritize certain areas, while even the most theory-driven capitalists must possess a degree of flexibility.

Multicoin is on one end of this spectrum. As Jain puts it, "We start with theory first. Many investors say this, but we take it to an extreme." Indeed, Jain emphasizes that the company's primary task is to formulate an investment plan, not to find investment targets:

"I often joke with our investment team that their job is not to find good investment projects. I don't care if they can find high-quality investments. I want them to find good investment theories. We just happen to monetize their viewpoints through investments."

Jain believes this framework is fundamentally pragmatic: "Theory formers are more valuable than finders of investments because you may get multiple investment opportunities from it, so knowing what matters is more important."

"What is truly needed?" Multicoin's theory starts from here. Notably, both hedge funds and venture capital operate as a single team, executing a consistent strategy across different departments. In our conversation, Samani and Jain told me how they built new perspectives for Multicoin.

First, they identify a promising market. This may start from a high-level perspective, such as selecting a track like DAOs, and then narrowing down to precisely target goals. Once the target area is determined, Multicoin begins to try to understand the "layers" and "design decisions" within that space. How will different teams handle relevant opportunities? Why do they use a specific tech stack instead of another? What choices and trade-offs do they need to make? Jain believes that weighing trade-offs is particularly important:

"This is helpful because when you are exploring at the possible margins, there are usually no right answers; it's a trade-off."

Once the planning is complete, Multicoin focuses on the most exciting elements in the design space, looking for "big, targeted bets." While this may sound like a trivial addition, it is crucial for understanding Multicoin's strategy. The firm explicitly does not want to focus on a specific market or business model.

"We don't like to say, P2E is interesting, so let's invest in P2E projects in India, the Philippines, and Argentina," co-founder Kyle Samani says. "Being in a red ocean market is also fine," he adds, "but if we are really going to enter a red ocean market, we need to be very clear about why our investment team can take a unique approach to build structural trenches that ultimately generate scalable returns."

The commitment to accuracy is one of the main strategic distinctions between funds like Multicoin and those like Tiger. While both are theory-driven, Tiger focuses on macro trends; when it finds a method it believes is effective, it will repeatedly invest across the market. In contrast, Multicoin's investment type is more like surgical precision.

For example, at the end of 2020, it published the article "Trade-offs in the Decentralized FTX Space." Written by Tushar Jain and Spencer Applebaum, it outlines the opportunity for a "decentralized FTX" and discusses the pros and cons of different approaches. Jain and Applebaum highlighted ten characteristics needed for decentralized derivatives exchanges, including the ability to guide liquidity and enable "moderately high" leverage.

Four months after Multicoin published that article, the firm announced its investment in Perpetual Protocol because they believed Perpetual met several of the indicators outlined by the team, such as providing deep liquidity and high leverage.

In this regard, Multicoin seems to have perfected a form of "risk demonstration," using its blog as a vision board to summon the startups it wants to see. Browsing the blog content, you will find a very direct connection between the initial statements and the final investments. Discussions about decentralized storage turned into investments in Arweave, while thoughts on speed and scalability led to investments in Solana.

This model indicates that Multicoin's self-description as theory-driven is certainly not empty talk and has been validated by its established portfolio.

Although the fund tends to operate with this research-first, deploy-later approach, its partnerships indicate that flexibility is also present. Samani explains:

"We strongly lean towards investing with a theory about how the market will develop and why a certain team will win. But we also believe that in certain markets, we cannot firmly make such decisions."

According to Samani's estimates, about 10% of Multicoin's investments fall into the latter strategy. The Web3 credential network Project Galaxy is one such example. Although there is no clear view on how the market will develop, Multicoin has confidence in this entrepreneur and believes the Galaxy team is seeking viable growth strategies.

Step 2: Finding Opportunities

Once Multicoin has an investment theory, it begins searching for suitable companies.

Since its inception, much of Multicoin's effort has focused on developing "interest marketing." From the beginning, Jain and Samani understood the power of building an audience and recognition, which helped the company establish one of the best approaches to crypto thinking in this field. Multicoin has continued this strategy and even expanded its business coverage.

In 2020, Mable Jiang created the company's Mandarin podcast, noting that it has become the number one crypto program in China. According to Jiang, the English version has also attracted many listeners from Vietnam, Thailand, and Singapore. Project Galaxy CEO Harry Zhang stated that he discovered the fund through Multicoin's media activities, "I read the research papers published by Multicoin, and they are really great," adding that Multicoin is an "obvious" tier-one player in the Chinese market.

Multicoin's audience is not limited to traditional media. It is most active on Twitter, especially Samani. As mentioned in previous articles, Multicoin's tendency to exaggerate may mislead some, but this seems to be a somewhat deliberate strategy.

One version of the firm's publicly released 2018 annual letter states that Samani and Jain "often use Cunningham's Law," meaning that the best way to get the right answer on the internet is not to ask a question but to post a wrong answer. Samani reiterated his interpretation of the 2018 annual letter, saying, "A large portion of my tweets is fishing games, and it works very well." This behavior from Samani and Multicoin seems to have somewhat mellowed over the past two years.

Due to the company's close collaboration with Solana, a relatively new source of potential projects has emerged. In an outstanding marketing initiative, the high-speed Layer 1 is building "hacker houses" globally, and Multicoin is almost present wherever it is. As the next generation of Solana developers is developed, many will naturally turn to Multicoin.

As you might expect, a large number of opportunities are obtained through traditional marketing efforts. These include both passive and active approaches. On one hand, everyone at Multicoin emphasizes diverse reading, with Samani being particularly prolific. According to him, he starts reading for four hours every morning at 6:00 AM, with various content flooding the company's Slack channel.

Samani subscribes to a large number of news sources, reading up to 30 articles daily. This content usually comes from companies he has spoken with and wants to continue observing, as well as the outputs of other investors and thinkers.

Samani notes that he spends no less than an hour a day on Twitter, and in his view, this is not a waste of time, as Twitter's algorithm has effectively tailored to his tastes. To find opportunities, the company's analysts and colleagues also immerse themselves in Discord or Reddit. Additionally, the Multicoin team iterates its viewpoints by talking with other investors and builders.

Beyond these efforts, Multicoin also conducts business in the most primal way: going out to recruit. Especially at the beginning of the fund's establishment, both partners traveled extensively to expand their networks and meet emerging builders in the industry. Samani notes that in 2018 and 2019, he spent 120 days a year on the road, attending conferences and hackathons from one coast to another, from one continent to another. "We met almost everyone, and it turned out to be very important," Samani says.

Step 3: Evaluation

Once investors have the opportunity to evaluate projects, the real work begins. Due to its theory-driven roots, Multicoin has a unique perspective on evaluating deals.

In our discussion, Samani mentioned Marc Andreessen's classic article "The only thing that matters," in which the a16z founder argues that among team, product, and market, investors should focus on the market. Multicoin agrees with this view but also has its own perspective: the market is important, but it is even more important to understand how the market will develop and operate.

To conduct evaluations, Multicoin examines the degree to which a project maps to its market viewpoint. Does it possess the key advantageous characteristics that Multicoin considers most important? How will it evolve as the market space develops? Samani discussed the importance of answering these questions:

"We spend a lot of time discussing how we think the market will develop and operate. What do we believe, and what are the probabilities?"

Our goal is to ensure that Multicoin fully considers the maturation process of investments, as well as the second and third-order effects that may arise from initial successes or failures. Most importantly, this evaluation seems to be at the core of the fund's assessment, as it is a focal point of investment committee meetings, as we will discuss later.

Samani states, "Compared to market evaluation, Multicoin spends remarkably less time on team and product." To some extent, this is because great entrepreneurs often struggle to articulate what is novel about their projects. Samani says, "I find that most of the time, entrepreneurs cannot clearly express their viewpoints." As mentioned in previous articles, Solana founder Anatoly Yakovenko is an example.

In addition to these factors, the team also evaluates any systemic advantages the company may have. Samani and Jain consider network effects and psychological arbitrage as interesting perspectives for evaluation.

"I think most people misunderstand them," Samani says when discussing network effects. "Most of the time, when people mention network effects, they are exaggerated. Then there are times when people greatly underestimate them." Portfolio company Helium is an example, as its network effects may still be undervalued. As nodes enter the system, the performance and functionality of the decentralized wireless network also improve.

Although not a project invested in by Multicoin, Samani points out that PoolTogether is an example of psychological arbitrage. The protocol offers a gamified savings product: users have the chance to win larger rewards by depositing. Since the reward is generated through DeFi staking, even those who do not win can get their money back and receive the native token POOL for participation. The longer you save in PoolTogether, the more POOL you earn.

If a potential Multicoin investment project has a serious flaw, it will be viewed as a "first-order error." In short, the team believes that a problematic product is meaningless and has fundamental flaws in certain aspects. Multicoin takes this evaluation seriously, with Jain describing himself and Samani as valuing "first-order principles."

The rigor with which Multicoin makes this decision has led to missing out on high-quality projects, including Uniswap and Yearn Finance. Both entered the top 100 by market capitalization from relatively obscure positions.

While missing a groundbreaking project may be somewhat disappointing, Multicoin does not mind. For Samani and Jain, both projects still had first-order errors. In the case of Uniswap, Multicoin believed that the protocol was an invalid pricing mechanism, and the fundamental mechanics of the system meant it could never increase trading fees.

"In all other conditions being equal, if Uniswap increases fees, the system will stop working," Samani says. "If that happens, token holders may severely parasitize market makers and buyers." Jain adds, "There can be no parasites in open-source systems; they get forked out."

Multicoin's skepticism towards Yearn follows a similar logic but differs in some aspects. Yearn explicitly charges fees, although Jain does not believe in the sustainability of such revenue. "Nowadays, people are willing to pay YFI fees," he refers to the Yearn token, "but that is unreasonable. The market tends to rationality in the long run."

The inevitable result of disciplined investing is that you must accept missing opportunities that do not align with your viewpoint. Multicoin excels in its control capabilities; it can miss trades, but importantly, it wants to ensure that the companies and projects it supports are meaningful.

Step 4: Debate

If an investment is deemed promising, it ultimately enters Multicoin's investment committee. While many VCs hold similar meetings, it is essential for Multicoin's approach. In pursuit of in-depth research and conviction-based investments, Samani and Jain place new positions in a challenge designed to expose risks and blind spots.

According to Mable Jiang, everything starts with content, which is "the most important thing for Multicoin." First, team members create a memo outlining their viewpoints, especially regarding the market and its development. Anyone can propose their investment ideas, regardless of whether they are investors. "Our hierarchy is very flat," partner Matt Shapiro points out.

Once the document is formed, other team members are encouraged to read and comment, providing different perspectives. From asynchronous debates, it transitions into intense synchronous meetings. Partner and PR head John Roberts (JR) Reed discusses this, saying:

"The decision-making process is filled with friction. Sometimes there are heated debates. Sometimes people need to leave or change their communication style—from verbal to written and back to verbal. But through all the intense discussions, you arrive at the most solid ideas."

For Jain, the key to having productive conversations is "frequent opposition and getting good counterarguments." You might wonder how to oppose well. For Multicoin, it boils down to two main factors. First, "You need to fundamentally respect others," believing they have valuable viewpoints to share; second, "You must be curious." Jain points out that specifically, "You must be willing to constantly ask, what did I miss? Until you find the root of the problem. You just need to keep peeling it back layer by layer."

Not every debate can be resolved. In these cases, Multicoin seeks solutions based on conviction rather than consensus.

Of course, not all decisions require such in-depth deliberation. Given Multicoin's established relationship with founder Sam Bankman-Fried and its deep understanding of the exchange market, choosing to invest in FTX US's recent funding round did not take long. "We didn't need to discuss it for more than eight seconds," Samani says.

Step 5: Winning

It can be argued that there is currently no hotter venture capital market than cryptocurrency. Funds like Paradigm, Electric Capital, and a16z are scaling up; newcomers like Haun Ventures have entered the race with substantial capital; traditional players like Bessemer and Bain have also decided to compete.

How does Multicoin deploy to win compared to funds with larger teams and more capital? To some extent, it does this by picking some lesser-known arguments and identifying promising projects that other funds have already abandoned. As mentioned in previous articles, Solana, Helium, and The Graph all went through difficult fundraising processes before becoming hot games.

When Multicoin does operate in the "red ocean market," it relies on some weapons. First is its genuine interest and expertise, particularly in the track the project is in. Samani:

"One thing you might often hear about us is that whether we ultimately invest or not, we usually ask some of the most challenging, nuanced questions about how the market will develop. We really pressure them on this. This may be the most effective tool for winning investment contracts. The founders realize that these questions force them to think about the market in unprecedented ways."

Multicoin also recognizes that venture capital is a service business. "Entrepreneurs want investors to act at their pace," Jain says. To accommodate this speed, the Multicoin team makes itself broadly available to all investment projects and aims to respond as quickly as possible.

One lever that Multicoin is unwilling to pull to win deals is valuation. To maximize the potential of a grand slam, Multicoin wants to maintain pricing principles. Of course, every rule has exceptions. "My team and I are very clear: at some time or place, there is a valuation insensitivity," Samani says. Such events are rare, estimated to occur about once a year, but when they do arise, the team will discard the rule.

Serum is one such example; it is a decentralized exchange built by Sam Bankman-Fried based on Solana. Given Sam's reputation, Serum was highly valued, but Multicoin recognized it was an investment worth deviating from. "We knew Sam was the one creating it," Samani says, "and Anatoly's vision was to build an order book on Solana. This absolutely cannot be missed."

Step 6: Scaling

To benchmark Serum's high valuation, Samani notes that the fund has "actively" adjusted their positions. This involves another key step in Multicoin's process: deciding how much to invest in a deal.

Part of the reason Multicoin is so successful is its courage to make concentrated investments. According to Jain, the confidence in holding these positions can be traced back to the research from Step 1: "Understanding the market space and the trade-offs involved gives us confidence to scale it up." When its managing partners are optimistic, Multicoin tends to make the largest investments.

Jain discusses this when talking about himself and Samani. "That's why we are confident in actively adjusting the scale of our positions. I don't think we have any major wins that are without scale."

Another oddity is that the hedge fund allows Multicoin to short, although the fund is shorting less frequently. Given the many scams that are heavily hyped in the crypto space, you might wonder why. In fact, Samani mentioned the value of shorting in exposing bad projects, especially those relying on unsustainable economic models.

He says, "Shorting is a very interesting way to defeat Ponzi schemes," citing the recent project Olympus as an example. Multicoin's shorting behavior is not limited to potential Ponzi schemes. In the past, it has successfully shorted Zcash, Monero, and Ripple.

So why abandon this approach? "Shorting is hard to profit from," Jain says, as it has asymmetric disadvantages rather than asymmetric advantages. Additionally, it brings reputational risks, which are significant in the context of Multicoin operating a risk fund. "While shorting makes the market more efficient, it doesn't look good when hedge funds make money while others lose," Jain says.

Step 7: Active Support

Multicoin is not a hands-off investor. It constantly seeks ways to help its portfolio projects think and execute better. The efforts in this regard are diverse, but first and foremost, the portfolio companies come first. Samani states:

"We always share ideas or news events with them. Not the kind of 'Oh my, this is a competitor, and they will crush you.' More importantly, we send a note to the portfolio companies saying, 'Hey, I saw this article, and it reminded me of what you're working on. You might want to consider this content.'"

Entrepreneurs spontaneously support this notion. Project Galaxy CEO Harry Zhang states, "They are always thinking about how to help you without you having to ask." Samani adds that while about 80% of the messages he sends might be "don't go anywhere," it doesn't matter. "I want them to know that I'm always paying attention to them. In 20% of the cases, the message is still useful." Considering that Samani estimates he sends about 20 such messages to founders in his portfolio daily, a 20% success rate is quite high.

While Multicoin uses a percentage approach when providing advice, it also offers more tangible support. In particular, fund partner Reed provides strong marketing and PR assistance. LP Adam Mastrelli states that Reed's joining in 2018 was "milestone," as he brought new value. The founders of Multicoin confirmed this statement.

The Graph's Tegan Kline referred to Reed as "an extremely smart person," while Solana co-founder Raj Gokal stated that he shared everything "we know about PR, marketing, product launches, and community management." In the often confusing crypto world, having someone who understands the technology and can create compelling narratives is incredibly valuable.

Another way Multicoin provides support is by helping projects expand into China. Since hiring Mable Jiang in 2019, the company has established a certain status in China's crypto ecosystem. For example, during Solana's 2020 Asia tour, Mable Jiang utilized WeChat and Chinese social media platforms to help devise a "super-localized" bridging strategy. This included business development introductions to help Solana hire talent in China. Eighteen months later, Mable Jiang noted that "Solana's visibility in China has increased significantly." Additionally, Mable Jiang provided similar value for Helium and The Graph, helping both projects recruit regional staff.

Multicoin's ability to provide cross-continental support is a rare advantage. No other U.S. cryptocurrency fund has such a mature foundation in China. Samani reflects on Multicoin's approach:

"The crypto capital market is inherently global. We realized this early on and tried to help all the companies we invest in by integrating major cultures into our team."

In addition to PR and expertise in the Chinese market, Multicoin also seems keen to add value in other ways based on specific circumstances. For instance, as mentioned in previous articles, the team played a significant role in helping Helium define its token structure.

Finally, Multicoin seeks to drive company growth by advocating for progressive crypto regulation. Last year, former Chapman and Cutler partner Greg Xethalis joined Multicoin to oversee internal legal functions and guide the company's work in Washington. Xethalis had previously been involved in the first Bitcoin ETF proposal and represented several well-known crypto operators in the field for over nine years.

In our conversation, he noted that Multicoin "wants to participate in policy decisions in Washington." Specifically, he outlined two priorities. The first is to determine how Bitcoin and other digital assets should be treated from a tax perspective. The second is to create a framework for network launches and DeFi to support industry growth, although there will be "certain guardrails (referring to regulation)."

Xethalis acknowledged that while there is no single law that can address the industry's issues, he and the company are eager to advocate for a more lenient crypto environment in the U.S. Multicoin's regulatory interests are another example of actively helping companies.

Step 8: Active Follow-Up

Some decisions come at a painful cost to learn. In 2019, Multicoin bought Binance's native token BNB early on. Given that BNB rose over 6,300% in the following three years, it was a massive trade. However, Multicoin missed some of the profits. "We adjusted our positions too quickly, and as a result, it kept rising," Jain recalls with a sigh, "There were others, but we could have profited more, and it formed a massive market. We learned that you need to let your winners run."

Fortunately, this seems to be just an isolated judgment error. Overall, Multicoin tends to hold onto its winners rather than trimming positions. As mentioned earlier, Multicoin purchased Solana's tokens from other investors early on when many had already lost confidence in it.

Samani and Jain similarly followed up with Helium, The Graph, and several other companies. After purchasing FTX's token FTT, the team closely monitored Sam Bankman-Fried's work to assist in the creation of Serum and participated in FTX US's recent funding round. When Multicoin feels that a project will be a winner, it will double or triple down, even if other investors oppose.

Conclusion

Multicoin Capital has earned one of the rarest honors in the venture capital world: going against the tide. It has a history of choosing non-consensus investments and proving to be correct. Achieving this requires more than a flashy Twitter presence, trendy marketing, or provocative meetings; it hinges on the firm adhering to the most fundamental principles—independent thinking.