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February 28, 2014, 05:08:02 AM |
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By Serena Saitto
Feb. 28 (Bloomberg) -- Growing up in Latin America, Micky
Malka is no stranger to financial turmoil.
Coping with currency swings proved apt training for Malka,
an entrepreneur cum venture capitalist -- and one of Bitcoin’s
biggest bulls.
The 39-year-old Venezuelan joins higher-profile investors,
such as Marc Andreessen and Fred Wilson, in betting that the
virtual currency will keep gaining traction as a way for people
to buy and sell things online. These Bitcoin backers are holding
firm even as a barrage of bad news -- including the shutdown of
Mt.Gox, once the largest Bitcoin exchange -- makes others leery
of the digital money.
“I have no doubt on the future of Bitcoin because the
concept of money becoming digital in all shapes and forms is
here to stay,” Malka said.
Malka began investing in Bitcoins in 2011 to pay a
contractor in Argentina and bypass government money-transfer
restrictions. He founded venture capital firm Ribbit Capital the
following year with $100 million to invest in financial-services
startups and Bitcoin companies such as Coinbase Inc. and BTCJam.
Andreessen’s Andreessen Horowitz and Wilson’s Union Square
Ventures also back Coinbase.
Unlike most venture capital firms, Ribbit also invests
directly in the virtual currency. Social+Capital Partnership,
founded in 2011 by former Facebook Inc. executive Chamath
Palihapitiya also invests in Bitcoins. The two firms together
control at least 5 percent of the Bitcoins mined, according to
Palihapitiya, whose fund is an investor in Ribbit Capital.
Virtual Currency
That indicates that the firms’ holdings may be worth about
$360 million at current exchange rates, based on the 12.4
million Bitcoins in existence, according to Bitcoincharts.com,
which compiles prices and currency data, and the CoinDesk
Bitcoin Price Index.
“There’s more money to be made owning Bitcoins than
Bitcoin companies,” said Palihapitiya, whose fund doesn’t
directly back Bitcoin companies. He and Malka declined to
comment on the value of their holdings.
Bitcoin, subject to large swings, can test the mettle even
of investors willing to stomach risks. Tokyo-based Mt.Gox shut
this week amid reports that hackers may have pilfered more than
$390 million in Bitcoins from the exchange, sparking a slump of
about 10 percent in the currency.
Introduced in 2008, Bitcoin captured the attention of
technologists, investors and governments last year, fueling a
rally that drove it to a record of about $1,200 from $12.
Scrutiny from regulators, bans in China and India and stumbles
by merchants and service providers have fueled volatility and a
decline in the value of Bitcoins, which were trading today at
$576.
Money Alternatives
Mt.Gox Chief Executive Officer Mark Karpeles resigned from
the Bitcoin Foundation, an advocacy group for the digital money,
which provided information to federal prosecutors this week that
aided a probe into Mt.Gox.
“Mt.Gox is the only exchange that wasn’t backed by venture
funds or institutional investors,” said Malka, who is on the
foundation’s board. “It will take time for the rest of the
Bitcoin ecosystem to prove that this is a bad apple and not a
problem of the entire ecosystem.”
While Malka says there’s a chance the currency will flop,
he predicts that more businesses will use the currency as an
alternative to traditional means for investing and carrying out
transactions. He sees it as a payments system that can serve
economies, like Venezuela’s, that restrict the flow of money via
capital controls and as a hedge against inflation, like precious
metals.
Latin America
“It’s not going to be a smooth or overnight success,” he
said. “Financial services is the biggest industry which has not
been disrupted by technology.”
Wilson, a managing partner at Union Square Ventures, and
Margit Wennmachers, a partner at Andreessen Horowitz, said their
firms remain bullish on Bitcoin.
Venture funds have invested $86 million in Bitcoin
companies, mostly over the past 12 months, Wedbush Securities
Inc. wrote in a Feb. 18 report.
Venezuela’s hyperinflation, one of the legacies of Hugo
Chavez’s 14 years as president, drove Malka to come up with
alternative financial services and embrace Bitcoins, he said.
“I started my first company much earlier than I planned
because I lost my first job in the financial crisis triggered by
Chavez’s first failed military coup in 1992,” said Malka, who
in 1993 founded bond broker Heptagon Grupo Financiero in
Caracas, when he was 19.
Investing Rules
Malka, who graduated with a degree in economics from the
Universidad Católica Andrés Bello in Caracas, later started five
other financial services companies, including Patagon, an online
brokerage. Malka and Wences Casares, who co-founded the company,
sold Patagon to Banco Santander SA for $750 million in 2000.
After running the business in Spain and founding a bank for
low-income borrowers in Brazil, Malka moved to San Francisco in
2007 because he “wanted to play in the major leagues,” he
said.
In 2011, Malka and Casares started Bling Nation Inc., a
mobile-payments company. After ditching hardware and focusing on
software, the company was re-introduced as Lemon.com, which
LifeLock Inc. bought in December for $50 million, they said.
Malka then established Ribbit Capital, seeking to invest in
technology startups innovating in financial services. Ribbit has
so far backed 11 companies including Borro Ltd., which offers
cash for luxury goods such as jewelry, watches and cars.
Coinbase is an online Bitcoin storage service, while Brazil’s
BTCJam lets people borrow from each other using Bitcoin as a
benchmark.
Taking Risks
Directly investing in Bitcoins is an uncommon and risky
strategy for a venture capital fund, according to Josh Lerner, a
professor of investment banking at Harvard Business School.
“Venture capital agreements have strict prohibition on
investing in futures and currency,” said Lerner.
It’s still a risk worth taking, said Palihapitiya, whose
fund has been delivering an average annual return on investment
for limited partners of 40 percent to 60 percent since its
inception in 2011.
“My LPs don’t care if I invest in Bitcoins or Bitcoin
companies, as long as my returns are good,” said Palihapitiya,
whose fund has also invested in Bling Nation.
Ribbit Capital has done even better, returning 400 percent
since its debut, two people with knowledge of the situation
said. Malka declined to comment on his fund’s performance.
Digital Cash
When venture investor Jeremy Liew was considering whether
to back Bitcoin startups, he said he turned to Malka, who has
spoken on the virtual currency at five conferences in the past
year.
“We were interested in Bitcoin and Micky helped us get up
to speed,” said Liew of Lightspeed Venture Partners, which is
an investor in Malka’s fund. Lightspeed has since backed three
Bitcoin companies, including China’s largest Bitcoin exchange,
BTC China, and has seven indirect investments through a Bitcoin
incubator that supports early stage startups.
While companies and regulators are still debating how to
treat Bitcoin, others have embraced it.
David Marcus, president of EBay Inc.’s PayPal payments
unit, said he finds Bitcoins “fascinating,” and he only
invests in the virtual currency with personal funds as a limited
partner in Ribbit Capital. PayPal itself won’t offer Bitcoin
services until regulatory issues become clearer, Marcus said.
“Venture capital is about taking risk, and you can’t be
focused on financial services without investing in Bitcoins,”
Marcus said of Ribbit’s strategy. “There are very few venture
capitalists focused on financial services, and that makes Malka
sharp and truly unique.”
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