An era for builders
November 28, 2022
The last few years have been a portrait of excess without good governance. Startups raised at astronomical valuations, getting term sheets for fundraising rounds in days often times without even needing to provide a data room. If anyone ever tried to do real diligence, the company would push back and just go with the investor who didn't need it. After the rounds were done, the normal process of setting up a board, holding quarterly meetings, adhering to thresholds that required board approval, all went out the window. Founders felt empowered to do as they pleased because in their mind, investors needed them more than they needed investors. The downstream impact of these decisions have hit fairly close to home for us these last few weeks.
The FTX debacle is a textbook case study in mismanagement and lack of governance put in place by investors. The ability for any one individual to raise hundreds of millions of dollars, then proceed to pay himself hundreds of millions from that round, without raising any red flags with the board is simply astounding. The founder of FTX, Sam Bankman-Fried, was perceived by "top tier" investors to be the archetypal CEO and as such, didn't need a board, didn't need governance, didn't need any controls or checks and balances, he could just operate as he pleased. $8B+ in losses later, some of which is now impacting one of our borrowers, and the truth of just how improperly run this company was is fully on display.
Another one that just got revealed was [ ], a company we were often compared to, with investors wondering why we even need to exist if [ ] was going to be the future. After raising over $[ ]M at a $[ ]B+ valuation, the questions around our competitive viability got louder and louder. "You're not raising enough to compete," "They have thousands of sign ups and everyone knows who they are," "Their business model is so much simpler than yours," "They're not a lender, they're building the future of finance." Now the truth is coming out. Rumor has it they had no governance, no oversight, tens of millions in losses on the balance sheet, founders cashing out millions in secondary sales, and an absolute scattershot business strategy, a far cry from what they started from.
This is a crucible moment for startups, including our own. In times like this when the tide washes out and money is tight, investors start to poke and prod into exactly what they invested in. Unfortunately for those who didn't do the work at the outset, all of the mismanagement and even sometimes outright fraud emerges. The era of grift is over, and the era for builders is now. When all is said and done, there will be a graveyard of startups who flew too close to the sun and the ones that survive will win by default. They will be the ones who are patient, well governed, and methodical in their fundraising and execution. These have always been adjectives that describe us and now it's our time.
