In this case the potential exit was big: owning checkout for the web is a multi-multi-$B business.
The risks, however, were also big. This was a highly competitive market, with lots of complicated technical and GTM problems to solve. But, investors seemed to believe in their vision + chutzpah + ability to execute, hence they discounted the risk and gave them a rich valuation.
As it turns out, the risks were very real! They successfully hired a big, seemingly-experienced team (something many companies struggle to do) but failed to make enough progress to justify their valuation, i.e., de-risk the business and demonstrate a higher probability of achieving a big exit to potential next-round investors. The product never worked well (actually 502 hard-crashed on launch day) and their team got bloated and slow. Their GTM strategy was fundamentally flawed (horrible CAC/LTV on small merchants) and the founder spent like a mad man. This wasn’t foreseen but perhaps should have been especially by the pros at Stripe
Fast lived a short, insane life and will quickly fade into obscurity versus the more infamous WeWork and Theranos implosions. But I think it’s a more relevant cautionary tale: Fast was backed by “proper” Valley institutions (Index, Stripe, etc.), was a pure software business, and from the outside had all the trappings of hypergrowth success. Lots to be learned by investors, employees, and founders here.
> They successfully hired a big, seemingly-experienced team (something many companies struggle to do)
So they hired a massive team of oncologists no expense spared, but their abiilty to deal with cancer isn't good enough
> As it turns out, the risks were very real!
Well, they wouldn't be risks otherwise.
You call it "romantic" but the rest of your comment is just restating/affirming two random points?
>> So they hired a massive team of oncologists no expense spared, but their abiilty to deal with cancer isn't good enough
The Fast founders highlighted their team at every turn, showcasing trophy hires from larger, successful companies. Investors bought into this hard especially at the Series A and B fundraises, and believed that a strong executive and engineering bench de-risked the business more than they had.
>> Well, they wouldn't be risks otherwise.
Not to them! The issue here was the high degree of self-delusion and spin amongst their team and investors. They downplayed the challenges at every turn, and tried to convince others (and themselves) that they had already gotten past all the hard parts. As it turns out they had not.
What is your take on why they failed?
Find accurate fundamentals and they will be.
IPO and public markets are different case where private valuation can turn out to be inflated and tanks after the IPO. However, retirement funds usually cant buy in to IPOs and institutions can often buy the stock before the stock trades publicly so in that case it can be the public who is left holding the bag.
Its a pretty awesome deal, when you can do it fast enough, or often enough.
I would say what the investors do is more Ponzi like than what they do with the shares.
Some investors, the VCs, pretty much guarantee the portfolio company some business by making their other portfolio companies the customers, which gooses the revenues of the primary company and then they make up the revenue multiple to convince others to buy some more shares at a 12x higher valuation (which means its the same money going around in a circle, VC money invested in one company and that company becomes a customer buying the widgets using the of the next company the same VC invested additional money into, but the widgets were also bought with the VC money invested into the first company). Until going public and dumping yet again in the public market. Rinse, repeat.
All this time the VCs are often raising additional funds and going into the the same company’s rounds. So the VCs are more ponzi like than any individual company, but the company does also overlap with some aspects of a ponzi.
(I dont have an issue with any of this except for the aforementioned caste system, let the people invest and fight for deal flow)
And they do.
Just because you see 9/10 failures and think it’s a Ponzi scheme doesn’t mean it is, especially when the market is quite happy with what’s happening, and there are still plenty of profitable unicorns being created.
You are skewing your opinion towards not survival bias but failure bias basically.
Can't help but think the famous VC concept of "pattern matching" is a euphemism for something more sinister.
BTW, going for "VCs aren't falling over themselves to fund my FOSS funding startup, therefore there is a sinister conspiracy because there is no possibility whatsoever that the idea itself is not very profitable" is itself somewhat of a red flag for investors. Few people want to invest in a founder who is convinced the entire world is conspiring against them.
Prevalence of MLMs doesn't make any of them any less impractical.
Are you doubting that VCs can be victims of their own in-group biases?
People who try to make Fast sound like theranos are evil-minded.
Fast had good early traction. Then, the traction stopped. They didn't lie about the numbers and couldn't raise more money.
Theranos didn't get actual traction, lied about almost everything, and successfully raised even more money.
Big difference.
Bullshit. Theranos told investors clear falsehoods they knew to be false in order to get funding. Fast sold a vision they couldn't deliver on, and unless more info comes out I didn't see anything that said they committed fraud.
Its a market after all, VCs have the option to say no. And every smart person with financial analysis skills is welcome join the industry and beat the rank incompetence with an 80% failure rate, can't be difficult can it?
I’m not familiar how Fast actually did their fundraising but it’s not impossible to get pre-emptive terms sheets from VCs when you have barely met them or shared any data.
Once you get a term sheet or close to one, this sometimes starts the hypetrain where VCs beg you to meet them and consider them for an investment. At that point it becomes a competition between the VCs who win the deal. The competition will often balloon the valuation since investors care more about ownership % than valuation.
It sounds crazy to invest in a company with no real numbers or traction, but VCs have seen that it works sometimes when the company actually delivers on the story they told when fundraising.
Also amount of ARR or other revenue matters less than the speed it is growing. $10M with stable growth over the years is worse than $5M growing 3-10x a year.
As another example look at the current PE ratio of the companies in the S&P 500: https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-ea.... This shows that prices are unusually high compared to earnings.
The 26 years back-of-the-envelope calculation was correct though: 2.6 billion / 100 million = 26 years.
See also: bitcoin, meme stocks, etc
And using Tesla (Elon Musk reference) as an example, as Tesla is the prime example of a company that would be bankrupt would it not be for the biggest stock market bubble in history, diminished what was a very good and correct explanation.
If we find out that there are huge operating costs and little revenue for this valuation then I would be not surprised to see it close down faster than Fast.
Going to be interesting to see how the other companies that raised big A and B rounds in the past one to two years fare.
I believe this really boils down to "Why did Stripe's investment arm value at $150M for an A they lead and then go on to co-lead a B at $500M?". Honestly, it mostly sounds like bad diligence by the folks at Stripe. The co-lead for the B was Addition One, a newish firm that also had invested in one of Stripe's latest rounds, so they may have just been co-investing with Stripe from a "oh yeah, we're all in on Stripe".
Edit: or looking at the timeline, perhaps Addition closed this investment in Fast in January 2021 to get in on Stripe's Series H in May 2021.
Perhaps, although given the market they're in, success for Stripe may look very different to most others investing in Fast.
Fast weren't going to create their own payments system, so being entirely or substantially backed by Stripe payments would have been valuable to Stripe once Fast scaled. Investing in them as a mechanism to encourage this could have been quite beneficial.
It's also quite possible that a desirable outcome for Stripe was potentially buying out Fast and integrating it into Stripe. At that point Stripe would already have plenty of inside knowledge, being on Fast's board, and already owned a significant proportion of the business.
Investing ~$100m to get this might sound like a lot, but if you make 10 investments like that, and get one success out of it that can generate ~$2bn of revenue at some point for Stripe down the line, that's probably around break even, assuming 50% margin. Very rough approximation, but at Stripe scale, that sort of business is entirely possible. TaxJar is another example, not sure if they were investors, but they acquired the company and it'll probably end up contributing that sort of revenue, possibly more.
Corporate VC funds are supposed to do one of two things: find uncorrelated investments or adjacent partner opportunities. You can argue that acquiring the company is downside protection ("worst case, we buy the team") but it's still pretty inefficient.
tl;Dr: the real goal is (should be?) to generate large, cooperative partners not overpay for R&D and integration later.