Venture valuations can be most simply understood as: potential exit value (reward) * probability of reaching that value (risk).

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.

Unfortunately values for reward and risk aren't methodically calculated on some fundamentals. It is mostly driven by hype cycle, FOMO and hubris among other things. This allows lot of companies to reach valuations which don't seem justifiable to anyone else.

> Unfortunately values for reward and risk aren't methodically calculated on some fundamentals.

Find accurate fundamentals and they will be.

Ironically, although you accuse your parent comment of this, I'm not sure what the intended takeaway of this comment is.

You call it "romantic" but the rest of your comment is just restating/affirming two random points?

If the question is "how did they get that valuation despite being a very bad business", it's simply that investors gave them too much forward credit against the very big risks they had to surmount, the biggest of which seemed to be the Founders lack of discipline and inability to execute properly.

>> 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.

> This is a romantic take and the only takeaway from it is that Fast failed because it failed.

What is your take on why they failed?

Because they failed https://cdn.ilbianconero.com/images/2018-07/SOCIAL.asamoah.m...

It is because venture funding has become a legal Ponzi scheme. Seed investors make money by convincing Series A investors to follow and buy them out. Series A does the samr to Series B, etc. The final suckers are ordinary people whose investment/retirement funds buy stock when the company goes public. Enough companies start to create actual value throughout the process to justify the scheme. And this is the reason why, when someone boasts that his startup is valued at X, I ask about annual revenue first.

Not quite, everyone dumps on you and your mom’s 401k when the company goes public, and you’re legally shut out from investing in the private rounds in a perpetual caste system that people barely know exists, by design.

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)

Seed investors almost never sell in series a or series a investors in series b. Company just raises more money and dilutes the previous investor. Investors only get bought out if there is a serious issue or reason to remove an investor, or later stage there is lot of demand for the stock so the company offers a secondary. Investors are not really in the business of making small returns.

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.

Is it common for seed investors to want to be bought out by Series A investors? I've only read a little about the process, and was left with the impression that the inverse would be more common: seed investors really wanting to also invest in Series A to maintain their share (pro rata).

It's highly, highly uncommon, which is why the "Ponzi scheme" label falls flat to anyone who is close to venture. Seed investors will typically not exit their positions until very late in the company's life, either in later growth rounds (C, D, etc.) or at IPO.

Not really. Just because they exit at a later stage doesn't mean its not a ponzi scheme. Chamath Palihapitiya certainly disagrees with you (https://youtu.be/RwRZtZQoLtQ). Skyhigh valuations with no product market fit and no path to revenue certainly sounds like one to me. Many startups burn money to acquire customers, but churn is high because they don't have PM fit. It becomes an endless cycle of raising to acquire more customers. Once the money stops, someone will eventually be holding the bag.

This isn’t true, every venture capitalist pretty honestly says only 1/10 or 2/10 of their investments will make all the returns.

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.

Shhh you’re not supposed to talk about this.

Really quite infuriating as a founder hearing stories of nonsense projects getting handsomely funded while meeting with time-wasting VCs that insist on taking less-than-zero risks on you.

Can't help but think the famous VC concept of "pattern matching" is a euphemism for something more sinister.

Just the sheer amount of big competitors to Fast should show you that it is not a nonsense project. Being a big player in a crucial part of ecommerce is valuable and many companies are trying to have a go at it.

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.

I've never pitched any of my OSS projects to VCs. Hope I didn't touch a nerve.

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?

Not at all, VCs are just normal humans after all. Someone have a bias is not what I would call "sinister" though. That word implies shadowy conspiracies to me, not some human beings being imperfect. I'm not a native English speaker though, so perhaps I add a connotation that is not intended to be there.

I was alluding to casual racism, not a shadowy conspiracy.

There’s nothing to get. They oversold what they were doing and VCs didn’t do their necessary due diligence.

Like Theranos?

Theranos committed outright fraud. It seems like fast didn’t lie about anything but was overvalued. Are you really confused about the difference?

I refuse to believe that people don't understand this difference.

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.

Easy to ascribe pure malevolence when the rank incompetence is so glaring. How does a half-billion dollar company collapse overnight? How many layers of VC bureaucracies of aides and accountants failed to foresee this?

If you understand that VC returns are usually made from 1 or 2 out of every 10 investments this is no surprise.

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?

There’s a difference between a business declining over time with a clear downwards trajectory, and suddenly dropping from the sky and crashing. The latter is why this is so shocking.

Not sure if this happened to Fast, but this tend to happen when startups run out of runway/funding.

100% agree. I wanted to scream at my computer everytime I read some bullshit article about how "Theranos was playing by the Silicon Valley 'fake it til you make it' ethos".

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.

Right, uBiome is a better example of that. Featuring actual Silicon Valley investors, too.

Hype in the VC community.

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.

Because everything is crazy expensive currently. We‘re in a bubble. Look at the valuation of WD-40, Bitcoin or Shopify for example. WD-40 had a 500k annual revenue and is valued at 2.6 billion. Their free cash flow is only about 100k, so they would need 26 years to buy all stocks back at the current valuation assuming no growth in earnings.

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.

You're off by a few orders of magnitude for WD-40 (WDFC). They had 488 million in revenue for 2021.

Thanks for pointing that out. I meant 500 million annual revenue and 100 million annual cash flow.

The 26 years back-of-the-envelope calculation was correct though: 2.6 billion / 100 million = 26 years.

You mean 26,000 years

They were being valued on obtaining X% of a known market. Simple as.

Valuations are not based on earnings, valuations are based on ”how much is the next fool willing to pay for this”.

See also: bitcoin, meme stocks, etc

Big picture:

https://youtu.be/NVVsdlHslfI

Thanks—this is a great video. I was half expecting to be rick rolled but was pleasantly surprised to see this entertaining explanation from Chamath instead.

It is indeed a good video. The only fault in the analysis, is the assumption that people doing these deals don't realize what they are doing.

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.

Good question. It is also the exact same question I have been asking about Clubhouse's valuation which ever since my comment [0] it is somehow valued at $4B with nothing to justify it.

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.

[0] https://hackertimes.com/item?id=25883362

We'll have to give it this treatment if it ends up being right.

https://hackertimes.com/item?id=30958502

the (late)-2020 to 2021 euphoria environment is partially to blame too.

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.

tl;dr: Seems like the folks at Stripe didn't do very good diligence and others followed them in.

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.

> Seems like the folks at Stripe didn't do very good diligence

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.

It can also be defensive - if Fast were to somehow destroy Stripe's payment business, you want to have a piece of that pie.

$100M or even $50M is real money though. If Stripe had wanted to enter the market directly, that pays for many person years of compensation.

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.

Look up the list of investors for every such startup implosion (Theranos, WeWork, Fast, Quibi). It is always going to be a new firm or someone from outside the valley without much tech experience who doesn't have the expertise to do the necessary due diligence. Such firms will always be taken for a ride by slick talking founders and flashy PowerPoint decks.

That was not the case here though! Fast's primary backers were Index, one of the leading valley firms, and Stripe, which, while not a professional venture firm, is highly sophisticated and deeply knowledgable in this space.

What is or was fast?

“Fast AF inc” chuckle

In what fantasy world is only $10m ARR given a $500m valuation? Ridiculous.

We live in a ponzi/clown world. Once you understand this it will start to make sense.

Investors GAVE the valuation.