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Venture valuations can be most simply understood as: potential exit value (reward) * probability of reaching that value (risk). In this case the potential exit
by barrrrald 5y ago
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.
- ljm 5y agoThis is a romantic take and the only takeaway from it is that Fast failed because it failed. > 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.
- cmeacham98 5y agoIronically, 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?
- barrrrald 5y agoIf 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.
- caffeine 5y ago> 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?
- lnxg33k1 5y agoBecause they failed https://cdn.ilbianconero.com/images/2018-07/SOCIAL.asamoah.meme.1.100718.1080x648.jpg https://cdn.ilbianconero.com/images/2018-07/SOCIAL.asamoah.m...
- blackoil 5y agoUnfortunately 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.
- xboxnolifes 4y ago> Unfortunately values for reward and risk aren't methodically calculated on some fundamentals. Find accurate fundamentals and they will be.