Some Thoughts on Fast
The fast collapse of Fast reveals some important lessons for both operators and employees
I’ve been posting sporadic thoughts about the Fast meltdown on a few different channels this week, so I figured I would centralize everything right here.
I’ll admit, I wasn’t all that familiar with Fast before news started coming out about their imminent collapse a week or two ago. I’m not an avid online shopper, so if I had come across the Fast button on one of the few e-commerce sites I’ve used over the past few years, I must have missed it.
I had, though, seen their branding and marketing efforts all across Twitter and other channels. As I have dived into the business a bit more this week, it has come as no surprise that the Fast brand took precedent over the Fast product and business – or lack thereof.
When a prominent company like Fast collapses so suddenly and publicly, there are usually people online who say things like “startups almost always fail so let’s not use this opportunity to dunk on this particular failure.” As someone attempting to build a startup right now, I often sympathize with that message. Company building is really hard and more often than not, founders need a mix of luck, talent, grit, relentless execution, luck, and more luck to even come close to success.
But Fast wasn’t a typical startup. This is a company that raised more than $120 million from some of the most prolific and accomplished VCs in the world, including a $102 million Series B raise co-led by Addition and Stripe announced just over a year ago. This round valued the company at more than $1 billion, something that only around 1% of seed funded startups achieve.1 So to see a company with the resources of Fast shut down seemingly out of nowhere means that leadership woefully violated their fiduciary responsibilities. So no, as I wrote on Twitter, I hold zero sympathy for anyone at Fast who was tasked with allocating capital or any investor who thought it was smart to write a nine-figure check into a company that neither generated meaningful revenue nor exhibited responsible spending habits.
Hiding in Plain Sight
I don’t want to spend that much time dissecting where things went wrong with Fast. I don’t know enough about the business to properly post-mortem this failure, and I obviously haven’t been in a position where I’m tasked with allocating nine-figures in capital. What I can say with some level of certainty, though, is that Fast made no effort to conserve cash – especially once it became clear that they would not be able to raise additional capital. A quick scroll through Fast’s Instagram reveals a company focused more on hyping up its founder and building a lifestyle brand for fans of NASCAR and extreme sports rather than highlighting the supposed groundbreaking innovations made possible by the company’s hundreds of engineers, designers, and marketers. I’m genuinely curious if any Fast investor or board member ever spent two minutes scrolling through this feed. (If you are a Fast investor reading this, feel free to send me an email and let me know).
The Biggest Loser(s)
Fast is not the first high-profile company to collapse out of nowhere, and it certainly won’t be the last. 2021 was a true outlier year in venture, with global investments surpassing $620 billion.2 This abundance of capital means that companies were able to raise at grossly inflated valuations relative to historical averages. After all, there are only so many “high quality” companies out there. It’s quite likely Fast will end up being the most egregious example of valuation inflation with its $1B valuation on $600,000 in revenue ( > a 1600x revenue multiple), but again, it certainly will not be the last.
So who loses here? Sure, one could argue the biggest losers here are the investors who entrusted Fast management with their precious capital only to see it squandered on NASCAR sponsorships and irresponsible hiring plans. But those investors failed in their own fiduciary duties to thoroughly diligence deals and responsibly invest on behalf of their LPs. If you are an LP who lost money in this deal, I’m sorry that your GPs got caught up in FOMO, but at least you’ll have more chances (per Crunchbase, Addition has made 82 investments out of its first fund).
The real losers here are the Fast employees. Unlike investors in VC funds, employees don’t get the opportunity to make 80+ simultaneous bets; they get one. This is precisely why it's important to make responsible decisions about where you choose to invest your time as an employee. To be clear, many people join startups for reasons beyond just wanting to make money. Perhaps they want to feel invested in building something from nothing or they feel like startups provide better exposure to key decision makers and thus an easier path to career advancement. Both are valid reasons to join early stage companies.
Lessons and Takeaways
Even if your goals are not strictly monetary-focused, any prospective startup employee should know the basics of startup equity and posses the confidence to ask questions about that equity in an interview. This includes asking about the company’s latest 409A valuation (the fair market value assessment of the company), which essentially serves as the floor price for your stock as a new employee. Something to keep in mind is that by the time you hear about a hot startup, a lot of the hype has already been priced into the equity that you will have the option to purchase.
Not to get too technical, but companies typically undergo 409A valuations when conducting a priced equity round – since the company is actually selling securities. For pre-seed and seed rounds, where companies typically raise on a SAFE, 409A valuations are much less common. This matters because if you are an employee receiving equity, you will almost certainly pay a considerably lower strike on your stock absent a 409A. This allows many employees, advisors, and founders to early exercise their equity, file an 83b election, and subject their shares to reverse vesting. Early exercising allows equity holders to avoid costly tax liabilities later down the road by having any gains taxed as long-term capital gains rather than as ordinary income.
I’m not saying that to maximize financial upside you have to join a company at the earliest stages. Obviously, the earliest stage is also the riskiest stage, and the worst scenario would be to early exercise stock that ends up worthless. What I do think needs to be realized by founders, though, is that raising at high valuations too early in a company’s life may lead to greater challenges in recruiting top talent interested in major upside and thus difficulties growing the business.
Another important data point founders should be more transparent about are secondary sales. It’s well-known that startup equity is by and large not liquid, and I think most prospective employees understand this. But that does not mean insiders cannot sell shares until a liquidity event. When a company goes through a fundraise, they typically authorize more shares (grow the pie) to welcome new investors, but existing shareholders can also sell their own shares to new investors (rearrange the pie). In a company like Fast, which grew from a valuation of $0 to $1 billion in just two years, it’s almost inconceivable to think that the founders didn’t take some money off of the table – even selling 1% of the company would mean securing ~$10,000,000. While most investors discourage founders from selling a disproportionate amount of equity on secondary markets due to the signaling risk of doing so, this information can help paint a clearer picture about the founder’s long-term confidence in the company. As a prospective employee, you should ask if the company allows employees to sell their own vested stock on secondary markets. Buzzy startups such as Pipe and Almanac have already adopted this for their employees, and I expect more will follow suit. In the wake of the Fast meltdown, some startups have already begun to publicly disclose insider secondary sales. This is great, and I hope we see much more of this.
Conclusion
The Fast meltdown is easy to make fun of as it now feels so obvious in hindsight, especially if you were a member of leadership team privy to the company’s (lack of) growth metrics. But like with any failure, we would be doing ourselves a disservice if we didn’t take some lessons away from this. As an operator, I think the most important takeaway is to understand that capital is finite even when it feels infinite. While markets can remain irrational for years, reversions to historical means are inevitable and can come quicker than anticipated. As a fiduciary to investor capital, operators need to be keenly aware of this and proactively adjust burn before it’s too late. The operators at Fast clearly did not do that. On the other hand, employees should have a better idea of how startup equity works and be equipped to ask important questions about the business so that they can make smarter decisions about where they invest their most valuable resource: their time. I am by no means an equity expert, but I have tried to paint a basic picture of the process using my own lived experience. If you believe anything I have said is inaccurate or just plain wrong, please let me know.
Thanks for reading!
https://www.cbinsights.com/research/venture-capital-funnel-2/
https://www.bloomberg.com/news/articles/2022-01-12/startups-raked-in-621-billion-in-2021-shattering-funding-records
Great read