When tech startups make headlines, it’s normally for celebratory reasons. We mark expansions, record-breaking funding rounds, and high-profile hires. However, over the past few weeks, tech startups have made headlines for negative reasons. As much as we might like to say “that could never happen to me”, it’s more productive to take a closer look and perhaps identify a few lessons to be learned.
What Tech Startup Headlines Are We Talking About?
For this blog, I want to take a closer look at two stories. One of them is the collapse of the cryptocurrency exchange FTX, which is mainly being played out in the United States. The second one happened closer to home, in Salford. I’m talking about the Volution Fit founder’s ban from owning a business for 12 years.
At first sight, these two events may seem unrelated. Adam Norton of ANorton Holdings Limited, trading as Volution Fit, tricked investors into paying more than three-quarters of a million pounds into his personal bank account. He provided false bank statements, leading investors to think that their payments were received in a company account. Norton is now being branded a “dishonest and reckless director” by the Insolvency Service.
By any stretch of the imagination, the sum Norton secured is not small. However, it pales in comparison to the potential fallout from the FTX collapse. According to the New York Times, investors backed founder Sam Bankman-Fried with approximately $2 billion. Whilst the reasons for FTX’s collapse are still under investigation, several sources are suggesting potential crypto fraud.
How Could it Happen?
In the case of FTX, commentators are questioning the lack of oversight. How could seasoned investors trust a relatively inexperienced physics and math graduate with billions? The growing excitement surrounding cryptocurrencies in the last few years may be part of the reason.
However, excitement doesn’t answer the question NBC News is asking: “Where was the oversight?” Neither does it explain why there were so “few strings attached” to the investment funds, as the Times is pointing out. Some FTX investors have now said that Bankman-Fried was leaving them little choice. They could “support him and observe” or be left out of FTX’s development. On 11 November 2022, FTX filed for bankruptcy.
Could it happen in the UK? It’s too easy to shake our heads and dismiss this case as an outlier. Perhaps, fewer founders have access to that kind of capital, but I guarantee that the Volution Fit backers feel just as disturbed as those who invested in FTX.
What Startup Founders and Investors Can Learn From These Examples
None of us can turn back time, but we should all stop long enough to learn a few lessons from these two cases. Here are some learnings that come to my mind:
- Tech startups are vulnerable
- Due diligence is irreplaceable
- If something looks wrong …
- Staying on top of a company’s finances is critical
1. Tech Startups are Vulnerable
For years, tech startups have had an aura of invulnerability. No matter what app or solution someone developed, with the right kind of financial backing, growth was almost inevitable, and the founders were more likely to succeed than not.
The last few weeks have shown that tech businesses are vulnerable. Just like the dotcom companies of the late nineties, tech companies can fail. If you have trouble believing that, just look at the news during the first half of November. Leading tech brands (no longer startups) like Twitter and Meta are making severe cuts to their workforces to stay afloat.
If these giants can struggle, how can you believe a startup is invulnerable?
2. Due Diligence Matters
This point is mostly aimed at investors. Startup founders may seem like charismatic geniuses, and they may very well be on to the next big idea. However, that doesn’t remove the need to check, check, and check again before and after investing. Even genius founders make mistakes, just like genius investors do.
Asking questions and reviewing financials before committing to fund a startup is crucial. Likewise, investors are well advised to remain involved in the startup after providing funding. In most cases, this approach benefits both sides. Many investors are businesspeople themselves, and founders can take advantage of their insight and experience. Plus, four eyes see more than two when it comes to diagnosing potential issues early, providing a possible safeguard for startups.
It is too easy to get carried away by “investment manias” like the ones we witnessed last year.
3. If Something Looks Wrong …
Participants in high-risk sports like technical diving have a saying: ‘If something looks wrong, it is wrong. Get out while you can.’ Granted, investment is not an extreme sport, but heeding the warning signs usually pays dividends.
In the case of FTX, founder Sam Bankman-Fried held a video meeting with top investors whilst also playing a video game. On that occasion, Bankman-Fried’s presentation was well received, according to FTX head of product Ramnik Arora.
For a later presentation, the founder was asked to prepare a slide deck. The deck was badly put together, giving the impression that it had been prepared less than carefully. Arora recalls that investors felt uncomfortable but weren’t offended. They had become used to different rules of business perhaps. Had they intervened at that stage, who knows how FTX might have fared?
4. Staying On Top of a Company’s Finances is Critical
Arguably, this is one of my favourite points to talk about – nothing replaces a good grasp of a company’s financial situation. This applies to founders, leadership teams, and investors equally.
I understand that not everyone has an accounting background or likes numbers. But if you plan to be involved in a business in any capacity other than as a very silent backer, you need to be able to assess its financial situation regularly.
Few financial problems develop overnight. Instead, there are usually warning signs that add up. If you heed those warnings, there is every chance that you can find solutions for the impending problems. Those who ignore them do so at their own peril.
Access the Right Expertise
Not every founder has a head for numbers, and some investors are in the same situation. If that applies to your company or a business you invest in, don’t hesitate to look for external support and expertise. An outside perspective can be invaluable when you are in danger of overlooking issues simply because you are too involved.
As your virtual CFO or finance director in Edinburgh, Numbersmiths has got the acumen and the expertise in the tech startup space to help you make better decisions. We’re here for founders, investors, and anyone looking to become involved in this area. Contact us today to find out how we can help.