Category: Venture Capital

The FTX implosion is a train wreck and I 👏🏽can👏🏽not👏🏽 look away. It’s shocking because of the scale of the implosion and the depth of the chaos, and this is just the early hazy days of the aftermath.

But we can learn from anything, right? This one is instructive far beyond the crypto world, all the way into the livestock world.

If you aren’t familiar with the FTX story, this and this give a good overview.

“FTX failed after its founder and former CEO, Sam Bankman-Fried, and his lieutenants used customer assets to make bets in Bankman-Fried’s trading firm, Alameda Research.

Launched by Bankman-Fried when he was just 28, FTX became one of the largest crypto exchanges in just three years with a valuation of $32 billion. Bankman-Fried used aggressive marketing, including a Super Bowl ad campaign, and the purchase of naming rights to the home of the Miami Heat basketball team.

FTX and FTX.US crashed due to a lack of liquidity and mismanagement of funds, followed by a large volume of withdrawals from rattled investors. The value of FTX’s native token, FTT, plummeted last week, taking other coins down with it including Ethereum and Bitcoin.”

What’s the parallel to livestock?

When funny business happens in livestock, it’s likely to happen in the cattle feeding business. In the vertically integrated swine & poultry or in dairy where animals do not frequently change hands, there just isn’t much room for shysters to maneuver. So cattle feeding seems to attract them all…in the US anyway.

Of course, the funny business is rare; by and large the cattle feeding industry is professionalized and well-managed. Importantly, the bad actors are a thorn in the side of the 99.99% of good actors.

But do a quick scan on the google and you’ll find plenty of headlines about, umm, ‘mismanagement’ in cattle feeding from the last few years including some big companies on the receiving end of that bad behavior. (To be fair the Big One was $240M not $32B like FTX so that’s something?)

My hypothesis is that the root causes that allow bad actors in cattle feeding echo the root causes that undid FTX.

This is oversimplifying, but there are (at least) two layers of blame in the FTX story:

1. An entrepreneur carried away by greed, incompetence, and/or hubris.
2. Investors allowed an entrepreneur to operate with woefully insufficient governance.

There are a lot of advantages of youth, but it’s hardly surprising that a 30-year-old founder of a company valued at $32 billion maaaaay have been tempted to buy into his own hype.

It’s also hardly surprising that a 30-year-old did not have the experience to build a complex financial company with the appropriate guardrails or to know/admit that he needed to hire a management team that could build guardrails into the business, or even to know/admit that he could benefit from a board of directors with the expertise to advise on such matters.

The generous explanation of the situation is youthful hubris and incompetence; the less generous explanation is unbridled greed and negligence. Reality is probably somewhere in the middle, as it usually is.

So, uh yeah, looking out for red flags of those traits in business partners seems like a reasonable rule of thumb.

But nobody looks for shysters to do business with; any sane person runs from the red flags around character.

So the real FTX takeaways are around the governance processes that counterparties put in place with any partnership or investment, whether a cattle-feeding customer, an angel investor in a super-early-stage startup, an established company building a partnership, or a venture fund investing in a growth company.

The practical FTX takeaways are around 3 layers of governance:

(1) Conduct thorough diligence.

I 10/10 recommend the book Bad Blood about Theranos and the company’s journey raising hundreds of billions of dollars to build & scale their technology that could run hundreds of tests from a single drop of blood, only to have the house of cards fall spectacularly. It’s basically a story about inept due diligence.

The author describes how an executive from one of the pharmacy chains that was exploring a partnership with Theranos raised concerns when Theranos management would not allow them to see inside the lab as part of due diligence before signing a major commercial partnership. The exec was saying ‘hey this doesn’t pass the smell test’ but the FOMO train was already running away internally and the exec’s concerns were dismissed.

That story speaks to the value of having multiple perspectives evaluate a potential counterparty.

Another diligence lesson from Theranos was that every new investor that came in assumed that the big-name investors that were already invested wouldn’t have invested without having conducted diligence. This happened in funding round after funding round, going back to the original pre-seed investor by a high-ish profile VC whose daughter was childhood best friends with Elizabeth Holmes….

That speaks to the value of doing your own homework, not looking at anyone else’s paper for the answers to the test because even smart people get it wrong or have different objectives than you do.

Theranos, and now FTX, are these gross extremes of why the most basic diligence – just asking the simple questions – shouldn’t be skipped. Even in the frenzy of a bull market, even in the frenzy of venture hype…even in the frenzy to lock in that cattle supply.

(2) Process controls in place.

CME Group CEO Terry Duffy had harsh commentary on the business model of FTX and the lack of risk management and process controls. Duffy pointed out, “you don’t have to accept anything as innovation that puts risk management in the back seat and that’s exactly what was going on.”

First, not everything needs to be innovated on. Sometimes incumbents are just slow to change and sometimes incumbents are the way they are for really really good reason.

Second, at a minimum, good governance includes understanding the internal processes and process controls that a company has in place.

(3) Board oversight that, ya know, actually oversees.

The myth of entrepreneurship is this idea of “not answering to anybody”…that’s not a thing. For starters, every business answers to customers. Second, every business with outside investors answers to a board…the well-managed businesses anyway.

Founders can stack the board with their drinking buddies, or they can run the business like a grown-up and assemble a board with people who 1) understand what fiduciary duty means, and 2) actually contribute to the management team running the company. IMO the best founders know how to leverage their board’s expertise for the benefit of the company….they don’t see the board as a negative or even neutral but as a positive, as a resource.

But cattle feeders are not venture-backed startups with boards, especially when they are family-run or independent operations, so maybe that piece of governance doesn’t translate very well for our parallel.

If you read much at all about fraud / funny business in cattle feeding, much of it stems from the fact that by eyeballing a pen of cattle you cannot tell whether those cattle have only your lien on them, or someone else’s also, or who owns them…or the absence/presence of “ghost cattle”.

While technology can solve a big piece of the cattle provenance puzzle, technology alone cannot prevent funny business in cattle feeding or any other type of partnership/investment.

The lack of good governance leaves the door open for bad actors to act badly in any partnership or investment.

I suppose the caveat is that the purpose of verifying robust governance is about reducing the likelihood of funny business even though the Enrons of the world prove the risk may not go to zero. (Btw the WSJ podcast series Bad Bets on how Enron unfolded is 🔥.)

One more thing – I hate these dumpster fires. Easterday, Nikola, Theranos, WeWork, FTX. Sure they make for entertaining podcasts but just like the shysters in the cattle feeding business are bad for the good operators, the knucklehead founders are bad for the good innovators.

But they do serve as cautionary tales.

What are your takeaways from the FTX fiasco?

For those interested in the venture capital side of things, this article is quite relevant:

An exchange? That’s not an unknown business model. Frankfurt exchange has been running for over 4 centuries. We know how this works. We know how brokerage works. When Matt Levine writes about how this is insane, he doesn’t need to, like, study up on esoteric secrets of cryptography. Whether you’re trading baseball cards or stocks or currencies or crypto, a margin loan is a margin loan and a fee is a fee.

What they (investors) should have known however are the basic red flags – does this $25 Billion company, going on a trillion by all accounts, have an actual accountant? Is there an actual management team in place? Do they have, like, a back office? Do they know how many employees they have? Do they engage professional services like lawyers to figure out how to construct the corporate structure maze? Do they routinely lend hundreds of millions of dollars to the CEO?

Sure Temasek didn’t get a Board seat, but did they know there was no Board at all? Or how exactly Alameda and FTX were intertwined, if not all the other 130 entities? It seems sensible to ask these things, even if you’re only risking 0.09% of your capital.

These are hardly deep detailed insane questions you skip in order to close the deal faster.

This isn’t Enron, where you had extremely smart folk hide beautifully constructed fictions in their publicly released financial statements. This is Dumb Enron, where someone “trust me bro”-ed their way to a $32 Billion valuation. 

First, focus on the basics: if you’re looking at a large financial company where there is no HR team, no accountant and no Board, try not to write multi hundred million dollar cheques. If the founder is regularly taking out absolute mountains of cash from the company to buy properties, donate to charity or blow it on burning a bit of capital for seemingly silly deals, that feels like bad governance.

Second, don’t fall in love more than necessary: Try to internalise the following: “human ability is normally distributed but the outcomes are power law distributed”. What this means is that just because someone builds a company that produces extraordinary outcomes, 10000x the average, doesn’t mean that they were 10000x as capable. Achievements are created from multiplicative outcomes of many different variables. So if you’re investing in a “10x founder” it doesn’t mean that they themselves are 10x the capability of everyone else, but what it means is that their advantage, combined with everyone else’s advantage, can get you to a 10000x outcome.

Which means the adulation we pour on top of some folks creates its own gravitational field, and makes others susceptible to falling in love.

The most difficult task is to not let someone else control your decision making for you, which is what you give up. If your job is to get seduced by the right narrative by the right-seeming person, guess what you’ll get seduced by anyone who can tell a compelling narrative.

Do NOT make decisions thinking surely someone else has done their part. As the names get bigger, a new investor thinks “hey, surely Sequoia and Temasek and all these big guys would have done their diligence, this makes me comfortable”, which just isn’t true.

FTX isn’t an example of crazy overextension, like WeWork, or outright fraud, like Theranos, but sheer unadulterated incompetence and hubris. The first two are understandable mistakes to overlook because investors are in the risk taking business, and are not detectives. The third is a failure of seeing things right in front of one’s eyes.

FOMO is real and investors are not at all immune, even professional VCs. In many ways, the venture capital model makes complete sense: in order to get outsized returns you take outsized risks which is why investors in venture capital funds (or angel investors in early-stage companies) should recognize that any one investment is likely to go to zero, but the goal is that the portfolio is constructed in a way that any one investment could return the fund.

But then I read stuff like this…

“So weird that we ended up with fast, bolt, pipe, bird, ftx et al in the past few years. No idea how that happened

…I can only hope a partner at one of the most storied venture funds did not actually say this. Instead of investing out of high conviction in a thesis and betting on companies with the potential to generate real value for all shareholders, the play is to follow the hype and just sell the asset at a higher price to someone else who bought into the hype before the hype dies???

That is hardly inspiring, or even respectable.

But FOMO is also the most likely explanation for all of the money that has simultaneously flocked to alternative meat startups or indoor ag startups or pick your other flavor-of-the-year venture-backed categories.

There has to be a better way to fund the future. What is it?

“If the cattle industry is to survive, it must adapt to new customer demands and scientific knowledge to create a better product. The industry’s real challenge is to produce a constant product of high quality. Today with fewer than half of cattle grading Choice, we are not producing the kind of product the consumer wants.”

Cattle feeding pioneer WD Farr penned those words in the mid-20th century. I think he’d be delighted to know that today more than 90 percent of cattle grade Choice or Prime. How did the switch flip?

WD Farr saw that one of the limiting factors for the beef industry was inconsistency in the eating experience for the consumer. There was no standardized grading system so packers had no mechanism to incentivize cattle feeders and reward them for high-quality, market-ready cattle. He noted:

“The beef industry works on averages. The poor, inefficient animals in every herd drag down the good animals. I do not believe any industry can exist on averages for a long period of time.”

So WD and other cattle feeders rallied the industry to support the formation of a national carcass grading system and decades later, we consider the inconsistency problem solved.

Some cattle feeders had a vision, rallied the industry, and put the systems and incentives in place to fix the problem.

Now a generation of cattle feeders see a new set of unsolved problems on the horizon, including reducing greenhouse gas emissions and managing natural resources.

Today we explore the key issues these cattle feeders are seeking innovative solutions to, by exploring why these issues have risen in priority and why they are not simple problems to solve.

First, some background. The Beef Alliance is the group of cattle feeders leading the charge. Its mission is to “support & guide innovation, drive industry-leading research, and engage strategically with industry stakeholders to preserve and enhance the U.S. cattle feeding segment.” And they’re dialing up those efforts with the upcoming Beef Alliance Startup Challenge, specifically to connect innovators who are solving these gnarly problems with prospective customers and decision-makers, cattle feeders. But more on that later.

Oh, and these new problems are in addition to the ongoing search for tools to improve animal welfare and health, operational efficiency, animal nutrition, and production efficiency that will be high priority forevermore.

There are 5 considerations as we think about that list of problems.

1. Why has figuring out the GHG emissions question become an urgent issue for cattle feeders?
2. High quality + reasonable price + _____ = customer expectations
3. Why is GHG emissions an incredibly challenging problem to solve?
4. In the absence of direct mitigation tactics, can indirect improvements get the job done?
5. AND solutions

Let’s take them one by one. <cracks knuckles>

This week’s newsletter is a Sponsored Deep Dive with the Beef Alliance. Here’s my commitment to Prime Future readers as I incorporate occasional Sponsored Deep Dives.

(1) Why have GHG emissions become an urgent issue for cattle feeders?

Because reducing GHG emissions is important to their customers. Because packers, retailers & foodservice companies are making boardroom commitments, including:

• Tyson: Achieve net zero greenhouse gas emissions across global operations and supply chain by 2050.
• JBS USA: Achieve net-zero GHG emissions by 2040.
• Cargill: Achieve a 30% GHG intensity reduction across North American beef supply chain by 2030 (measured on a per pound of product basis from a 2017 baseline).
• Walmart: Zero emission by 2040.
• McDonalds: Net zero emissions by 2050.

Keep in mind the perspective of Greg Bethard of High Plains Ponderosa Dairy, “We very much believe if we can produce milk and beef at a lower carbon footprint then we’ll have markets available to us that others will not. And that means opportunity. Whether or not you agree politically isn’t the issue, if our consumers want food produced in a certain way and we can do it profitably, then we’d be silly not to do it.”

Some quick level setting…

The 3 main greenhouse gasses are: (1) Carbon dioxide, (2) Nitrous oxide, and (3) Methane – largely from manure and enteric emissions. AgNext explains further:

• Direct greenhouse gases from livestock total 3.8% of U.S. man-made emissions.
• Enteric methane accounts for 30% of U.S. methane emissions.

(2) High quality + reasonable price +  _____ = customer expectations

Meat consumers have become accustomed to a consistent experience every time they hit the meat case at their grocery store of choice. That has become table stakes.

And strong demand even at record meat prices has shown just how important animal protein is.  While everyone’s sense of pricing is skewed at the moment, safe to say that all things being equal, people prefer to pay less than more…sorry to state the obvious.

But increasingly there are other expectations besides price and quality. Whether it’s animal welfare or lower emissions or how the animal was finished, there seem to be increasing expectations around what’s available at the meat case. This isn’t new, but it seems to be dialing up and more segments with stronger conviction are doing the dialing….which could/should mean more opportunities for hyper-niche marketing to meet those demands.

But ultimately, it’s an AND expectation of high quality + reasonable price + <insert attribute here>.

(3) Why is GHG emissions reduction an incredibly challenging problem to solve?

This entire space is nascent, it’s what I call an ‘assumptions on assumptions’ situation. In the absence of agreed-upon rules of engagement or when is the baseline year or even baseline measurement methodology or any of the other key assumptions, we end up with assumptions on assumptions which is….tenuous.

There are science and technology questions like having reliable tools to measure at reasonable cost, and then there are the alignment questions of what a win looks like.

And then assuming a GHG emissions win, there’s the ultimate alignment question of how the spoils are divided across the value chain.

These are neither easy scientific questions nor are they easy coordination questions.

It will take time. It will take investment. It will take focus. It will take patience.

It will take trial and error.

(4) In the absence of direct mitigation tactics, can indirect improvements get the job done?

We think in terms of financial fixed costs, and the magic that happens when you increase volume and spread those fixed costs out across more units of production. The fixed cost per unit decreases.

But the same concept applies to natural resource use & impact. Where the equation is ‘natural resource usage / total pounds of beef produced per animal’ then the fixed natural resource costs are diluted across more pounds.

It’s also funny because when we think about incremental improvements in any given year, they often sound like not much. But when you put them in the arc of history, consistent incremental improvements can be wickedly high impact. The Beef Alliance points out, “Between 1961 and 2018, the U.S. beef industry has reduced emissions per pound of beef by more than 40% while actually producing more than 60% more beef per animal.”

The best case scenario is for cow-calf producers and cattle feedyards to have a wide array of tools available to them, those that will directly decrease GHG emissions and those that create an indirect decrease of GHG emissions by improving efficiency.

(5) We need ‘AND’ solutions.

When the energy in the diet is lost to methane emissions, it’s costly for the producer AND it’s negative for the environment. So it stands to reason that solutions that reduce methane emissions *could* be good for the producer AND good for the environment.

If increasing soil organic matter by 1% increases the water holding capacity by 3.7%, then it stands to reason that for producers pumping increasingly expensive water to irrigate, that increasing soil organic matter could be good for environmental objectives AND good for the bottom line.

My point here is that sustainability objectives do not automatically imply a financial tradeoff must be made, where in order to satisfy sustainability objectives the producer will have to be worse off financially. I’m not operating with blind optimism and I recognize there could be those situations, but I think its a reasonable expectation that many solutions will be good for the producer and for the environment.

We need to hunt these ‘AND’ solutions down like the golden tickets they could be….and that’s what the Beef Alliance is doing.

This is a space where nuance is critical.

What about the nuance around the fact that for the methane emissions conscience consumer, grain-finished cattle are better than grass-finished cattle. This is such a narrative violation. It’s a contrast with the surface-level assumptions about beef production, and it’s just one example of how a sustainability objective could turn tolerance of efficiency-creating practices into an open-armed embrace of those efficiencies.

I think good things happen when the right people connect. And by good things, I mean better solutions on shorter timelines. It takes a long time to build a startup, typically 7-10 years. And a large reason for that is the early wilderness years when founders are wrapping their arms around the problem and the market and looking for people to share feedback and insights that could save a founder years spent chasing a misguided solution or sub-optimal early market.

Imagine if you could cut the wilderness years phase of a startup down by 20% or 50% just by getting them in the right rooms with the right people to have the right conversations. For industry, that could mean solving million-dollar problems years earlier than otherwise. That dual benefit is ultimately the objective the cattle feeders have in mind here.

“The Beef Alliance Startup Challenge provided a great opportunity for Resilient to connect directly with industry leaders. It’s fantastic to see the biggest players not only supporting new innovation but also designing a conduit for startups like Resilient to interact directly with the end customer. It’s clear the Beef Alliance hopes to create an innovation ecosystem to bring forth new technologies that can address critical challenges in the beef industry.  Winning the award served as critical validation for Resilient’s microbiome products and technology, which helps attract outside investors and adjacent industry players that want to support upstream innovation in the food supply chain.”

– Chris Belnap, founder of Resilient Biotics, winner of the 2021 Startup Challenge

If you are a founder working on cattle problems, throw your hat in the ring by applying here:

Beef Alliance Startup Challenge

It seems that progressive producers are jumping in to create opportunities out of their customer’s unmet needs as it relates to GHG emissions. These producers that are engaging are playing the long game with an optimistic view, rather than being defensive.

This brings us to one last WD Farr quote that is as true today as it was in the 1990s:

"During the next decade, those who are not willing to be optimistic and forward thinking will be lost in the dust of what promises to be the greatest century the world has ever seen."

What a time to be alive 😉

Imagine an alternate universe where William Cargill, Sam Walton, John Tyson, Bo Pilgrim, and JR Simplot had access to venture capital in their early days.

1. Could venture capital have improved the outcomes of their companies?
2. Let’s assume these companies wouldn’t have ended up any bigger than they did, but could they have shaved 50-100 years off the time from start to empire status?
3. Would those founders have taken venture capital if it had been available?

Venture capital is a tool for faster growth. But it comes with a time clock – industry standard is a 10 year time horizon for a fund.

But these companies are generational giants. William Cargill started the earliest seed of Cargill in 1865…that’s a minute ago. They grew the old fashioned way – by creating value at the right time for the right market(s). I’d love to have insight into their capital structure during mega growth phases but let’s assume that growth was financed by some debt and mostly revenues since venture capital didn’t even become a thing until the 60’s-70’s and even then was limited to high tech businesses.

Today we explore scenarios where venture capital either wasn’t needed or wasn’t a fit, and how survivor bias might influence our views on both.

Speaking of bootstrapping and overnight successes built over years decades, I recently interviewed Scott Sexton (CEO of Dairy.com which is now EverAg) for the Future of Agriculture podcast. Scott has been on my list of go to smart people ever since I was launching The Poultry Exchange. We downed a lot of coffee talking about strategies and tactics to get to liquidity in digital marketplaces since that was how Dairy.com started years before.

Dairy.com emerged from the ashes of the dot com bust backed by several large US dairy processors. Those dairy processors needed a better way to trade dairy products like cream to keep supply & demand in balance which is tricky when you have a perishable product and multiple components.

Because processors were invested in Dairy.com they drove volume into the trading platform, and because there was volume in the trading platform from suppliers then buyers showed up. This early path to liquidity was critical and it’s a topic for another day, but the lack of liquidity is what kills most marketplaces.

The marketplace was effectively what we’d call today their wedge product. It got them in the room, in the market, in the customer’s office. Then they started expanding, incremental step by incremental step.

They were facilitating the trade but then the customer needed to physically haul dairy products and there was a whole suite of challenges making that a nightmare. So Dairy.com moved into digitize hauling.

And once you’ve traded product and hauled product, someone needs to get paid for that product….which had its own suite of clunky paper based products. So Dairy.com moved in to digitize payments.

They’ve just repeated this process for 20 years, going deeper within the vertical while expanding their footprint wider across the value chain and shifting their identity from ‘marketplace company’ to ‘company that powers supply chains’. The company recently began that shift from ‘go deeper in dairy‘ to ‘go wider across ag’ by moving into other verticals.

Until the relatively recent private equity acquisition, Dairy.com grew in a capital constrained way, with steady growth.

So flip the script on their business. Could a venture backed Dairy.com have had a similar outcome in 1/4 the time? Or had a bigger outcome in the same time frame?

I’m still forming my hypothesis here but I think there’s something interesting, something durable about high ambition companies that grow slowly. I’m not talking about lifestyle businesses (and I don’t use that description pejoratively), I’m talking about companies that have high ambition for high growth but do it without relying on copious amounts of venture capital.

Maybe high ambition companies that grow slowly over time have the most staying power.

Venture capital is flashy. It’s big numbers and hockey stick growth curves (up and to the right, always!) and IPO’s and buzzy exits. Or at least, that’s what you read about.

What you don’t see press releases about are the companies that drowned in too much cash by attempting to grow faster than the foundation of the company could handle, or before their market was ready. The graveyard of these companies is grande.

Venture capital is a financial tool for growth, but it’s not always the right tool for the job.

Given the venture fund model and venture timelines, does VC add risk to the investee? In many situations, yes. Or as one founder put it recently, “VC’s have many bets in their portfolio, I have one and it’s this company. My outcomes are binary.”

Alternatively, does slower growth increase staying power of a company?

Depends on the market. The customer. The product. The company. The competition.

Another scenario: Hickory Nut Gap is a growing regional meat company selling into Whole Foods and other retail and foodservice outlets. This is a high ambition farm to label operation that has grown rapidly but is in a low margin category, where traditional growth capital sources aren’t quite a fit and yet some form of growth capital is needed to fuel the founder’s ambitions for the business.

I wonder about the alternative financing models that are needed but not readily available for these types of businesses, capital that is:

• more risk tolerant than private equity
• more patient than venture capital
• less expensive than equity
• more flexible than most debt

Is that a thing? Can that be a thing?

In agriculture, capital can’t remove all the bottlenecks to growth because often the bottleneck to growth is the reality of natural rhythms of live plants and animals who exist in complex biological ecosystems and producers operating in increasingly volatile financial environments.

The risk to this whole conversation is looking only at the winners, and failing to recognize Survivorship Bias.

Shane Parrish of The Knowledge Project describes it this way:

“Survivorship bias is a common logical error that distorts our understanding of the world. It happens when we assume that success tells the whole story and when we don’t adequately consider past failures.

There are thousands, even tens of thousands of failures for every big success in the world. But stories of failure are not as sexy as stories of triumph, so they rarely get covered and shared. As we consume one story of success after another, we forget the base rates and overestimate the odds of real success.”

This is incredibly true in the world of venture capital. But by definition it must also be true in the eras in which Cargill, Tyson, Walmart, Simplot, etc were forged.

So what’s the takeaway?

I think the moral of the story is that great businesses get built under every financing structure possible, in any market condition, in any vertical. There’s no absolute better or worse capital source, there’s only better or worse for this business at this time.

Would William & Sam & John & Bo & JR have taken venture capital? Impossible to say obviously (and we can have a whole other debate about whether their business models were venture friendly) but I wonder if the benefits of bootstrapping a high ambition business isn’t its own kind of super power.

What a time to be alive 😉

What company that is a small to midsize business today do you think will be a big business in 20-50 years?