Tag Archives: Money

Hedge Fund Ponzi Scheme Steals $39 Million from Investors

Another day, another hedge fund scandal. The SEC announced charges this week against a Detroit hedge fund for bilking investors of tens of millions of dollars.

From Financial Advisor magazine:

The Securities and Exchange Commission today announced fraud charges against Detroit-based EIA All Weather Alpha Fund Partners I LLC (EIA) and its sole owner, RIA Andrew M. Middlebrooks, for an alleged multiyear Ponzi scheme that the agency said included the misappropriation and loss of nearly $39 million in investor funds.


The commission said in its complaint that from at least mid-2017 to April 2022, EIA and Middlebrooks deceived investors in their hedge fund, the EIA All Weather Alpha Fund I LP, by making false and misleading statements that “wildly” misstated the fund’s performance and total assets. The SEC also said in the complaint that the fund and Middlebrooks provided falsified investor account statements, misrepresented that the fund had an auditor and created and disseminated a fake audit opinion to investors.


In addition to being a rotten trader, Middlebrooks had a taste for the finer things in life. He paid for them with investor money:

Middlebrooks also misappropriated investor funds for personal use, allegedly transferring at least $470,000 to his wife’s business, making more than $750,000 in transfers to his personal bank account and using $64,000 in investor money to pay for jewelry, the agency said.

It seems likely that his victims will lose their entire investment:

“Middlebrook’s losing trading strategy coupled with his misappropriation has resulted in near total loss of investor funds,” the SEC said.


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The hedge fund describes itself rather differently on its website:

We are active investors, not closet indexers, and we have structured an investment process and environment that enables us to be disciplined, to be patient and to exercise good judgment.

It turns out investors would have been far better off with that boring index fund. Indeed, they form the core of my portfolio.

The fund’s LinkedIn profile comes closer to telling the truth:

This intellectual framework allows the Portfolio Manager to manage the Fund unencumbered by emotions or inherent bias.

Emotions definitely didn’t stop Middlebrooks and his cronies from bilking unsuspecting investors.

I was able to find what appears to be the actual slide deck that Middlebrooks used to pitch investors. The scariest part about it is that the pitch seems fairly plausible, proposing a long/short strategy that combines value and momentum.

In addition to their thieving, it appears that EIA partners were paid well. Glassdoor records total compensation of $254,000.

I guess that wasn’t quite enough to cover their expensive tastes.

We see one case of shady behavior after another in the hedge fund world. The SEC and DOJ need to step up and start seriously scrutinizing these funds.

I’m as pro-free enterprise as anyone you’re likely to meet. But fraud doesn’t qualify.

As Memorial Day approaches for those of us in the United States, one of the more patriotic things we can do is to safeguard that free-enterprise system by purging its bad actors.

What do you think will be the next hedge fund to fall? Leave a comment at the bottom and let me know!

There will be no blog on Monday for the holiday. Have a great Memorial Day weekend everyone! 🥳🇺🇸

More on markets:

$6B Hedge Fund Cut Off from Trading As Investigation Looms

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

Citadel Adds Millions to AMC Options Bet

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Photo: EIA Alpha Partners CEO Andrew Middlebrooks

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Talking About Today’s Startup Market on The Accelerator Podcast

I had the pleasure of chatting with angel investor Michael Conniff on his The Accelerator podcast recently! We talk about how to find a great startup to invest in, some of my recent investments, and the robot pizza future.

I’ve provided some links to key parts below. Enjoy!

3:28: What I look for in a startup

4:50: The technique for judging startups quickly that I learned from Jason Calacanis

6:31: Why I like SaaS

7:00: Problems with D2C companies

9:00: Why I invested in VADE, which is changing parking forever

13:29: My recent investment in Fathom, which is letting us search podcasts the way we do text

15:52: Why I invested in Capbase, the best way to start your start-up

19:17: Will robots make our pizza in the future? 🍕

22:35: Why I started this blog

25:06: What sectors I invest in

What did you like about the podcast? What did we miss?

And would you like to see more podcast content like this? Leave a comment at the bottom and let me know!

More on tech:

Talking Startups and Today’s Fundraising Pullback

Why Investors BS You

Robot Pizzas and the Future of Fast Food

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Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

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Misfits Market

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$6B Hedge Fund Cut Off from Trading As Investigation Looms

Hedge fund giant Segantii Capital Management has been cut off from trading by two major banks. From a Financial Times report that broke this morning:

Bank of America and Citigroup have suspended all equity trading with Segantii Capital Management, due to the banks’ concerns about the hedge fund’s bets on the sale of large blocks of shares, according to several people with knowledge of the matter.

BoA and Citi may be acting to save themselves from legal liability. Segantii is caught up in a federal probe of short sellers:

Media reports earlier this year said US authorities had sought communications between Morgan Stanley, which is at the centre of the block trading probe, and a former employee of Segantii.

The federal investigation centers on block trades. Wall Street traders may have sold short stocks when a large block of shares was about to come onto the market, pushing the price down.


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These short sellers should not even know about the block trades. But it seems they’re getting the information, likely from someone inside the bank doing the big trade.

From the Financial Times:

The SEC probe is looking at whether other traders are getting advance word of these large sales — either directly from the banks or in some other way — and improperly profiting by shorting the shares in expectation that prices will fall.

So what will happen to Segantii?

It still has a few banks that will trade with it, including Goldman Sachs. But the federal probe is gathering information on Goldman as well, according to the same Bloomberg report that named Segantii as a subject of the probe.

Two major banks cutting off Segantii entirely is likely to make the fund toxic, in my view. How will you explain to your boss, or the government, that you kept trading with a fund subject to a federal probe even after other big banks cut them off?

Segantii may struggle to keep doing business. And bad press spooks investors, which may lead them to pull their money from the fund.

This could result in a spiral reminiscent of the recent demise of Melvin Capital Management.

One thing Segantii seems to have in its favor is that it has not notched any huge reported losses. Yet.

Do you think Segantii is another Melvin? Leave a comment at the bottom and let me know!

More on markets:

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

FBI Raids Short Sellers

The Real Reasons Melvin Is Shutting Down: No Fat Fees and a Federal Investigation

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Photo: Segantii chief Simon Sadler

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

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The Autonomous Weapons of the Future…and Present


A man walks in a remote field. From a place he cannot even see, a quiet drone takes off.

It’s headed his way.

This drone was made by Anduril Industries and this time, it just watched. But it can do a lot more.

These powerful craft can fly at 80 to 100 mph. By comparison, a typical DJI drone can reach about 40 miles per hour.

The Anduril drone is so fast and durable it can knock other drones out of the sky. The five year old defense startup bills itself as different from the big boys like General Dynamics or Northrop Grumman:

“Unlike most defence companies, we don’t wait for our customers to tell us what they need. We identify problems, privately fund R&D and sell finished products off the shelf.

David Goodrich, CEO Anduril Australia & Asia Pacific

Anduril is taking robot warfare beyond aerial drones. It recently bought a company called Dive Technologies, which makes autonomous submarines.

What if you had hundreds of even thousands of these autonomous subs patrolling your coast…or even attacking your enemy’s navy right in its own harbors? These relatively cheap and quick to produce vessels could change naval warfare forever.

Anduril’s drones rely on computer vision and AI to spot threats.

I’ve actually seen similar technology used by startups that sell security cameras to individuals. In those cases, the system flags a potential intruder for a human to review in real time.

This type of tech isn’t just being used abroad. It’s in our neighborhoods and also on our southern border, where it’s used to track immigration.

We’ve had numerous issues with policing of poor communities in America. It concerns me how a new generation of AI and robotics could be trained on those who already have the least.

As explosive as certain policing incidents have been, what will happen when the unarmed man is confronting a robot?

But like any new technology, Anduril’s capabilities can also be used for good. The startup is working with NATO forces in Poland, perhaps to prepare them for a Russian threat to Poland stemming from the Ukraine conflict.

I doubt we can put this genie back in the bottle. But I hope governments and citizens will work together to ensure these powerful technologies are used for good.

What do you think of Anduril’s tech and how it may be used? Leave a comment at the bottom and let me know.

More on tech:

Growing Veggies on Mars

How Tech Could Stop Wildfires

The Startup Pitch Checklist

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

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Talking Startups and Today’s Fundraising Pullback

Hey everyone! 👋 Hope your Monday is going great.

I gave a talk at the Starta Accelerator in NYC last week. It was a lot of fun!

I talk about how the venture capital market works, my investing approach, and today’s pullback in fundraising. And a lot more!

Here are some interesting parts:

9:06: When I invest without traction, and David Sack’s latest startup, Callin.

20:01: How long I take to make a decision to invest

23:11: Why Jason Calacanis’s syndicate is the best one out there

29:07: Fundraising in a tougher environment for startups

34:09: Conspiracy theories on Peloton and Sex and the City’s Mr. Big. 🙂

41:02: Why investors BS you

45:21: How I help the startups I invest in

52:37: Jason’s book Angel and other great books on venture capital and startups

59:00: Why single founders are sometimes ruled out by investors, and why they shouldn’t be.

What information here was most useful to you? What did I miss?

Leave a comment at the bottom and let me know!

Have a great week!

More on tech:

Why Investors BS You

Inside Today’s Early Stage Venture Market

The Burn Multiple: What Is It, and What Can It Do for You?

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Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

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I wrote a detailed review of Misfits here.

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Why Investors BS You

Ever had a conversation like this?

Investor: This is an incredible concept! You guys are going to change the world!

You: Thank you so much! So, how much do you want to invest?

Investor: Well, actually, I couldn’t get my partners there. But you guys are going to do great! Keep me posted and let me know how I can be helpful.

You: *Scratches head*

We investors ply startup founders with big smiles and happy talk. Star fruit, anyone?

Many founders hear nothing but compliments but come away without a check. Why do investors do this?

As someone who nodded and smiled at founders for a good long while, allow me to pull back the curtain…

Preserving Optionality

Or in plain English, “keeping your options open.”

Maybe an investor thinks that a startup they meet with is not going to make it. But they could always be wrong.

Really wrong.

If the company takes off in a major way, the VC may find himself begging to get into the Series A when he missed the seed round. And if that happens, he doesn’t want the founder angry at him because he was too candid at a meeting 2 years ago.

Reputation

As an angel investor or VC, your reputation is everything.

If I tell a founder the hard truth that his company is burning too much money and may go out of business, he might accept that as constructive criticism. But he might also get very upset with me.

Founders talk to each other. If that entrepreneur tells two dozen others that I’m a jerk, there goes my deal flow.

It is in the interests of the founder for the investor to be honest. It can help the founder improve her pitch or fix issues in her business.

But it’s not in the investor’s interest! He’s more interested in avoiding a hit to his reputation than in helping a struggling founder.

Tell Them Why Their Baby’s Ugly

After hearing complaints about happy-talking investors from some of the best founders I know, I’ve changed my approach. When I’m not interested in their company at this time, I’ve started trying to tell founders in a direct but polite way.

I also try to explain why they don’t meet my criteria for investment and how they might meet it in the future. As noted angel investor Zach Coelius said, “You have to tell them why their baby’s ugly.”

The Time for Honesty Is Now

Being honest with founders is especially important right now. The fundraising environment has gotten a lot worse for startups in the last few months.

Many startups will not survive this. If giving a founder some constructive criticism prevents a business from dying and a bunch of people from losing their jobs, that’s a risk we investors need to take.

We have to remember why we’re really here: to build the ecosystem and help new companies grow and thrive.

Please remember this when an investor gives you constructive criticism: she’s actually taking a risk she doesn’t really have to take. Whatever decision you make, at least consider the investor’s ideas.

What frustrates you about dealing with investors? Leave a comment at the bottom and let me know!

Have a great weekend everyone! 👋

More on tech:

The Burn Multiple: What Is It, and What Can It Do for You?

Inside Today’s Early Stage Venture Market

What the Best Founders I Know Have in Common

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

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If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

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The Real Reasons Melvin Is Shutting Down: No Fat Fees and a Federal Investigation

Melvin Capital Management LP is shutting down, according to a report from Bloomberg that broke last night.

The once highflying hedge fund was badly burned by short positions in meme stocks like AMC Entertainment Holdings, Inc. and GameStop Corp in 2021. This year, it lost a further 20% of its capital in bad bets.

Founder Gabe Plotkin sounded positively high-minded in a final note to his investors. From the New York Times:

Mr. Plotkin wrote to his investors that he had decided that the “appropriate next step” was to liquidate the fund’s assets and return cash to all investors.

Mr. Plotkin, who founded Melvin in 2014, also wrote that he recognized he needed to “step away from managing external capital.”

But let’s ignore the sound bites and dig into why Melvin is really shutting down.

Just last month, Melvin tried to remove a crucial provision in its agreement with investors: the “high-water mark.” This provision only lets the fund earn performance fees if it makes back prior losses.


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Hedge funds like Melvin usually charge a 2% management fee and 20% of all gains. The management fee pays for offices and staff, but the 20% performance fee is the real prize for hedge fund managers.

Melvin had lost most of its capital, so it would have to more than double in order to get back to its high-water mark. This would be quite difficult, especially with losses mounting by the day.

So Melvin made a bold request to investors: remove the high-water mark so we can charge you even more fees to make back the money we lost. Such a move is highly unusual and, predictably, investors balked.

Facing many years without that juicy performance fee, Plotkin decided to shut down Melvin rather than try honorably to win back the investor money he’d lost. I find this conduct deranged and disgraceful.

On top of its huge losses, Melvin faces another problem: a federal investigation. The Justice Department is currently scrutinizing its short sales.

No fat fees and a federal investigation. No wonder Melvin is shutting down.

But Plotkin could have at least been honest about the real reasons behind his firm’s ignominious end.

On April 26 on this blog, I predicted that Melvin would shut down. It took just 23 days.

With major losses stinging funds from Melvin to Tiger and beyond, I suspect Melvin will be just the first of many.

Who do you think is the next fund to fall? Leave a comment at the bottom and let me know!

More on markets:

Melvin Capital Faces Investor Revolt

Citadel Adds Millions to AMC Options Bet

Melvin Capital Under Federal Investigation

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

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Misfits Market

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Citadel Adds Millions to AMC Options Bet

Citadel LLC added tens of millions of dollars to its option bet on AMC Entertainment Holdings, Inc. in the most recent quarter.

Its net bullish position increased from $90 million to $125 million, according to an SEC report released yesterday. It also built a bullish position in GameStop Corp. options during the period.

The hedge fund giant held $245 million in call options and $120 million in puts, versus $191 million and $101 million respectively in February.


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This bullish position is ironic given that Citadel was a major backer of Melvin Capital Management LP. Melvin lost billions shorting AMC, Gamestop Corp., and other meme stocks last year, and may have imploded had Citadel not rescued them.

Perhaps Citadel’s patience with Melvin’s investing style has run out. Citadel has pulled out most of its $2 billion investment in the failing firm, and began adding to its AMC options position around the same time.

The SEC report doesn’t specify the strike prices or duration of the options, so we don’t know exactly what Citadel’s strategy is. It could be expecting lower prices in the short term and higher ones in the long term, or vice versa.

But I find it fascinating that this archvillain of the meme stock saga has capitulated and placed bullish bets on the same companies. It seems Citadel’s losses in Melvin’s hedge fund taught it a lesson.

What do you think Citadel’s strategy is? Leave a comment at the bottom and let me know!

More on markets:

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

Melvin Capital Faces Investor Revolt

Hedge Funds Could Lose Nearly Half of Assets Under Proposed SEC Rule

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Photo: Citadel LLC CEO Kenneth Griffin

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

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Misfits Market

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Move to T+1 Trade Settlement Could Crush Short Sellers

US markets will soon move to faster settlement of trades. This change could seriously damage some short selling hedge funds.

From a new report in The Trade News:

The Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) are working together to reduce the T+2 settlement cycle in the United States to T+1 by the first half of 2024.

This could quickly lead to regulators requiring that trades settle same day, or T+0, according to a Deutsche Bank report. Faster settlement could have two disastrous effects on short sellers:

Naked Short Selling Gets Harder

Some hedge funds sell short shares without ever borrowing them first. This mostly illegal practice shows up in huge, persistent fails to deliver in volatile meme stocks like GameStop Corp. and AMC Entertainment Holdings Inc.


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If trades have to settle faster, it will be harder to sell short shares you don’t own while possibly locating some shares later. You have less time for your incomplete trade to sit in limbo.

Without this powerful tool to push down stock prices, it will be more difficult for short sellers to tank a stock.

Brokers Are Less Likely to Suspend Trades in Volatile Stocks

Last January, Robinhood Markets Inc. and other brokers stopped users from buying shares of volatile meme stocks like GameStop and AMC. Their rationale was that given how much the stocks’ prices were moving, they couldn’t afford to put up the necessary margin to process the trades.

After buy orders were stopped, GameStop stock plummeted:

Brokers like Robinhood have to post money with clearinghouses such as the National Securities Clearing Corporation (NSCC). The more volatile a stock and the longer it takes to settle the trade, the more money they have to cough up.

If the time it takes for a trade to settle is cut in half, the amount of margin brokers would have to post would likely be cut in half as well. Indeed, reducing margin requirements is one of the main reasons why regulators want to move to T+1 settlement.

Where This Leaves Short Sellers

Short sellers in recent years have had a lot of advantages.

Loose trade settlement rules made naked shorting easier. And if that failed, brokerages might bail you out by stopping retail traders from buying the stock to squeeze you!

And even with these advantages, hedge funds like Melvin Capital lost billions on their short positions. How big would the hole have been without these tailwinds?

The Loophole

There is one good piece of news for shorts: there may be a loophole. SIFMA, a Wall Street Lobby, is seeing to that:

…SIFMA requests an exemption from SEC Rule 15c6-1 for security-based swaps, which are generally bilateral and executory in nature.

This would make swaps exempt from the faster settlement rules. Hedge funds like Archegos have already used these derivative contracts to make massive bets out of the public eye.

If the move to T+1 settlement makes short selling harder, I expect more funds to move into swaps to avoid the rules. I encourage the SEC to find a way to make T+1 apply to swaps transactions as well.

The future is looking darker for short selling hedge funds. The question is, will regulators create a more efficient market for everyone, or let lobbyists pick apart their work piece by piece?

What do you think new settlement rules will mean for short sellers? Leave a comment at the bottom and let me know!

More on markets:

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

Hedge Funds Could Lose Nearly Half of Assets Under Proposed SEC Rule

Archegos Used Swaps to Hide Positions; Other Funds Are Too

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Photo: Prominent short seller Gabriel Plotkin, founder of Melvin Capital

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Misfits Market

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Use this link to sign up and you’ll save $15 on your first order. 

Inside Today’s Early Stage Venture Market

The good times are over. And they didn’t even last that long.

The NASDAQ quickly bounced back from an over 30% fall in early 2020 as COVID raged. The tech stock index reached all-time highs last November, only to plummet a further 29% since.

Now, the tech stock rout is making its way into private markets. So what does this mean for early stage startups and angel investors like me who fund them?

Here’s what I see going on inside today’s market:

1) Deals are taking longer to close. A deal that might have closed in 1-2 months last year is taking 3-4 months now.

2) Valuations are down moderately. I am seeing declines of around 10-20% from the 2021 peak.

Publicly released numbers show less of a correction, but remember that there is often a several month lag between when a deal is priced and when it’s publicly announced. If valuations drop, it won’t be apparent to the general public until months after it happened.

3) High growth companies are still getting plenty of funding.

Seed stage and Series A startups that are growing revenue rapidly, in the range of 10-20% month over month or more, are raising almost as before. These are the strongest startups, and in a tougher market, investors will gravitate toward them.


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4) Some investors are increasing their pace of capital deployment.

I’ve actually invested a bit more than usual in the last two months as valuations have retreated. If you can invest in great companies for less than you could 6 months ago, you may want to deploy more cash than usual.

5) Crypto/NFT projects continue to command crazy valuations.

Bitcoin has fallen by more than half since November. NFT trading volumes on major exchange OpenSea are also down more than 50% since the beginning of this year.

Yet this, the most rah-rah of all venture sectors, seems to be going full speed ahead. I still see extremely expensive rounds in blockchain companies that have few if any customers and often not even a launched product.

The NFT area seems the most overheated of all. I recently saw a $1 billion valuation for an early stage NFT company.

It not only didn’t have a product yet, it didn’t even have a deck.

I expect a brutal correction in these markets in the coming months, leaving behind only the most useful and widely adopted projects.


In all, if startups focus on good, cash-efficient growth, I’m confident they’ll still find the funding they need in today’s market. But companies with no revenue, no product in market, heavy burn, and/or anemic growth are in trouble.

What are you guys seeing in early stage venture markets? And what do you think the future holds?

Leave a comment at the bottom and let me know!

More on tech:

What the Best Founders I Know Have in Common

Amp It Up

The Startup Pitch Checklist

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Photo: “2016/366/238 Proceed with Caution” by Edna Winti is marked with CC BY 2.0.

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $15 on your first order. 

If you found this post interesting, please share it on Reddit/Twitter/etc. This helps more people find the blog! 

Save Money on Stuff I Use:

Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $15 on your first order.