Apocalypse for startups: how BlockFi went from tech unicorn to decline

“Seeing him rise up a tall building, seeing him banqueting guests, seeing his building collapse.”

Just 12 months ago, BlockFi was in full swing.

Amid a crypto bull run and a wave of staggeringly high company valuations in 2021, the cryptocurrency lending platform has emerged as one of the fastest-growing startups in the industry, with investors from blue- chip VCs such as Bain Capital, Tiger Capital and Peter Thiel ‘s Valar Ventures raised hundreds of millions of dollars.

All seemed to be going well, and nothing could stop BlockFi CEO Zac Prince ‘s ambitions, but no one expected what came after: $240 million “cabbage” buyout, FTX ‘s Sam Bankman-Fried (SBF) at the end Instant “relief”.

Sources told Blockworks that the nature and cause of the problem has important lessons not only for BlockFi, but for all crypto companies operating in the ups and downs of market cycles.

In Prince’s case, the pitfalls date back to at least last year, when a series of key (and even questionable) management decisions sent the lending platform into a spiral of collapse.

What was the first domino? — BlockFi executives are eager to raise venture capital from some of Wall Street’s biggest players, even as the crypto market struggles.

In the days leading up to the FTX deal, after reports that Bankman-Fried could acquire BlockFi for as little as $15 million, Prince scheduled a series of executive meetings to find better options. According to Prince’s Google calendar, this includes ConsenSys , Binance , Fortress , JPMorgan , Galaxy Digital , and blockchain giant Barry Silbert , among others.

Blockworks spoke to three sources familiar with the matter, including current and former BlockFi employees, about the incident. Blockworks obtained some internal company documents, and the sources were allowed to discuss sensitive business deals anonymously.

It turns out that one or two seemingly inconspicuous mistakes could be a near-fatal flaw in this overvalued startup.

turning point of fate

A questionable fundraising effort (the results of which were not previously reported): With a Series E round originally scheduled for June 2021, Prince set an ambitious goal of raising $500 million at a $4.5 billion valuation.

Prince pitches BlockFi to prominent crypto investors and traditional asset managers. Some of these options include: Third Point Management of prominent hedge fund manager Dan Loeb, under various strict terms, BlockFi will go public or be acquired outright at a valuation of $9 billion. Other targets: London-based venture capital firm Hedosophia, and other high-profile venture capitalists.

Without Third Point’s participation, the financing ended up closing at less than half of Prince’s target, or $225 million, despite the same valuation, the sources said.

Sources point to reasons for the shrinking funding including an oolong incident a few weeks ago when BlockFi mistakenly sent promotional rewards for bitcoin , as well as the potential for future regulatory conflicts: New Jersey, Texas, Alabama a month later And state regulators in Vermont ordered the startup to stop offering crypto interest-bearing products.

In this wave of misguided promotional rewards, BlockFi mistakenly issued bitcoin as a stablecoin, with some users receiving as much as 700 BTC (worth $28 million) instead of the expected $700. Another Reddit user said they received an email from BlockFi asking them to return the funds and threatening legal action.

At least one employee was fired over the incident, according to two sources.

Still, about three months after the startup raised a $350 million Series D in March 2021, the Series E round ended with a significant shrinkage, but its valuation jumped from unicorn status to $3 billion ( BlockFi’s Series C ended in August 2020, valuing the company at $450 million).

Sources describe BlockFi’s demise as a cautionary tale about tech startups that have experienced exponential growth — but don’t have strong balance sheets to prepare for a bear market.

For BlockFi, the threat of a bear market was quickly replaced by regulatory conflict. Last November — a week after Bitcoin hit an all-time high of $69,000 — foreign media detailed the U.S. Securities and Exchange Commission’s ( SEC ) dissatisfaction with BlockFi’s interest-bearing crypto accounts, which federal regulators treat as securities, with the state. level regulators.

The SEC’s investigation has hit company morale badly, six months after the blundered promotional bonus incident.

In February 2022, a settlement was reached in which BlockFi agreed to pay $100 million in fines to federal and state regulators, and the company also agreed to stop offering its yield products to U.S. retail investors (but business as usual for institutional clients).

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BlockFi had intended to register its interest-bearing accounts as securities, which would allow the product to be rolled out to U.S. retail investors again.

However, Blockworks was informed that this plan was delayed again in late August, pending an audit.

Internally, BlockFi employees say the company’s leadership is starting to see the SEC ordeal as a plus.

“The story is, ‘This is actually great, and now we can be one of the first crypto companies to register with the SEC — we’re paving the way,'” one source said.

Despite the attractiveness of the SEC’s potential backing, BlockFi, which once attracted about 70% of customer deposits in the U.S., is seeing customers churn.

A bigger crisis?

Sources attributed customer churn as the main reason for the failed financing.

BlockFi closed the accounts of U.S. traders between February and March, and new sign-ups roughly halved, followed by a larger exodus of users. BlockFi’s user deposits peaked at more than $10 billion last year — they briefly hovered at $8 billion before quickly shrinking to between $2 billion and $3 billion.

The crypto bear market further dragged the company down, with the total crypto market cap shrunk by nearly 60% at one point.

Series F financing to SBF

It’s clear that Bankman-Fried’s cash infusion — the option to buy BlockFi outright — is a mixed bag for Prince after a bumpy 18 months.

Company insiders detailed issues such as lengthy tech stacks powered by the obscure programming language Elixir, crude “digital-driven” incentives, deposit-pulling tasks, and more.

A source said: “We’re building a bad tech stack, which makes our development rate ridiculously slow – launching products and updates slower than our competitors, the company has to hire more developers to make up for the progress.”

BlockFi fired its chief technology officer last year, who joined in 2018, the sources said. The company also asked its chief growth officer to leave.

A number of other key employees have also recently left voluntarily, including other growth and development executives and Mitch Port, vice president of strategy and finance.

Port, who holds the position of an expert associate partner at Bain & Company, declined to comment, saying only that BlockFi is “an incredible company to work with some of the most talented people I’ve ever worked with.”

Other executives also decided to quit, including David Olsson , Shane O’Callaghan and Samia Bayou. Key figures on the institutional side of BlockFi remain, including Bank of America veterans Giles Colwell and Brian Oliver. Oliver joined in May after spending ten years at private equity firm Red Devil Investors.

At its peak, BlockFi had around 1,000 employees, and its growth trajectory has in some ways moved the company’s core business away from crypto-native attributes.

For example, the company’s most recent chief marketing and growth officer has no professional crypto experience, like many new hires — a shift that’s seen internally as a good thing: non-crypto players should attract others of their kind.

BlockFi seeks liquidity – very urgent

Backed by JPMorgan, Prince and other executives are encouraged as they seek Series F funding in late 2021, which they see as a secret trump card: BlockFi’s interest-bearing account will soon be the first and only SEC-registered account , which, in theory, will attract a large number of retail investors.

BlockFi initially sought to raise as much as $500 million at a valuation of $6 billion to $7 billion (about 60% higher than its previous funding round), but given that the company is barred from serving new U.S. customers, the sources said This proved to be a difficult financing process.

Meanwhile, employees were told the company would go public soon. As negotiations dragged on, the target value was no longer possible, and a goal of raising $85 million at a $1 billion valuation was finally set.

One condition of raising the funds was to cut 20% of staff to boost profits, a plan that also includes industry companies such as Coinbase and Gemini.

BlockFi assured employees that it was solvent, the sources said, claiming it could have processed twice as many withdrawals during the May and June market crashes. According to company filings, customers withdrew about 30,000 bitcoin (now worth $568 million), 230,000 ether (now worth $292 million) and $1.5 billion in stablecoins between June and July.

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While it’s unclear exactly how close BlockFi is to the brink of collapse, the company has never suspended withdrawals or other functions during the broad crypto bear market. Sources say the company was a good, ethical player, but it was just in trouble or SBF would not have come to the rescue.

Competitors Celsius and Voyager have both struggled under the weight of cascading liquidations, margin calls and price slumps, with massive withdrawals of funds from panicked markets causing both companies to go bankrupt and tens of thousands of users losing money.

BlockFi took the opposite tack. The company could have — presumably, in a real pinch — sold the collateral of its institutional clients for user withdrawals, though such an extreme measure would surely upset its institutional clients.

Regardless, uncontrollable withdrawals, looming threats only make raising cash more urgent.

BlockFi “Big Sale”

On Friday, June 10 — three days before BlockFi fired 20% of its workforce — Prince’s phone rang at 9:00 a.m. with an important announcement: “Contact lead investor,” and a board meeting two hours later .

A week-long meeting will follow, starting at 10:30 a.m. on Sunday, with Kyle Davies and Su Zhu , co-founders of now bankrupt Three Arrows Capital , and other executives including BlockFi agency general manager Brian Oliver Had a 30 minute call.

Four days later, BlockFi said it had liquidated all Three Arrows positions.

Aside from private sessions, the only scheduled meetings that were absent was a week-long series called “Project Batman,” which involved Prince, Amit Cheela (BlockFi’s senior vice president of finance), Matthew Chan (BlockFi’s corporate development strategist), and JPMorgan focused on Investment banker in fintech companies.

The following is the schedule of the internal meeting:

June 15

  • 8:30: Mark Yusko (CEO, Morgan Creek)
  • 9:30: Tony Lauro (BlockFi CFO); Flori Marquez (BlockFi Co-founder); Jonathan Mayers (BlockFi General Counsel)
  • 18:15 : Robby Gutmann ( CEO, NYDIG ; Head of Digital Asset Strategy, Stone Ridge); Ross Stevens (CEO, Stone Ridge); Marquez (Co-founder, BlockFi)

June 16

  • 9:00: Marquez (BlockFi Co-Founder); Lauro (BlockFi CFO); James Fitzgerald (Valar Ventures Founding Partner); Andrew McCormack (Valar Ventures Founding Partner)
  • 10:30: Yusko (CEO of Morgan Creek)

June 17

  • 14:45: Richard Chang ( Head of Capital Markets, FTX Ventures )
  • 16:00: Barry Silbert (CEO of Digital Currency Group)

June 18

  • 12:00 PM: Gutmann (NYDIG CEO; Stone Ridge Head of Digital Asset Strategy); Stevens (Stone Ridge CEO); Fitzgerald (Valar Ventures Founding Partner); McCormack (Valar Ventures Founding Partner); David Heller (Investor, former Goldman Sachs executive)
  • 15:30:Chris Ferraro(Galaxy Digital CIO)
  • 18:00: BlockFi legal team
  • 20:00: Thomas Farley ( Bullish incoming CEO)

June 19

  • 8:30: Bankman-Fried (FTX CEO); Caroline Ellison (Alameda Research CEO); Ramnik Arora (FTX Product Lead)
  • 9:00: Brian McGrath ( Ribbit Capital General Partner)
  • 13:00: Peter Briger (Head of Fortress), Mayers (General Counsel of BlockFi)
  • 14:00: Cheela (BlockFi SVP Finance); Ellison (Alameda Research CEO); Arora (FTX Product Head); Bankman-Fried (FTX CEO); Mayers (BlockFi General Counsel)
  • 17:00: Cheela, Phil Rich (Binance, M &A); Kaiser Ng (Binance SVP Finance); Ken Li (Binance, M&A); Michael Chan (Binance Head of M&A)
  • 18:00: BlockFi Board of Directors with three Haynes Boone attorneys (BlockFi outside law firm)
  • 20:00: Cheela, David Merin (Head of Corporate Development at ConsenSys), Matthew Gilmour (Associate in Corporate Development at ConsenSys)

June 20

  • 8:30: Gavin Michael ( Bakkt CEO)
  • 9:00: Howard Chen (Co-Head of Market Infrastructure at JPMorgan); Dan Pombo (Head of Restructuring at JPMorgan); Jeremy Sipzner (Executive Director at JPMorgan), Xavier Loriferne (Managing Director, M&A at JPMorgan); Keith Canton (Morgan Stanley) Chase Head of Private Capital Markets)
  • 9:30: Peter Smith ( Blockchain.com CEO)
  • 16:00: Tom Jessup (President of Fidelity Digital Assets)
  • 17:00: Marshall Beard (Chief Strategy Officer, Gemini)
  • 18:00: FTX executives

June 21

  • 9:30: Marquez (BlockFi co-founder); Lauro (BlockFi CFO); Frederik Mijnhardt (SecFi CEO)
  • 11:00: BlockFi Plenary Announces FTX Bailout
  • 11:30: Bloomberg reporter

While it’s unclear whether each call ended up being held, all attendees were present, and Prince arranged between multiple calls with Bankman-Fried with Binance, Ribbit Capital, ConsenSys, Fidelity, Bakkt, and Gemini. Meeting with executives.

After one month, BlockFi offered voluntary severance pay for 80% to 90% of the remaining employees (about 700 people) for 10 weeks’ wages. According to sources, around 200 were accepted and the company now has 400 to 500 employees.

Some of the remaining employees were given a separate, more complex contract: a 10 percent pay rise, with the potential to receive up to 20 percent over six months if new, stricter metrics were met.

Those metrics include raising the value of private customer deposits in interest-bearing accounts by 40% to $3 billion by the end of January, and reducing cash burn to less than $6 billion by the end of the year.

In fact, BlockFi, like many of its growth-struggling startup peers, has little net positive cash flow.

The company’s operating cash flow lost $13.8 million in June, its worst month of the year, an internal filing showed, with negative $12 million in July and negative $9.1 million in August — an average for 2022 Negative $7 million per month.

The filing also shows that BlockFi’s operating cash burn was positive for just one month this year: in May, positive earnings were $1.7 million, a particularly optimistic and hopeful performance.

From the beginning of 2022 to August, BlockFi’s cash burn is $55.9 million.

What is the price of corporate integrity?

What’s next for BlockFi is far from certain. Some prominent crypto players, while refusing to speak out publicly, praised the company’s efforts and integrity — not least by pointing out their willingness to dive headfirst into alternative revenue streams rather than doubling down on things that don’t work.

One source said: “Do I want to be BlockFi? No, [executives] made a lot of money. They could have cashed out and closed. They could have exploited their investors, what they choose to do now is much harder many.”

Adding to the woes: The decoupling of stablecoin Terra sparked an implosion and the collapse of rival crypto lending platforms Celsius and Voyager, which reduced BlockFi ‘s monthly revenue to $15 million in July and August, a 70% decline from the beginning of the year.

The company earned $48 million in January between its loan ($33 million), transactions ($11 million) and credit card ($4 million) revenue streams.

In July and August, BlockFi attracted $15 million in monthly revenue across its three main products, with loans accounting for nearly 80%. Overall, that’s less than half of the company’s June revenue of $32.5 million.

BlockFi’s credit card business has proven to be more resilient than its transactions, recently generating about $2.3 million in monthly revenue, down from $4 million in January. Transactions in August were just $1 million, down from $6.8 million and $7.2 million in May and June.

The company now hopes to revive its business by building a global fiat currency gateway, Stripe payments support, and offering crypto derivatives to its institutional clients, according to internal documents and sources. A Stripe spokesman declined to comment.

While such an integration doesn’t entirely imply a clear partnership with the payments giant, BlockFi will be a client of the likes of FTX and Coinbase.

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The inclusion of FTX custodial services and the launch of derivatives products for institutions, as well as efforts to secure customer deposits, have also begun, with BlockFi still using lending and trading revenue as the main avenues for growth.

BlockFi’s U.S. license appears to be the main reward for Bankman-Fried and its strong institutional business, although it will take a long time to get it.

Most of the company’s employees are still waiting to learn what will happen to their stake, one source said. It could turn into FTX stock, but under different and unknown fundamentals.

To retain employees, BlockFi recently increased the weight of its retention incentives from 40% to 80%, reducing the importance of customer deposits and cash burn rates.

This is not a climax of a successful study of “shuangwen”, BlockFi’s rapid ascent has seen co-founders Prince and Marquez briefly surpass digital assets, beyond fintech, and into the wider technology field, where they have been featured on mainstream TV shows and podcasts. Compete to report.

There are many lessons one can learn from the BlockFi saga, whether it’s “be prepared for danger”, “customer deposits are a dangerous growth indicator for crypto lending platforms”, or “never lend crypto to Su Zhu or Kyle Davies.”

But maybe, to put it simply – “Never send bitcoins by mistake”.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/apocalypse-for-startups-how-blockfi-went-from-tech-unicorn-to-decline/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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