Today’s newsletter is a guest contribution from Nnanna. He has previously contributed to the newsletter here and here.
“Success is a lousy teacher, it seduces [seemingly] smart people into thinking that they can’t lose.” - Bill Gates
Some background: This week, the Nigeria-focused crypto startup, Nestcoin announced staff layoffs after some money it had earmarked for operational expenses (Financial Times estimated the sum to be $4 million) got trapped in FTX. For those who have not been paying attention this week, the collapse of the centralised crypto exchange, FTX, means that anyone who kept money in the exchange will almost certainly not get it back. There are rumours that some other startups in Africa also had funds in FTX, but there have been no other confirmations at this time.
First off, my thoughts and prayers are with the now ex-employees of Nestcoin who have been caught in the line of fire due to these actions. I’ve had the privilege of interacting with, and crossing paths with quite a few of them, and they’re an incredibly talented group who do not deserve this. So close to Christmas, and in Buhari’s Nigeria no less. I hope they bounce back quickly and find their footing by joining or building new places. If you are hiring, consider emailing alumni-hiring@nestcoin.com for candidates.
Over the last 10 years, the technology ecosystem in Lagos has experienced growth and some measure of success, thanks to the concentration of relatively accessible infrastructure, talent, capital and opportunity in comparison to other parts of the country. In that time, we have celebrated successes and witnessed spectacular and muted failures. Media attention and social media have seen us elevate the new-age millennial members of the founder class to inflated levels of importance. Many of the millennial-founder class enjoy cult statuses, far above the founders who came before them and “paved the way” for the successes and privileges the ecosystem enjoys today.
It has largely allowed them to avoid scrutiny. But we’ve seen this year that under the glare of accountability, many of these people are fallible. We’ve read allegations of sexual impropriety, defrauding employees, assuming dual identities, financial impropriety, workplace bullying, burning cash without a product, aimless pivots, lack of structure, inadequate checks and balances, outright fraud, ignorance or all of the above.
As we’ve previously argued, when shit hits the fan, employees and customers are the largest and first casualties; it’s why many of these behaviours should not be enabled or excused. So I was shocked to see other leaders of this small ecosystem offer their condolences when Nestcoin’s founder admitted to a combination of ignorance and terrible risk management practices that led to the evaporation of about $4 million of investor monies, and the loss of over 50 jobs.
Saying “Sorry” doesn’t fix anything
While 2022 has been the year of “I’m sorry” from CEOs and fraudsters alike, apologies should not suffice when people’s lives are upended and investor monies are set on fire. Saying “sorry” after engineering financial ruin will not absolve leaders of blame or pay the bills.
The incident at Nestcoin ABSOLUTELY did not need to happen, yet it did, and some people have already decided to let the company’s leaders get away with an apology. We wonder and complain about how and why folks like Neumann, Kalanick, Breslow, Domm Holland, Justin Kan—and surely but soon enough SBF—all get second or even third chances at raising money and rebranding to destroy more capital and lives in the process. In the same breath, we turn a blind eye to our own people with alleged patterns of questionable behaviour at the companies they run. When it all implodes, we come back to talk about all the red flags these individuals had in hindsight.
This industry is small. Many of us have read and heard the rumours about the questionable behaviours of founders. Yet the default is to look the other way, and because of this, their behaviours go unchecked, and they are rewarded with more capital rather than consequences.
It’s time to rest the “changing the world”, or “changing Nigeria” narratives. Most founders are building pieces of software with terrible unit economics. My advice is to enjoy the ride, and the privilege, and be humble. Do right by your people, and don't hurt them. And most especially, don’t crash and burn, please.
For the sake of posterity and for those caught in the web of all this, I want to end with a few things that should’ve never happened in this case:
There was absolutely no reason to hold your company’s entire operating capital in a single centralised exchange, no matter the rumoured investment terms from FTX.
Prudential guidelines and risk management principles exist for a reason. We should not be educating a provider of financial services on the need to diversify and spread out the risk of managing their treasuries in custodial and non-custodial on chain and off chain means. It is irresponsible and highlights the lack of risk management going on in this space.
For more context on how much of a fuck up this was, I received two different emails this week from Nigerian based providers, which I have used to handle crypto transactions in the past. They reassured clients on their risk management processes, which include combinations of multi signature cold storage wallets, as well as their portfolio allocation processes at any given time.
These excerpts below show that people can and are managing on chain risk, portfolio allocation, and storage better than what Nestcoin is apologising for. Frankly speaking, a 10-year-old who reads Wikipedia articles on crypto would have managed risk better than what happened here.
Here is a link to one of the emails in the excerpt above (Note: This was sent from another company that received investments from Alameda research and SBF.)
No matter the rumoured investment terms from FTX, using other investor monies which were allegedly sent in Fiat for yield farming on FTX is a show of greed, it is fraudulent, a crime of funds diversion, and a breach of standard investment contacts. That on its own is a criminal offence, and I sincerely hope investors take action in this regard. “I am sorry” does not make $4 million reappear after evaporation.
No matter the regulatory landscape in this country, If you raise money for a Nigerian operating business (Delaware company or not), try to get some of the investment proceeds repatriated back to the country and a Nigerian bank in the form of a CCI. There is no reason to try to be smart by a mile in these matters. The short-term gains are not worth it.
Finally, where were the risk management or checks and balances here? I can’t believe that there wasn’t a point where any of the smart people in the room thought to say, “having over $4 million of our operating treasury in one place is a bad idea.” Or was this another one of those Nigerian stories where one person controls access to all information, operating in secrecy, not entertaining questions of their authority, and doling out favours to yes (wo)men and sycophants as they deem fit?
This situation, which could have been avoided, was not the fault of the FTX collapse. It was a combination of greed, ignorance, a lack of accountability, and poor risk management. Actions have consequences, we should stop accepting that “man in the arena” rhetoric from these people and begin to hold them accountable for the (alleged) crimes they commit.
This may all be a game for some people, but for most others, it's their livelihoods, and “I’m sorry I messed up” doesn't fix that damage. Godspeed to everyone.
I could sense the anger in your words, and rightfully so. Someone raises money and suddenly we should cut them more slack because they're "building" lol. I don't like that general attitude that tolerates the excesses of folks just because they have handled significant funds, so we can't really vet their knowledge. You hit the nail on the head with this one, but of course I wouldn't bank on any significant outrage from the ecosystem per se. Everyday fintechs prove traditional banking systems regulated by centralized authorities right with their actions/inactions, but that's story for another day (I guess? Lol)
I could sense the anger in your words, and rightfully so. Someone raises money and suddenly we should cut them more slack because they're "building" lol. I don't like that general attitude that tolerates the excesses of folks just because they have handled significant funds, so we can't really vet their knowledge. You hit the nail on the head with this one, but of course I wouldn't bank on any significant outrage from the ecosystem per se. Everyday fintechs prove traditional banking systems regulated by centralized authorities right with their actions/inactions, but that's story for another day (I guess? Lol)