The $9M Regulatory Blindspot

Invested in fintech startup disrupting small business lending. Amazing team, strong traction, 40% month-over-month growth.

Company had innovative underwriting algorithm using alternative data. Approved loans in minutes vs. weeks for traditional banks. We conducted technical, financial, and market due diligence. Legal team reviewed "compliance"—company had money transmitter licenses in 15 states. Founders assured us they were "working with lawyers" on remaining states. We trusted them. Invested $9M leading Series A. Post-close, I joined board.

Four months post-investment, we got cease-and-desist letter from state regulator. Company was operating in 12 states without proper licenses. "Working with lawyers" meant "lawyers said it would take 18 months and cost $2M, so we decided to launch anyway and fix it later." Cost to remediate: $3M in legal fees, $1.5M in fines, 8 months of stopped growth in those states. Competitive advantage evaporated during pause. Worse: 2 of the 12 states required full operational audits revealing other compliance gaps. We eventually sold the company for $4M. I lost $5M personally.

• Hire independent regulatory counsel—don't rely on company's lawyers
• Red flag any "we're working on it" answer about regulatory compliance
• For fintech: assume compliance takes 2x longer and costs 3x more than estimates
• Make regulatory compliance a closing condition with personal liability for founders
• Escrow portion of founder equity until full compliance achieved
• In regulated industries, regulatory diligence is more important than technical diligence