The latest in the Binary Capital blowup and what it means for startup investing

Binary Capital, the San Francisco-based early stage fund whose cofounder, Justin Caldbeck, resigned this past Sunday, is shutting down for all practical purposes.

A source tells Bloomberg that the young firm, which had closed its second fund last year with $175 million in commitments but barely begun to invest that capital, will be wound down.

Binarys portfolio companies, including from its $125 million debut fund, will either be managed by the firms remaining co-founder, Jonathan Teo, or its stakes will be sold to other investors (presumably with some input from the founders). A third option, says Bloomberg, would be for another investor other than Teo to manage out the firms current investments. [See updates below.]

A report in The Information published last Thursday set off the chain of events leading to this moment. Its story recounted numerous occasions on which Caldbeck made unwanted advances toward women with whom he worked or who were seeking funding from Binary for their startups.

Three of those women allowed The Information to use their names, despite the risk that their accusations would not be taken seriously.

They were.

Though Caldbeck initially downplayed the report, outrage throughout Silicon Valley grew steadily until, the following day, Caldbeck issued an apology that only seemed to further inflame the startup community. By Saturday, Binary had suspended plans to raise yet another new fund. Sunday night, both Caldbeck and a much newer member of the team, Matt Mazzeo, resigned from the firm and Teo, whod seemingly stood beside Caldbeck at the start, began blowing up his life vest. Specifically, he issued a public statement, calling Caldbecks behavior toward women predatory and demeaning and, for good measure, also deplorable.

The move wasnt enough to buffer Teo, who wasnt just late to distance himself from Caldbeck but who has a reputation as a charmer with many admirers, says one fellow investor. That kind of reputation cuts both ways in a situation like this one. When Teo expounded on his public statement in a Facebook postto his friends, more than 1,800 people men and women liked what he had to say, with hundreds voicing their support.

Meanwhile, possibly sensingcoming accusationsof thebirds-of-a-feather variety, Teo deletedhis Instagram posts(or archived them) so that they couldnt be used against him.

Fair or not to Teo, the deal is done now.Meanwhile, the implosion of the founders young firm whose break-up has happened at breathtaking speed holds a few lessons for other investors and founders in the startup world.

First, Binary wasnt the first venture firm to be dissolved by its limited partners. We can think of at least two precedents. But those situations each took more than a year to play out.

That will never be the case again. Today, it takes one spark on social media to ignite a firestorm. That means that both colleagues and limited partners who once had the luxury of anguishing over how to manage an unprincipled VC no longer do. That should make those whove used their position to take advantage of founders very nervous.

Second, LPs need to do a much better job of due diligence. While frustration over the Binary situation has come from every direction, most of the ire has been directed at Caldbeck, Teo, and earlier colleagues who did little to stop Caldbeck.

Lightspeed Venture Partners which formerly employed Caldbeck and removed him from a board observer position after Stitch Fix founder Katrina Lake complained about him acknowledged on Twitter today that it should have done more.

You can guess that Lightspeed, which had asked Lake to sign a non-disparagement agreement, will receive more blowback for its handling of the situation. In the meantime, less frustration has been directed at Binarys LPs and perhaps should be.

The venture community has broadened considerably over the last decade, but it still remains tight-knit compared with many other industries. When it comes to Caldbeck, who joined the field in 2005 as an associate with Bain Capital Ventures, its hard to believe Binarys backers were oblivious to Caldbecks reputation.

If they were in the dark, it says a little something about the kind of due diligence that institutional investors are doing. That is, it doesnt work. If they knew of Caldbecks reputation and turned a blind eye anyway, theres perhaps a related lesson to be learned from what just happened. While the pursuit of profit may not be evil, backing evil individuals (or unethical ones, anyway) doesnt pay. Not anymore, it doesnt.

Update one: Another Binary portfolio company, Assist, is speaking out. It says it has requested to buy back 100 percent of Binarys investment in its company and to dissolve our working relationship with their firm completely. This also includes termination of board observer rights, voting rights, and buying any shares of Assist in the future. Its adding that if Binarys LPs hire a women-led venture firm to manage out the current investments, it will reconsider our request and work directly with the LPs in this situation.

Update two: Jonathan Teo has now offered to resign entirely from Binary Capital, says Axios.

Read more: https://techcrunch.com/2017/06/27/the-latest-in-the-binary-capital-blowup-and-what-it-means-for-startup-investing/