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Turned away $2.5M he didn't need
His company rests on an underwriting model, and the only question he cared about early was whether that model worked. So he put six figures of his own money into loans and ran hypothesis tests on loan size and duration.
He had no interest in hiring a lot of people or building custom proofs of concept for his customers. He prioritized a cofounder with perfect founder-market fit and kept every decision pinned to the stage the company was in.
What had to happen now mattered to him, and what he would do at the next stage of the company could wait.
Why would a startup refuse offered funding?
Every dollar of equity funding sells a slice of the company, so taking more than is needed gives away ownership for nothing. Venture funds also depend on a small number of outsized winners, a pattern called the power law, so their investors push portfolio companies toward fast growth. A funded company inherits that pressure along with the cash. A round also sets a valuation that later rounds are expected to beat.
How does a lender test an underwriting model?
An underwriting model predicts which borrowers will repay. The model only proves out when repayment dates arrive, so the honest test is to make real loans and watch what happens. Lenders run small cohorts that vary one factor at a time, such as loan size or term, then compare default rates between them. Shorter loans give answers sooner, since a loan's outcome is known only at its end.
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