Kalshi Founders' Journey - Turning Wagers into a $5B Powerhouse

Welcome to our "Founders' Journey" series by CoffeeSpace, where we explore the remarkable stories and cofounder journeys behind the world’s most successful startups.

In this edition, we explore the rise of Kalshi, the world's first federally regulated exchange for trading on Event Contracts. Founded in 2018 by two MIT graduates and former quantitative traders from Citadel and Goldman Sachs, Tarek Mansour and Luana Lopes Lara, Kalshi has rapidly evolved from a complex regulatory challenge into a multi-billion-dollar market leader attracting funding from Wall Street titans like Charles Schwab and premier VCs like Sequoia Capital. By pioneering a new financial instrument—the Event Contract—Kalshi allows individuals to directly trade on the outcome of real-world events, from political elections and Federal Reserve rate decisions to economic indicators and even sports scores.

The modern financial landscape is designed to manage and transfer risk, yet for centuries, one crucial category of risk—the outcome of specific, real-world events—remained largely unhedgeable or confined to unregulated offshore markets. This gap represented not just a deficiency in financial tooling but a massive, untapped market for intellectual commerce. The founding of Kalshi, a financial exchange that allows users to trade on the outcome of future events, is a definitive narrative of regulatory perseverance, technical ambition, and the creation of an entirely new asset class.

Founded by two quantitative trading veterans, Tarek Mansour and Luana Lopes Lara, Kalshi’s journey from a concept hatched at MIT to a federally regulated Designated Contract Market (DCM) is characterized by a strategic, three-year siege on the US regulatory apparatus. Unlike typical venture-backed startups that move quickly, shipping products and iterating on customer feedback, Kalshi's existence was predicated on a singular, almost impossible goal: securing the highest level of regulatory approval from the Commodity Futures Trading Commission (CFTC) before launching a single trade. This foundational choice created an immense technical and financial barrier to entry, but ultimately forged the regulatory moat that defines the company’s success and its $2 billion valuation milestone.

Phase I: The Genesis and the Bold Decision (2018 – Early 2019)

The foundational concept for Kalshi emerged not from an ideological stance on prediction markets, but from the practical frustrations of professional trading. Both founders, Mansour (CEO) and Lara (COO), were graduates of the Massachusetts Institute of Technology (MIT) and held quantitative trading positions at prestigious firms—Mansour at Goldman Sachs and Citadel, and Lara at Bridgewater Associates and Citadel. This background gave them a unique, insider's view into the mechanics of risk management.

The core realization that spurred the company’s creation was the widespread difficulty in hedging against systemic, binary risks, exemplified powerfully by events like the 2016 Brexit referendum. While institutions and individuals could attempt to hedge the economic fallout of such a vote indirectly through equity markets, foreign exchange, or traditional options, there was no direct, specific instrument to take a position solely on the "Yes" or "No" outcome of the vote itself. Mansour and Lara recognized that global events—ranging from weather patterns and Federal Reserve decisions to political outcomes—imposed vast, uncompensated, and unmanageable risks on investors and corporations alike. They believed that democratizing access to event-based contracts could stabilize financial decision-making and provide a clearer, less biased aggregated forecast of the future.

The very inception of Kalshi in 2018 was defined by a profound and strategically audacious decision by its founders, Tarek Mansour and Luana Lopes Lara. Having witnessed the real-world financial chaos caused by unhedgeable binary events, such as the Brexit vote, they recognized that the challenge was not merely technological, but fundamentally regulatory. While other prediction market startups pursued rapid growth in unregulated or offshore environments, Mansour and Lara chose a singular, incredibly challenging mission: to secure the Designated Contract Market (DCM) status from the U.S. Commodity Futures Trading Commission (CFTC) before launching their product. This was a deliberate choice to build a formidable regulatory moat, establishing that legitimacy and institutional trust were non-negotiable foundations for their exchange. By committing to the same rigorous standards as giants like the CME, Kalshi immediately diverged from the industry standard, accepting a multi-year "silent siege" of development and compliance that would ultimately grant them a unique and unassailable position in the financial world.

In early 2019, the founders sought initial guidance and support, securing a place in the Y Combinator Winter 2019 batch. This was a critical juncture. While Y Combinator typically favors rapid product deployment, Kalshi presented a multi-year, regulatory-first roadmap. The challenge was immense: convincing investors that two young, non-Wall Street veterans could navigate the arcane, decades-long process required to win approval from the CFTC to operate a federally regulated exchange. The initial skepticism was fierce, centered on the idea that they were attempting to create a new asset class under strict federal oversight, a feat usually reserved for deeply entrenched financial institutions.

Phase II: The Regulatory Siege and DCM Approval (2019 – 2020)

The period between 2019 and late 2020 represented Kalshi’s "silent years"—a time of intense, non-public development centered entirely on compliance and infrastructure. The founders understood that the CFTC’s Designated Contract Market (DCM) designation was not merely a license; it was a commitment to operate with the same rigor, technology, and surveillance capabilities as established futures exchanges like the CME or ICE.

To win DCM approval, Kalshi had to demonstrate proficiency in every aspect of a functioning financial market, including:

1. The Exchange System: Building the matching engine and market rules for fair and orderly trading.
2. The Clearing System: Establishing the mechanisms for settling trades and managing counterparty risk, including maintaining adequate capital and risk management procedures. Initially, Kalshi partnered with a regulated clearinghouse, LedgerX LLC, to satisfy this stringent requirement.
3. Surveillance and Compliance: Developing sophisticated systems capable of detecting market manipulation, fraud, and ensuring adherence to the anti-money laundering and Know Your Customer (KYC) regulations mandated by the Commodity Exchange Act (CEA).

As Mansour noted, the team had to build "the exchange itself, a broker, and a surveillance system that complied with all regulations... all before having a live product or a single real user." This was a massive capital and time commitment with zero immediate return. The 18-month process involved countless filings, detailed presentations, and convincing regulatory staff that "event contracts" were a legitimate form of hedging derivative, not disguised gambling.

The debate centered on Regulation § 40.11, the CEA’s "Special Rule," which grants the CFTC the authority to prohibit contracts deemed to involve "gaming" or activities "contrary to the public interest." Kalshi’s argument was that their event contracts were structured similarly to existing derivatives (specifically, binary options or swaps) and served a clear economic purpose for risk transfer, distinct from a traditional wager.

The grueling, eighteen-month regulatory siege culminated on November 3, 2020, with the achievement of the single most important and difficult milestone in Kalshi's history: the U.S. Commodity Futures Trading Commission (CFTC) officially granted the company the status of a Designated Contract Market (DCM). This designation was far more than a simple license; it was a profound institutional endorsement, marking Kalshi as the first CFTC-regulated financial exchange specifically authorized to trade event contracts in the United States. This regulatory victory immediately created a powerful, virtually insurmountable moat, validating the founders' entire strategy. It conferred unmatched institutional legitimacy, which was non-existent in the grey market of offshore prediction platforms, and granted Kalshi the exclusive, legal ability to offer these novel risk-transfer products to the vast U.S. retail and institutional investor base.

Phase III: Validation and Public Launch (2021 – 2022)

With the DCM license secured, Kalshi transitioned from a regulatory project into a fundable, viable business. The financial market immediately responded to the de-risking of the venture.

The moment the DCM license de-risked Kalshi’s entire regulatory premise, the financial markets responded with decisive conviction, culminating in the closing of a $30 million Series A funding round on February 17, 2021. This round was a dual validation, bridging the gap between Silicon Valley and Wall Street: it was led by Sequoia Capital, a global benchmark in venture funding, and featured participation from towering institutional figures such as Charles Schwab and private equity co-founder Henry Kravis. Although the reported valuation might seem low for a Series A, it was strategically typical for a highly regulated industry where massive initial capital was already sunk into building compliance infrastructure with zero immediate return. Crucially, this funding served as market proof that the most significant hurdle—securing federal oversight—had been successfully navigated, allowing Kalshi to immediately allocate the capital toward aggressive product development and scaling the engineering teams for its impending public launch.

Finally, the arduous years of regulatory groundwork culminated in the official public launch of the Kalshi trading platform in July 2021. Having secured the federal stamp of approval, the company shifted its focus to market execution, initially concentrating on quantifiable, non-controversial events designed to showcase the utility and legitimacy of the new asset class. Early markets focused on clear, objective outcomes, such as macroeconomic indicators ("Will the CPI reading exceed in Q3?"), specific weather patterns, and technological milestones. The contracts themselves were engineered for elegance and accessibility: structured as binary, "Yes" or "No" questions, they were priced between a penny and 99 cents, with a guaranteed settlement value of $1.00. This pricing mechanism ensured that the contract price at any given moment directly represented the market’s instantaneous, aggregated probability of that event occurring. This combination of transparency, simplicity, and federal regulatory backing proved highly effective, successfully attracting a wide base of retail traders while simultaneously laying the foundation necessary to foster trust and institutional interest.

The post-launch phase in 2022 was dedicated to scaling the platform and diversifying the market offerings, demonstrating the utility of event contracts for corporate hedging and forecasting. The goal was to prove that these contracts were indispensable tools for risk management, positioning Kalshi not as a curiosity, but as an essential element of modern financial infrastructure.

Phase IV: Conflict, Unicorn Status, and the Future (2023 – 2025)

The most contentious phase of Kalshi’s journey began when the company attempted to fulfill its broader vision of allowing investors to hedge against legislative and political uncertainty.

The regulatory truce that followed Kalshi’s DCM approval was inevitably short-lived, giving way to the company's most significant legal and commercial battle in 2023. That year, Kalshi sought to fulfill its founding mandate of providing a hedging tool for all systemic risks by self-certifying a set of contracts tied to U.S. elections, specifically allowing users to trade on which political party would control Congress's chambers on a specified future date. This move directly challenged the historical regulatory reluctance to treat political outcomes as financial commodities. Predictably, the CFTC, likely facing political pressure, utilized the contentious Regulation § 40.11—the special rule against "gaming" and activities "contrary to the public interest"—to review the contracts. In September 2023, the agency issued an order prohibiting their listing, deeming them akin to gambling, despite clear and significant dissenting statements from two of the CFTC's own Commissioners, underscoring the legal ambiguity of the new asset class.

Kalshi’s response was immediate and aggressive, initiating a landmark lawsuit against the CFTC in the U.S. District Court for the District of Columbia in late 2023. The legal contest hinged on the interpretation of the Commodity Exchange Act (CEA) itself. Kalshi successfully argued that the CFTC had overstepped its statutory boundaries, contending that contracts based on elections—a core, lawful democratic activity—did not inherently "involve gaming" or illegal activity. The culmination of this legal fight came in September 2024, when U.S. District Judge Jia M. Cobb granted summary judgment in favor of Kalshi. The court's ruling was historic: it held that the CFTC had exceeded its statutory authority, effectively stripping the agency of its claimed broad, unbounded power to veto contracts based on a subjective "public interest" analysis outside the CEA's specific prohibitions. This established critical legal precedent, enabling a regulated U.S. exchange to finally offer financial instruments on political outcomes and opening an entirely new dimension of hedging possibilities, a shift that permanently altered the legal landscape, even as the CFTC pursued an appeal.

The market’s confidence in Kalshi’s successful navigation of this existential legal threat fueled the subsequent dramatic financial validation. In June 2025, Kalshi secured a massive $185 million Series C funding round, led by the prominent crypto-focused venture capital firm, Paradigm. This injection of capital, which saw continued support from Sequoia and notably included new strategic investment from financial titan Peng Zhao, CEO of Citadel Securities, officially vaulted Kalshi’s valuation to $2 billion, solidifying its status as a "unicorn" company. This valuation was directly underpinned by the firm's explosive growth in the preceding year—reporting a remarkable 100x increase in volume and a 10x increase in users. The funds were strategically earmarked for an aggressive engineering expansion, the launch of complex new market structures (including the KalshiEco Hub for blockchain prediction markets), and an eventual move to self-clearing, signaling its definitive transition from startup disruptor to a fully institutionalized financial exchange.

Despite the federal legal victory, Kalshi faces ongoing jurisdictional battles, notably with state regulators in Massachusetts, Nevada, and Maryland, who argue that event contracts—especially those related to sports—constitute unlicensed gambling under state law. These multi-forum legal challenges are the next frontier, seeking to clarify the supremacy of federal commodities law over state gaming laws in this burgeoning sector.

Conclusion 

Kalshi’s founding journey is a definitive case study in regulatory arbitrage and strategic patience. Tarek Mansour and Luana Lopes Lara did not just launch a startup; they built a financial institution. Their initial, painstaking decision to pursue the DCM license created a three-year head start and an insurmountable competitive barrier, transforming event contracts from a regulatory grey area into a federally protected, legitimate asset class. The key milestones—the 2020 CFTC approval, the 2021 public launch, the institutional backing of the Series A, and the crowning 2025 unicorn valuation following a historic federal court victory—all trace back to this foundational commitment. Kalshi has successfully carved out a new space in the financial ecosystem, positioning itself as the "Bloomberg Terminal of uncertainty" and ensuring that the ability to hedge or express a view on any real-world event is now, finally, a regulated reality for every American investor.

Founder Lessons

Regulatory Moat is Superior to Speed

Kalshi made the "bold decision" to pursue the most stringent regulatory approval (CFTC Designated Contract Market, or DCM) before launching a single trade. While this created a massive "three-year siege" and financial barrier, the resulting regulatory status became an "insurmountable competitive barrier" and the ultimate moat that justified its later $2 billion valuation.

Define Your Category, Don't Just Build a Product

The core challenge was not how to build the technology, but what they were building. The founders had to convince the CFTC that "event contracts" were legitimate, necessary hedging derivatives (for risk transfer), not "disguised gambling." By winning this legal argument and establishing a new, federally regulated asset class, they fundamentally changed the legal and financial landscape for everyone else.

‍Validate with Infrastructure, Not Iteration

Unlike typical Y Combinator startups that "move quickly, shipping products and iterating," Kalshi spent its early years building "the exchange itself, a broker, and a surveillance system." The lesson here is that in complex, regulated finance, you must build institutional-grade trust and compliance infrastructure first—a costly process with "zero immediate return"—to attract institutional investors and survive regulatory scrutiny later.

Leverage Insider Knowledge and Outsider Ambition

The founders, Tarek Mansour and Luana Lopes Lara, used their background as "quantitative trading veterans" (from Goldman Sachs, Citadel, Bridgewater) to deeply understand the "practical frustrations" of risk management. They then combined this insider knowledge with the outsider ambition (as young, non-Wall Street veterans) to challenge the status quo, which helped them secure crucial early investment from financial heavyweights like Charles Schwab and Henry Kravis.