There are many victims of the FTX debacle, including retail investors who lost their shirts and above-board crypto companies suffering reputational damage from the fallout.
Venture capital firms, however, are not one of them.
In fact, short of former FTX CEO Sam Bankman-Fried and his coterie of charlatans, arguably nobody deserves more blame for the current catastrophe than Silicon Valley investors.
In the 11 days since FTX rival Binance started a run on the cryptocurrency exchange, culminating with its ignominious collapse, it’s become undeniably clear that prominent tech-minded VC outfits skipped basic due diligence and risk-mitigation steps while lavishing Bankman-Fried with $2 billion. In doing so, they facilitated FTX’s house of cards, allowing the company to build its customer base, pay for expensive marketing campaigns, and dole out billions with impunity.
A full accounting of the venture capital community’s dereliction will take time to complete, but all signs point to inexcusably irresponsible behavior by major investors.
First and foremost, the available evidence strongly suggests that FTX’s financials were an indecipherable trainwreck, which should have set off every alarm this side of the Bahamas.
As Fortune’s Luisa Beltran reported, Bankman-Fried relied on messy, unprofessional, and incomplete Excel files showing revenues and profits when soliciting venture capital investment, eschewing traditional records like audited financial statements.
“They are sales documents, and do not provide a clear accounting of how FTX was valuing its various tokens or liabilities when calculating figures such as ‘net profits,’” Beltran wrote.
Beltran’s reporting mirrors comments published last week by the New York Times from FTX’s head of product, Ramnik Arora. According to the Times, Arora bragged to a reporter in April about the company’s devil-may-care approach to convincing potential investors about its financial stability, recalling an instance when FTX executives slapped together a slide deck in a couple of hours.
While dozens of potential investors were unfazed by FTX’s sloppiness, some were rightfully taken aback. Semafor, citing a source familiar with the matter, reported Wednesday that VC titan Andreessen Horowitz passed on investing in FTX in part because its partners didn’t trust Bankman-Fried. Dennis Kelleher, co-founder and CEO of the financial reform nonprofit Better Markets, said FTX executives couldn’t answer tough questions about the company’s operations during a meeting with his organization.
“The many crypto investors, enablers and legitimizers weren’t ‘seduced’ by FTX and SBF as they now claim,” Kelleher, a staunch crypto skeptic, wrote in a statement Sunday. “They were just willing to accept whatever a billionaire with a ‘vision’ said without doing the most basic due
diligence or asking the most obvious questions if they thought it would make them rich.”
FTX’s new leadership confirmed accounts of FTX’s financial slovenliness, lambasting Bankman-Fried and his team in bankruptcy court filing Thursday.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” wrote FTX’s new CEO, John J. Ray III, a lawyer who oversaw Enron’s bankruptcy.
Venture capital investors compounded their errors by allowing FTX to operate with virtually no outside oversight.
Rather than demanding seats on FTX’s board as a part of their investment, VC firms essentially ceded governance over the company to Bankman-Fried. Bloomberg reported that FTX’s board had three members: Bankman-Fried, former FTX executive Jonathan Cheeseman, and a lawyer in Antigua specializing in online gaming.
In his bankruptcy court filing Thursday, Ray wrote that “many of the companies in the FTX Group, especially those organized in Antigua and the Bahamas, did not have appropriate corporate governance.” (FTX is headquartered in the Bahamas, with affiliated corporate entities spread across the world.)
Had VCs taken spots on FTX’s board, it’s highly plausible that they would have identified what appears to be the core issue behind the company’s demise: the decision to lend billions of dollars in customer assets to an affiliated trading arm, Alameda Research, which used the money to make risky and illiquid investments.
“I hope what comes of this Enron-like moment in crypto is that whatever loose norms there were about not giving that level of oversight and governance as part of investing goes away immediately,” David Pakman, managing partner of the blockchain-focused investment firm CoinFund, told TechCrunch.
Some VC firms have claimed they conducted extensive due diligence, chalking up FTX’s collapse to the risk-reward nature of venture capital (see: Sequoia Capital, Temasek). Yet such statements defy the mounting evidence that venture capital failed from start to finish, making it more of an enabler than a victim of FTX.
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Jacob Carpenter
