FTX fiasco symbolises venture capital cult out of control
By Matthew Lynn
Partner swapping at a luxury penthouse in the Bahamas. Meetings uncovered with presidential aides. Billions switched from account to account, and social activism on a lavish scale. It promises to be the trial of the century – at least so far.
When he appears in court this week, the 30-year-old former billionaire Sam Bankman-Fried is expected to plead not guilty to charges of fraud, setting up an epic legal battle over whether the one-time crypto whizz-kid was crooked, unlucky, or simply incompetent. It will be a riveting spectacle.
And yet, in truth, it will not just be Bankman-Fried who is in the dock. It will be the entire venture capital industry, and the money managers and bankers who surround it. The FTX founder could not have kept the show on the road for so long without an army of enablers, nor without a culture that was willing to invest billions in his brand of arrogance and carelessness.
As a courtroom drama, with its mixture of big money, high-powered politics, and personal vanity, it will probably outstrip even the trial of Ghislaine Maxwell in 2021. Less than a year ago, Bankman-Fried was celebrated as one of the world’s smartest young entrepreneurs. His cryptocurrency trading empire, FTX, was valued at $US32 billion ($47.1b), and its founder at $US26 billion ($38.2 billion). It was growing at lightning speed, investing in related tech start-ups, and with its championing of “effective altruism” leading a very millennial version of social active capitalism.
The fall, however, was spectacular. In a few short weeks last year, FTX ran out of money and collapsed with debts that are estimated at more than $US3 billion ($4.4 billion), but which could easily turn out to be a lot higher once the mess is finally cleared up.
Bankman-Fried, of course, remains innocent until proven otherwise. It is perfectly possible for a company to go bust without any form of fraud taking place. Simple incompetence, naive over-confidence, or just a run of bad luck will do the job just as effectively as deliberate dishonesty.
His lawyers will no doubt make a case of some sort that nothing criminal happened. And yet, even if that turns out to be technically correct, there is nothing “innocent” about Bankman-Fried or about the industry that elevated him to cult hero.
He was emblematic of a venture capital cult that grew wildly out of control during a decade of easy money, and which created vastly overvalued companies based on little more than some fast-talking chutzpah.
In reality, FTX would never have grown to the size it did without the active support of the finance industry, and the culture of “growth at all costs” and “break stuff quickly” that it encourages.
Bankman-Fried fitted every entrepreneurial cliché of the past two decades – and the finance industry loved him for it.
The shaggy-haired 30-year-old with his shambolic manner suddenly found himself in a position where billions of dollars were thrown at him. Its investors included mainstream names such as SoftBank and Sequoia while it was working with some of the biggest banks, accountants and law firms in the world. The likes of Bill Clinton and Sir Tony Blair were happy to talk at its conferences, lending gravitas to a company that had appeared from nowhere.
There were red flags all over FTX that any proper investment professional should have picked up on. There were few checks or controls and clearly a massive conflict of interest between the crypto hedge fund that was run alongside the exchange. Investors who asked perfectly ordinary questions about what was happening internally were told to go take a flying jump.
As far as anyone can tell, there were no audits, nor even very much in the way of basic bookkeeping. “Never have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” said John Ray – the insolvency specialist, and also the man who sorted out Enron – drafted in to deal with the mess the company was left in. It is a damning verdict.
And yet all that was ignored because Bankman-Fried fitted the image of the disruptive genius the venture capital industry has come to believe in.
He was absurdly young, and a mess, typically attending meetings in shorts and a T-shirt. He championed social activism, donating vast sums of money to left-liberal political candidates and causes, even as he cheerfully admitted that most of it was just a way of making the business look good.
Bankman-Fried surrounded FTX with high-profile celebrities such as the sports star Tom Brady and the model Gisele Bundchen (although Taylor Swift, to her credit, declined the opportunity to get involved). Perhaps most of all, he dressed up what was basically a fairly old and dull idea – FTX was just a commodity exchange, trading cryptocurrencies instead of metals, or oil, or, come to think of it, scrap metal – with lots of visionary jargon about how it was creating something that no one had ever seen before.
Bankman-Fried fitted every entrepreneurial cliché of the past two decades – and the finance industry loved him for it.
We have seen this already, of course. WeWork was wildly over-hyped, for what turned out to be a fairly dull office management company pretending to have reinvented the world. Klarna, the “buy now, pay later” start-up, has seen its valuation collapse as people work out that lending money to people who don’t have very much of the stuff has always been a difficult way to make a living.
FTX is without question the most spectacular collapse so far. But there are plenty more very flimsy companies out there, and there will be lots more writedowns in the year ahead. In reality, it is the venture capital industry, and the bankers and fund managers that support it, who should be on trial, not just as Bankman-Fried. They are just as guilty – if not more so.
The Daily Telegraph
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