Remarkable that a venture-backed company can loan $10B to the founder's hedge fund without running into some sort of board/corporate sign-off that's required to literally execute the agreement/fund transfer.
They had no real board. They had no real governance. What's amazing is that large venture funds would put this much money into this kind of company without any board seats.
He simultaneously played League of Legends when pitching to VC on Zoom call. That indicated to VC how serious and responsible he was. They unanimously and immediately signed off funding merely out of awe.
Really shows how little oversight any of these venture funds have.
They come across more like frat bros with huge pockets casually giving away billions under a pinky promise of eventual returns.
At this point, they are doing the same level of DD as those degens in WSB.
But I guess you don't have much leverage when the fed is printing trillions for years and we end up with dozens of Zuckerberg types, too much power and no oversight to hold them accountable.
It is dangerous to extrapolate from one case (or even a few notable cases in recent years) that venture funds have "little oversight" over portfolio companies. These are the exceptions rather than the rule.
Obviously, some boards are better than others at oversight, but the complete absence of a functioning board, as was the case at FTX, is definitely very, very unusual.
"Silicon Valley Poured Money Into FTX, With Few Strings Attached"
"A marquee roster of investors from Silicon Valley and Wall Street swarmed FTX. They invested nearly $2 billion with few strings attached and no oversight on the cryptocurrency exchange’s board, promoting it as a safe bet."
Anyhow, The board of directors consisted of SBF until the summer of 2021. Then 2 "independent" directors were added, 1 was an FTX executive, the other was a lawyer in Antigua
The recent Sebastian Mallaby book about VC charts the growth of this "founder rules" approach.
In the age of ESG, it turns out that the "G" part is being ignored totally (because it counter to the interests of insiders) but the "E" and "S" is ever more important (because it is in the interests of insiders) despite it doing little to help improve returns (SBF was the king of "S"...might there be a correlation between saying you are more ethical than anyone and permitting yourself to steal from customers?).
> SBF himself has amassed more wealth in a shorter period of time than anyone else, ever. The 2022 Forbes Billionaires List pegs SBF’s net worth at $24 billion. He’s now 30 years old. But we get ahead of ourselves.
This is just gold.
Hopefully this all circus going down will also bring down all the phonies from VC companies like Sequoia Capital, guys (they're mostly guys, of course) who still live off the few successful bets they made in the early 2000s. We need fraudster-enablers like Sequoia to actually go bust if we really want for our industry to find its lustre again and for real innovation to come back.
Later edit: I've mostly gone through all of it, and I have to say that that that archived article is pure genius, it has copy-paste-ble gem after copy-paste-ble gem. It would most probably deserve its own, separate submission, on HN.
In a saner investment environment that sort of article, and the huge fraud the people behind it helped perpetuate by giving this SBF guy money (one of the Skype founders, really? the rationalist community, really?) should help bring some people down, and in so doing leaving our industry, well, cleaner.
But I'm pretty sure that nothing like that will happen, the small fries will be too scared to call these people out as fraudster-enablers, thinking that they might need money from them at some future point, the other sharks in the pool will behave like nothing has ever happened, hoping that the regulatory powers that be will move along, to say nothing of the politicians, after all, to quote Vox, SBF is "one of Biden’s biggest donors" [1].
To re-capitulate, one of the US president's biggest donors has just defrauded people out of $10 billion (that we know of) while some of the biggest figures/institutions in the US tech industry had stood behind him. Business as usual in the rules-based United States.
>But, right there, between a bright yellow sunshade and the crumb-strewn red-brick floor, SBF’s purpose in life was set: He was going to get filthy rich, for charity’s sake. All the rest was merely execution risk.
A nice quote that seems rather relevant right now:
> To do the most good for the world, SBF needed to find a path on which he’d be a coin toss away from going totally bust.
That link is taking me to a "oh shit our bad" sort of page now, but I'm curious on the date. I don't see an original timestamp on the wayback machine version, though. :(
If they were still taking him seriously as "ethical" after the Luna fiasco where he had previously trashed it in press (as the scheme was just a perpetual motion machine) but was perfectly willing to make money off of poor suckers who got conned... I don't know what to say.
Sequioa, who invested in FTX quite loudly, reported to their LPs that they only lost 150MM in their fund that had 7.5B in realized gains. Going off their letter they took 5B and turned it into 12.5B for a return of 150%[0].
After this spectacular blowup barely put a dent in their returns, why would LPs demand anything? Sequioa will just tell them "hey it's the name of the game, there are some losers who go bankrupt and winners who return the entire fund several times over".
If Sequioa took a massive markdown on FTX that would be a different story. However they came out unscathed and looks like they are managed well despite fellating SBF quite openly. What would you even demand of them given that they didn't lose much money? They probably lose even more money on companies that end up just not being successful in the first place. You can't ask them to not invest in risky business, thats the whole point of VC.
[0] Could be misinterpreting the letter, they said FTX was 3% of commited capital, 150M / 3% = 5B, and they had 7.5B of realized and unrealized gains.
I generally agree, but it's not "people," it's institutional funds (endowments, pension funds, etc). The way venture returns are distributed is that a small number of funds (of which Sequioia has historically been one) stand out from the rest in terms of returns. With the lengthy bull market that we have had until this year, VC was a high-performing asset class. Pension fund and endowment managers felt they needed to be in the asset class, which really meant being in those top 10 or so funds that were generating outsized returns. When LPs are competing to get into a few top funds, the funds have all the leverage. My sense is that LPs don't feel like they can make any kind of demands on the VC funds, for fear of being blocked out of investing.
Now we have a market turn and VC is unlikely to sustain the returns of the past decade. That may shift the leverage, but history suggests that LPs will still not put any kind of meaningful pressure on the top funds to do anything different.
I mentioned this is another reply, so sorry for anyone who reads both.
I would read Mallaby's history of the VC industry to see why this isn't possible. Around 1997 the balance of power shifted heavily in favour of founders (this is when dual-share class) started, and they stopped demanding seats on the board.
Iirc, Sequoia was a firm that held out (along with other old-style funds), they missed out on a lot of companies over the next ten years so ended up racing to the bottom...this is how we got here.
Btw, just on corporate governance...it is the most important factor for a company. A lot of the issues with corporates we have today are due to poor oversight from shareholders (not helped by passive). If corporate governance isn't working, capitalism won't work either.
The number of 'major red flags' here is shocking, and frankly, you'd think after 2008 that firms would have to hire, you know, an 'accountant'.
My god, there are so many things that were there to have been a modicum of parental oversight, the situation would not have festered.
This one is going to stain Web3, Defi, and notably VC.
Hey - VC are the partners of innovators so it's not good to see them in these situations.
Partly they are victims, but partly, they are responsible obviously.
We should note, this has a lot to do with the magical 'made up' nature of tokens. The entire Ponzi was based on tokens worth nothing, with massive leverage. It's a lot of money that VC cab hardly take their eyes off of. Why invest in 'doing stuff' when you can just 'make something up' and say it's worth billions? Given the way VC portfolios work they are going to run at that stampede because of the money flowing into it.
It's a systemic problem.
It would help if there were more regulations around this - at least to dampen he leverage. More transparency, higher interest rates will help as well.
I was partner at a couple of hedge funds. Every fund has its own docs, but normally it is going to restrict you to sending money to specific things, you can't just do anything you want. Certainly you cannot just lend it to yourself if you want serious investors, they do a whole due diligence questionnaire about what sign-off is needed, who can sign, audits, and so on.
I remember a friend with a fund, he was in a short-term pickle waiting for some money to bridge a house purchase. Didn't even cross his mind to lend it to himself and pay it back two weeks later, even though that would have been nearly risk free and a minuscule proportion of the fund.
> Corzine was subpoenaed to appear before a House committee on December 8, 2011, to answer questions regarding 1.2 billion dollars of missing money from MF Global client accounts. He testified before the committee, "I simply do not know where the money is, or why the accounts have not been reconciled to date," and that given the number of money transfers in the final days of trading at MF Global, he didn't know specifics of the movement of the funds. He also denied authorizing any misuse of customer funds.
> On the day of MF Global's bankruptcy, a Bloomberg reporter wrote "Jon Corzine's risk appetite helped destroy his firm. It also provided an object lesson for Paul Volcker's campaign against proprietary trading on Wall Street."
And for anyone who wasn't familiar with this guy and doesn't click on the link, he was a US Senator and then NJ Governor who ran this fund immediately after leaving office. He's the guy Chris Christie replaced.
Of course not. Crypto is a vehicle for tech founders to do all the unethical things that are banned in traditional finance without technically breaking the law.