11 ms·

how did ftx successfully raise so much vc money recently? do these top vc firms do no due diligence?

by moneycantbuy 4y ago

ingenieros 4y ago
Effective altruism at its finest. LOL
- gruez 4y ago
  What does effective altruism have to do with VCs that invested in FTX and their due diligence? If anything effective altruism is downstream from that.
  - ingenieros 4y ago
    Sam used the EA card and his generous donations to places like MIT's Media Lab in the same way Epstein did. This not only earned him tons of goodwill from the scientific community, but it also allowed him to rub shoulders with the likes of Tony Blair and Clinton. Who wouldn't want to invest in someone who is helping to make the world better and has all these aforementioned personalities and institutions helping to provide an air of legitimacy to his pursuits? (Also, the guy who coined the term EA sat on the board of his FTX fund and was helping to facilitate deals with people like Elon Musk) https://www.vox.com/future-perfect/23458282/effective-altruism-sam-bankman-fried-ftx-crypto-ethics https://www.vox.com/future-perfect/23458282/effective-altrui...
    - gruez 4y ago
      How does this relate to effective altruism as a whole? SBF does these things... therefore this kind of behavior is endemic in the effective altruism community?
      - pessimizer 4y ago
        That its community idealized and gathered around a man with no moral center who thought their entire movement was both a joke and a way to avoid scrutiny for his ongoing frauds. That, at the least, gives an indication that its intellectual underpinnings are not solid.
        gruez 4y ago
        >That its community idealized and gathered around a man with no moral center You make it sound like SBF was the prophet/leader of effective altruism, but I don't think that's the case. The wikipedia article certainly doesn't paint him as some sort of leader, and only gives a passing mention to SBF. https://en.wikipedia.org/wiki/Effective_altruism https://en.wikipedia.org/wiki/Effective_altruism
        skinnymuch 4y ago
        Using Wikipedia as a barometer doesn’t always works. In this case it probably wouldn’t work even if SBF was much bigger than he was with EA. There’s a middle ground. He wasn’t a prophet but he wasn’t nobody either. He was a leading non-academic figure/celeb of EA that didn’t get too much pushback.
        gruez 4y ago
        >There’s a middle ground. He wasn’t a prophet but he wasn’t nobody either. He was a leading non-academic figure/celeb of EA that didn’t get too much pushback. That's the non-controversial opinion, but where does this leave OP's comment? Should we push back more on billionaires in movements? Should we assume that everyone who's in movements is in it for cynical reasons? Or maybe only billionaires? A new yorker article on effective altruism suggests that SBF got in before his crypto riches. How does that work? Did SBF suddenly turn cynical once his wealth crossed the $1B mark? [1] https://www.newyorker.com/magazine/2022/08/15/the-reluctant-prophet-of-effective-altruism https://www.newyorker.com/magazine/2022/08/15/the-reluctant-...
        nwiswell 4y ago
      - deleted 4y ago
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fortran77 4y ago
One lesson I’ve learned from this case and Theranos — avoid anything that comes out of Stanford.
- HideousKojima 4y ago
  After all, it is just a Junior University (Credit to my dad, a Cal alumnus, for that joke. Though I'm sure he got it from someone else back in his college days).
jerf 4y ago
That's one theory. Of course, given the depth of financial depravity on display here and the incredible thinness of the financial defense, one must also entertain the theory that they did do the due diligence, they were aware of how dangerous this was, and they invested anyhow for other reasons. And that those reasons are probably not good. There have been many cases where companies go to great lengths to do accounting alchemy to fool even very smart auditors, but we are clearly not dealing with that here. Binance or whoever was offering to buy FTX out literally figured out within single-digit hours of looking at FTX's books that they were not interested. A person skilled in the art can literally glance at these books and figure out that they are worthless. I do not believe there is any credible theory that any investor could possibly have been unaware of these issues. FTX's books don't so much have red flags as that they are printed on red flags, with ink derived from red flags, a custom-made red cover made out of more red flags, and each page, when opened, has pop-up red flags along with a little electronic speaker that plays Red Flag by Antigoni while you get sprayed with Red Flag perfume [1]. [1]: https://www.youtube.com/watch?v=HKk91x0Yg7Q https://www.youtube.com/watch?v=HKk91x0Yg7Q
- muggermuch 4y ago
  >FTX's books don't so much have red flags as that they are printed on red flags, with ink derived from red flags, a custom-made red cover made out of more red flags, and each page, when opened, has pop-up red flags along with a little electronic speaker that plays Red Flag by Antigoni. Lol. This should be a framed quote.
- abluecloud 4y ago
  >And that those reasons are probably not good. what would those be?
  - jaywalk 4y ago
    Money laundering.
    - hungryforcodes 4y ago
adrr 4y ago
Secret is to not take the pitch meeting seriously and play league of legends.
- twelve40 4y ago
  "you in"? that's probably how he pitched it too : )
huevosabio 4y ago
I have the same question. My best guess is that these VCs need to deploy so much capital that they don't really do due diligence, instead they go by "founder vibes" and "vision", a watered down version of "invest in the team, not the product". Sequoia, SoftBank, a16z all seem to be guilty of this. Anecdotally, Chamath Palihapitiya, in the recent All-in Podcast [0], said that they met with SBF and as a condition to invest they wanted to get rid of dual class voting shares (or something like that) and a board. FTX leadership (not necessarily SBF) replied with "fuck you". So I guess you have some VCs trying to do the right thing, but if founders can get capital with no strings attach elsewhere, then your ability to deploy that capital is hampered. Essentially, until recently there were was more capital than founders, so founders could just do whatever (and SBF did). I would expect that this changes a bit with raising interest rates and a tech downturn, but a16z's $350M investment in Adam Neumann's newest Thing makes me think that we are still flush with money ready to be thrown at anyone that has the connections to get a coffee chat in Sand Hill Road. [0] https://open.spotify.com/episode/3CKYt4mKxndPkEfAvc7SM0?si=eb3387650ff943e7 https://open.spotify.com/episode/3CKYt4mKxndPkEfAvc7SM0?si=e...
- itsoktocry 4y ago
  >but a16z's $350M investment in Adam Neumann's newest Thing makes me think that we are still flush with money ready to be thrown at anyone that has the connections to get a coffee chat in Sand Hill Road. They have loose morals. Kevin O'Leary, of Dragon's Den fame, who is now a creditor in the FTX bankruptcy (ie wiped out) recently said in an interview that he would invest with SBF again. The guy literally had money stolen from him. How do you even explain that?
  - MichaelCollins 4y ago
    Tim Draper still supports Elizabeth Holmes: https://fortune.com/2022/01/05/venture-capital-tim-draper-elizabeth-holmes-guilty-fraud-theranos/ https://fortune.com/2022/01/05/venture-capital-tim-draper-el... I don't know how. Maybe he's just fucking stupid, or too prideful to admit he was wrong.
    - 4y ago
twelve40 4y ago
depends on the stage, at some stages you are just pitching the growth (maybe even just the future growth), not the current financials, which may be terrible for any number of reasons. That, or fraud, of course.
PragmaticPulp 4y ago
The crypto space is full of projects with empty promises of future profits. If you're an investor looking at crypto projects, you're seeing hundreds of crypto pitches every year that are never going anywhere. Then Alameda comes along showing actual profits from their early trading operations. Someone who as actually figured out how to make money in the crypto world without selling their own tokens (yet). Compared to all of the other dead-end projects these investors get pitched every day, this seems like the golden child. Someone who is actually turning a profit. Investors want to put their money into the golden child's profit machine and get a piece of that action. SBF was also very successful in turning his early successes into a lot of momentum and social proof. He played investors and influencers against each other by bringing them all on within a short span of time. When this happens, investors go into FOMO / "me too" mode and just throw their money into the momentum, assuming some other investors have probably done the due diligence already.
- ethbr0 4y ago
  See also all accounts of Twitter deal funding, which seemed to boil down to "I'm oversubscribed (lie), so you'd better say yes now and give me more money than you want." Which is essentially all fundraising in a crowded market, but you would expect investors to be more sophisticated. Even accounting for selection bias (we're opining on the ones who invested).
bombcar 4y ago
Nobody wants to admit that a vast majority of VC due diligence is just assuming that the other VCs did due diligence.
- SV_BubbleTime 4y ago
  I have another take... It's been 15-20 years of literally free money. What did they care if some went away, they would just leverage some more.
sirmoveon 4y ago
My superficial theory is that they probably invested for inside information, then somehow shorted them on their downfall.
hankchinaski 4y ago
plato once said, storytellers rule the world
dahdum 4y ago
They weren't investing on fundamentals, the books didn't matter. His close association and largesse with regulators, media, and politicians along with his cloak of EA made regulatory capture and the promise of monopoly-like profits possible. VC's aren't stupid, even if they thought it was 80% likely he was an outright fraud, it's still worth the bet for a 20% chance at 50-100x returns.
- vkou 4y ago
  It's strange to see EA credited as both the reason for why this went on for so long with no oversight, and then damned in a 'ding dong the witch is dead' manner after it fell apart. When a confidence man and thief loudly and proudly shouts out a religious affiliation as his guiding star, we generally don't go ahead and condemn the religion for his behavior. (Doing so is a great way to get canceled. At most, we blame him for not being religious enough.)
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  - skinnymuch 4y ago
    In this case this tiny religion embraced him, so yes many would blame that to a degree as well.
  - dqft 4y ago
    Because "EA" as a thing is stupid and redundant even after you recognize that altruism alone is overrated. Its just obvious moralistic garbage.
    - johnsimer 4y ago
      Altruism is overrated? If you were poor or otherwise suffering would you not want help from someone richer than you?
lordnacho 4y ago
I've had one of the mentioned firms invest in a place I was a partner at, and it surprises the hell out of me. I remember the investment guy would tell the rest of us "on Wednesday, wear a shirt and tie, X big name is coming" and that's what we'd do. And millions of questions about the strategy, though didn't know much about those details. Current theory is there's some sort of investment U shape curve. Either people look the part and talk the part and get the part, or they look like they care so little that they must be the real deal. Wish I'd known this, because I am also able to play video games badly while wearing a T-shirt.
- ZoF 4y ago
- rippercushions 4y ago
  This is called countersignaling. Basically, if everybody else invests into doing X and somebody conspicuously does not, it's taken as a signal that they're so good that they don't need to. https://en.wikipedia.org/wiki/Countersignaling https://en.wikipedia.org/wiki/Countersignaling
  - bachmanity1212 4y ago
    There is an episode of the Silicon Valley series where the team tries to increase their VC funding by becoming increasingly toxic and abusive with the VCs they meet, and they end up signing with the biggest offer they got, after one of them literally puts his genitals on the table during negotiation. Turns out this was hitting very close to the truth. That show was great to show how much a clown world SV can be.
    - rippercushions 4y ago
      https://youtu.be/N6Zz-Nkkaxc https://youtu.be/N6Zz-Nkkaxc
rchaud 4y ago
They did plenty of due diligence to protect their own interests. Their term sheets gave them a big chunk of the "limited supply" tokens. So even if the business model was trash, they could cash out well before the market for that coin collapsed. It is similar to when investment banks underwrite stock issues; they purchase a chunk of the stock directly from the company at an agreed-upon price. The company gets guaranteed funds, and the bank is free to sell the shares on a secondary market and potentially pick up a profit. What's missing in crypto are the safeguards that ensure that banks + companies do not collude on pump and dumps in the securities markets. These include quarterly financial audits and oversight from a watchdog agency like the SEC. Obviously they are far from perfect, but considering the anti-regulation nature of US business (even after the Great Depression), the fact they even exist is a small triumph.
AmericanOP 4y ago
Its the inevitable conclusion of chasing easy money in the wake of the crypto asset bubble. Everybody got lazy.
itsoktocry 4y ago
Dead simple: Many VC's aren't very smart and/or ethical. How many major Silicon Valley scandals are VCs involved in? 100%. And for the most part they get a pass. This end of the era of easy money is going to reveal that many of the "geniuses of our time" are nothing of the like.
- tootie 4y ago
  The stuff that Sequoia said about him is almost unreal. They talked like he was going to be the greatest entrepreneur in human history. All because he exploited a momentary arbitrage in Japanese Bitcoin exchanges. Then they gave him shitloads of money and acceded to not getting board seats. I honestly wonder if they were that trusting or they just wanted to maintain deniability.
  - nullc 4y ago
    > All because he exploited a momentary arbitrage in Japanese Bitcoin exchanges. Originally the story was korean exchanges; he changed to saying Japanese, presumably after too many people pointed out the korean story was impossible. (The Japanese story was also more or less impossible, they could have made a bit of money maybe even millions but not the $10+bn he claimed)
    - dahdum 4y ago
      They made ~$10-30m from the Japan arb from what I've read, mostly blew it, but it still got Alameda off the ground. The Korean arb was the initial goal but proved too difficult. Both of these arbs were glaringly obvious and talked about constantly, but difficult to pull off due to banking hurdles in both countries.
  - duped 4y ago
    The pitch deck you give to Sequioa partners is not a description of your current business. It's a proof of concept that shows how much the market you're entering is worth and a long term vision of how you can carve a significant piece out of it. So you don't go in saying "hey look we can make a trillion dollars doing arbitrage between American, Japanese and Korean exchanges." You go in showing that your work doing the former proved the existence of a massive market for crypto securities and derivatives, and how you're uniquely positioned to capitalize on that market. And if they believe in the existence of that market and the founders are able to execute they'll invest. That's what they mean about investing in founders and teams.
matrix_overload 4y ago
The VC due diligence is not about corporate governance or a viable business model. Everyone does shady stuff to some extent and everyone aims to "exit" before turning in the first profitable quarter. The due diligence is about the founder's connections and the ability to use them to skirt regulatory oversight. This checked out - both Sam and his girlfriend came from well-connected families and so far acted the part (including the massive political donations). Whether it's going to save them remains to be seen. I hope we won't sink to a new low of bailing out Ponzi schemes with taxpayer money, but I wouldn't be surprised too much.
ClumsyPilot 4y ago
Between this, Theranos, Elon getting co-investment and loans in his project to set 44 billion on fire and recent investor letter to Google to cut staff and damage their main engine of innovation You can only conclude that there is a lot of dimb money out there. Some people made big money despite being idiots. Which means I have a chance as well!
nemo44x 4y ago
> how did ftx successfully raise so much vc money recently? Maybe they got to join the FTX polycule if they invested enough. Who wouldn't want to get in on that.
- DebtDeflation 4y ago
  Everyone can, vicariously, when the leaked SBF-CE tape drops tomorrow. Personally, I plan on staying off the internet all day so I don't accidentally see it.
  - nemo44x 4y ago
    Oh god, a disgusting sex tape is just the vomit encrusted cherry on top of this trash fire. There’s got to be a No-nut November joke in there.
- fxtentacle 4y ago
  I'm pretty sure that doesn't apply here. But if it did, I'd find that impressive, too. Most topmodels never make it to 10 billion USD.
ilamont 4y ago
The venture capitalists at Sequoia—the powerful investors behind Silicon Valley success stories like Google and PayPal—were certainly taken (or taken in) by him. Three months ago, one of the firm’s partners, Michelle Bailhe, offered a breathless take in a firm-sponsored story about SBF: “Of the exchanges that we had met and looked at, some of them had regulatory issues, some of them were already public,” Bailhe wrote. “And then there was Sam.” FTX, Sequoia felt, was “Goldilocks-perfect.” In colorful language, Sequoia partners reveled in their appreciation for his pitch for FTX.com as the center of all monetary transactions. In their own words: “I LOVE THIS FOUNDER,” typed one partner. “I am a 10 out of 10,” pinged another. “YES!!!” exclaimed a third. The firm has since deleted the article. https://www.commonsense.news/p/the-32-billion-crypto-scammer https://www.commonsense.news/p/the-32-billion-crypto-scammer
texaslonghorn5 4y ago
lots of the money came in 2021 and 2022. the audits done in july 2021 were by armanino and prager metis, both of which are trying to expand into the digital asset space and would stand to benefit from continued growth and success by ftx. the implication i am making is that there was no way for the audits to be unbiased. if the audits weren't junk, the company probably wouldn't have been big enough to cause such a mess
- camjohnson26 4y ago
  People sometimes forget that Enron’s collapse also took down their auditor, Arthur Anderson, which killed their audit business and spun the consulting business into what is now Accenture. The auditors in these situations are often as culpable as the companies.
matwood 4y ago
Or it highlights that VCs care more about relationships to the founders than ideas or abilities. We like to talk about a meritocracy when it's more about who did you room with at Stanford, MIT, etc...
unboxingelf 4y ago
listen to chamath’s explanation on the latest All In podcast, he puts it pretty succinctly.
snarf21 4y ago
How did Theranos?
mradek 4y ago
MIT? Check Connected family? Check QuIrKY AF? Check
oarabbus_ 4y ago
https://decrypt.co/114719/tumblr-blog-linked-ex-alameda-research-ceo-explored-race-science-imperial-chinese-harem-polyamory?amp=1 https://decrypt.co/114719/tumblr-blog-linked-ex-alameda-rese... if a crypto journalist was able to find these tweets and blogs, it would indicate the VCs didn't do their due diligence on the CEO, at the least.
wfaler 4y ago
Honestly, I think any "smart money" managers who invested in this should be ashamed. It's absolutely an indictment of their intelligence. The basics of due diligence is: * How is their record keeping of board decisions & financials? * What board decisions and indemnities exist in those records that may have conflicts of interest or claims from other third parties? (FTX didn't even have a board) * etc.. Furthermore, probably should raise every red flag ever for a reasonably intelligent person if some 20-somethings with a few years of experience claim they have the secret sauce to trade successfully under every possible market regime. It falls on its own implausibility and only reeks of hubris. To understand most market regimes likely to occur, you likely need people in their late 50'ies onboard, or even older (there's a reason Buffett, Soros et al come out relatively unscathed out of most crises, while everyone else bleeds out). This is a result of stupidity meeting easy money.
smegger001 4y ago
it a symptom of underlying economic issues. There is so much economic disparity between the top of the economy and the economic have nots. the 0.001% are running out of places to put money. Money is being poured into iffy startups and new economic vehicles, crypto being at the intersection of those is particularly attractive to those with more money than they know what to do with. place like FTX WeWork and Theranos and more have millions thrown at them with little oversight or due diligence because why not they have to put money somewhere. bond interest rates have been historically low for years to the point where some governments were issuing negative interest rate bonds. If you have hundreds of millions and your alternative is to loose money twice over (once to interest rates and again to inflation) Why not throw it at long shot investments with potentially high returns, especially when you may be able to liquidate your shares before they companies crash.

how did ftx successfully raise so much vc money recently? do these top vc firms do no due diligence?

ingenieros 4y ago

Effective altruism at its finest. LOL

gruez 4y ago
What does effective altruism have to do with VCs that invested in FTX and their due diligence? If anything effective altruism is downstream from that.
- ingenieros 4y ago
  Sam used the EA card and his generous donations to places like MIT's Media Lab in the same way Epstein did. This not only earned him tons of goodwill from the scientific community, but it also allowed him to rub shoulders with the likes of Tony Blair and Clinton. Who wouldn't want to invest in someone who is helping to make the world better and has all these aforementioned personalities and institutions helping to provide an air of legitimacy to his pursuits? (Also, the guy who coined the term EA sat on the board of his FTX fund and was helping to facilitate deals with people like Elon Musk) https://www.vox.com/future-perfect/23458282/effective-altruism-sam-bankman-fried-ftx-crypto-ethics https://www.vox.com/future-perfect/23458282/effective-altrui...
  - gruez 4y ago
    How does this relate to effective altruism as a whole? SBF does these things... therefore this kind of behavior is endemic in the effective altruism community?
    - pessimizer 4y ago
      That its community idealized and gathered around a man with no moral center who thought their entire movement was both a joke and a way to avoid scrutiny for his ongoing frauds. That, at the least, gives an indication that its intellectual underpinnings are not solid.
      - gruez 4y ago
        >That its community idealized and gathered around a man with no moral center You make it sound like SBF was the prophet/leader of effective altruism, but I don't think that's the case. The wikipedia article certainly doesn't paint him as some sort of leader, and only gives a passing mention to SBF. https://en.wikipedia.org/wiki/Effective_altruism https://en.wikipedia.org/wiki/Effective_altruism
        skinnymuch 4y ago
        Using Wikipedia as a barometer doesn’t always works. In this case it probably wouldn’t work even if SBF was much bigger than he was with EA. There’s a middle ground. He wasn’t a prophet but he wasn’t nobody either. He was a leading non-academic figure/celeb of EA that didn’t get too much pushback.
        gruez 4y ago
        >There’s a middle ground. He wasn’t a prophet but he wasn’t nobody either. He was a leading non-academic figure/celeb of EA that didn’t get too much pushback. That's the non-controversial opinion, but where does this leave OP's comment? Should we push back more on billionaires in movements? Should we assume that everyone who's in movements is in it for cynical reasons? Or maybe only billionaires? A new yorker article on effective altruism suggests that SBF got in before his crypto riches. How does that work? Did SBF suddenly turn cynical once his wealth crossed the $1B mark? [1] https://www.newyorker.com/magazine/2022/08/15/the-reluctant-prophet-of-effective-altruism https://www.newyorker.com/magazine/2022/08/15/the-reluctant-...
        nwiswell 4y ago
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fortran77 4y ago

One lesson I’ve learned from this case and Theranos — avoid anything that comes out of Stanford.

HideousKojima 4y ago
After all, it is just a Junior University (Credit to my dad, a Cal alumnus, for that joke. Though I'm sure he got it from someone else back in his college days).

jerf 4y ago

That's one theory. Of course, given the depth of financial depravity on display here and the incredible thinness of the financial defense, one must also entertain the theory that they did do the due diligence, they were aware of how dangerous this was, and they invested anyhow for other reasons. And that those reasons are probably not good. There have been many cases where companies go to great lengths to do accounting alchemy to fool even very smart auditors, but we are clearly not dealing with that here. Binance or whoever was offering to buy FTX out literally figured out within single-digit hours of looking at FTX's books that they were not interested. A person skilled in the art can literally glance at these books and figure out that they are worthless. I do not believe there is any credible theory that any investor could possibly have been unaware of these issues. FTX's books don't so much have red flags as that they are printed on red flags, with ink derived from red flags, a custom-made red cover made out of more red flags, and each page, when opened, has pop-up red flags along with a little electronic speaker that plays Red Flag by Antigoni while you get sprayed with Red Flag perfume [1]. [1]: https://www.youtube.com/watch?v=HKk91x0Yg7Q https://www.youtube.com/watch?v=HKk91x0Yg7Q

muggermuch 4y ago
>FTX's books don't so much have red flags as that they are printed on red flags, with ink derived from red flags, a custom-made red cover made out of more red flags, and each page, when opened, has pop-up red flags along with a little electronic speaker that plays Red Flag by Antigoni. Lol. This should be a framed quote.
abluecloud 4y ago
>And that those reasons are probably not good. what would those be?
- jaywalk 4y ago
  Money laundering.
  - hungryforcodes 4y ago

adrr 4y ago

Secret is to not take the pitch meeting seriously and play league of legends.

twelve40 4y ago
"you in"? that's probably how he pitched it too : )

huevosabio 4y ago

I have the same question. My best guess is that these VCs need to deploy so much capital that they don't really do due diligence, instead they go by "founder vibes" and "vision", a watered down version of "invest in the team, not the product". Sequoia, SoftBank, a16z all seem to be guilty of this. Anecdotally, Chamath Palihapitiya, in the recent All-in Podcast [0], said that they met with SBF and as a condition to invest they wanted to get rid of dual class voting shares (or something like that) and a board. FTX leadership (not necessarily SBF) replied with "fuck you". So I guess you have some VCs trying to do the right thing, but if founders can get capital with no strings attach elsewhere, then your ability to deploy that capital is hampered. Essentially, until recently there were was more capital than founders, so founders could just do whatever (and SBF did). I would expect that this changes a bit with raising interest rates and a tech downturn, but a16z's $350M investment in Adam Neumann's newest Thing makes me think that we are still flush with money ready to be thrown at anyone that has the connections to get a coffee chat in Sand Hill Road. [0] https://open.spotify.com/episode/3CKYt4mKxndPkEfAvc7SM0?si=eb3387650ff943e7 https://open.spotify.com/episode/3CKYt4mKxndPkEfAvc7SM0?si=e...

itsoktocry 4y ago
>but a16z's $350M investment in Adam Neumann's newest Thing makes me think that we are still flush with money ready to be thrown at anyone that has the connections to get a coffee chat in Sand Hill Road. They have loose morals. Kevin O'Leary, of Dragon's Den fame, who is now a creditor in the FTX bankruptcy (ie wiped out) recently said in an interview that he would invest with SBF again. The guy literally had money stolen from him. How do you even explain that?
- MichaelCollins 4y ago
  Tim Draper still supports Elizabeth Holmes: https://fortune.com/2022/01/05/venture-capital-tim-draper-elizabeth-holmes-guilty-fraud-theranos/ https://fortune.com/2022/01/05/venture-capital-tim-draper-el... I don't know how. Maybe he's just fucking stupid, or too prideful to admit he was wrong.
  - 4y ago

twelve40 4y ago

depends on the stage, at some stages you are just pitching the growth (maybe even just the future growth), not the current financials, which may be terrible for any number of reasons. That, or fraud, of course.

PragmaticPulp 4y ago

The crypto space is full of projects with empty promises of future profits. If you're an investor looking at crypto projects, you're seeing hundreds of crypto pitches every year that are never going anywhere. Then Alameda comes along showing actual profits from their early trading operations. Someone who as actually figured out how to make money in the crypto world without selling their own tokens (yet). Compared to all of the other dead-end projects these investors get pitched every day, this seems like the golden child. Someone who is actually turning a profit. Investors want to put their money into the golden child's profit machine and get a piece of that action. SBF was also very successful in turning his early successes into a lot of momentum and social proof. He played investors and influencers against each other by bringing them all on within a short span of time. When this happens, investors go into FOMO / "me too" mode and just throw their money into the momentum, assuming some other investors have probably done the due diligence already.

ethbr0 4y ago
See also all accounts of Twitter deal funding, which seemed to boil down to "I'm oversubscribed (lie), so you'd better say yes now and give me more money than you want." Which is essentially all fundraising in a crowded market, but you would expect investors to be more sophisticated. Even accounting for selection bias (we're opining on the ones who invested).

bombcar 4y ago

Nobody wants to admit that a vast majority of VC due diligence is just assuming that the other VCs did due diligence.

SV_BubbleTime 4y ago
I have another take... It's been 15-20 years of literally free money. What did they care if some went away, they would just leverage some more.

sirmoveon 4y ago

My superficial theory is that they probably invested for inside information, then somehow shorted them on their downfall.

hankchinaski 4y ago

plato once said, storytellers rule the world

dahdum 4y ago

They weren't investing on fundamentals, the books didn't matter. His close association and largesse with regulators, media, and politicians along with his cloak of EA made regulatory capture and the promise of monopoly-like profits possible. VC's aren't stupid, even if they thought it was 80% likely he was an outright fraud, it's still worth the bet for a 20% chance at 50-100x returns.

vkou 4y ago
It's strange to see EA credited as both the reason for why this went on for so long with no oversight, and then damned in a 'ding dong the witch is dead' manner after it fell apart. When a confidence man and thief loudly and proudly shouts out a religious affiliation as his guiding star, we generally don't go ahead and condemn the religion for his behavior. (Doing so is a great way to get canceled. At most, we blame him for not being religious enough.)
- deleted 4y ago
  [deleted]
- skinnymuch 4y ago
  In this case this tiny religion embraced him, so yes many would blame that to a degree as well.
- dqft 4y ago
  Because "EA" as a thing is stupid and redundant even after you recognize that altruism alone is overrated. Its just obvious moralistic garbage.
  - johnsimer 4y ago
    Altruism is overrated? If you were poor or otherwise suffering would you not want help from someone richer than you?

lordnacho 4y ago

I've had one of the mentioned firms invest in a place I was a partner at, and it surprises the hell out of me. I remember the investment guy would tell the rest of us "on Wednesday, wear a shirt and tie, X big name is coming" and that's what we'd do. And millions of questions about the strategy, though didn't know much about those details. Current theory is there's some sort of investment U shape curve. Either people look the part and talk the part and get the part, or they look like they care so little that they must be the real deal. Wish I'd known this, because I am also able to play video games badly while wearing a T-shirt.

ZoF 4y ago
rippercushions 4y ago
This is called countersignaling. Basically, if everybody else invests into doing X and somebody conspicuously does not, it's taken as a signal that they're so good that they don't need to. https://en.wikipedia.org/wiki/Countersignaling https://en.wikipedia.org/wiki/Countersignaling
- bachmanity1212 4y ago
  There is an episode of the Silicon Valley series where the team tries to increase their VC funding by becoming increasingly toxic and abusive with the VCs they meet, and they end up signing with the biggest offer they got, after one of them literally puts his genitals on the table during negotiation. Turns out this was hitting very close to the truth. That show was great to show how much a clown world SV can be.
  - rippercushions 4y ago
    https://youtu.be/N6Zz-Nkkaxc https://youtu.be/N6Zz-Nkkaxc

rchaud 4y ago

They did plenty of due diligence to protect their own interests. Their term sheets gave them a big chunk of the "limited supply" tokens. So even if the business model was trash, they could cash out well before the market for that coin collapsed. It is similar to when investment banks underwrite stock issues; they purchase a chunk of the stock directly from the company at an agreed-upon price. The company gets guaranteed funds, and the bank is free to sell the shares on a secondary market and potentially pick up a profit. What's missing in crypto are the safeguards that ensure that banks + companies do not collude on pump and dumps in the securities markets. These include quarterly financial audits and oversight from a watchdog agency like the SEC. Obviously they are far from perfect, but considering the anti-regulation nature of US business (even after the Great Depression), the fact they even exist is a small triumph.

AmericanOP 4y ago

Its the inevitable conclusion of chasing easy money in the wake of the crypto asset bubble. Everybody got lazy.

itsoktocry 4y ago

Dead simple: Many VC's aren't very smart and/or ethical. How many major Silicon Valley scandals are VCs involved in? 100%. And for the most part they get a pass. This end of the era of easy money is going to reveal that many of the "geniuses of our time" are nothing of the like.

tootie 4y ago
The stuff that Sequoia said about him is almost unreal. They talked like he was going to be the greatest entrepreneur in human history. All because he exploited a momentary arbitrage in Japanese Bitcoin exchanges. Then they gave him shitloads of money and acceded to not getting board seats. I honestly wonder if they were that trusting or they just wanted to maintain deniability.
- nullc 4y ago
  > All because he exploited a momentary arbitrage in Japanese Bitcoin exchanges. Originally the story was korean exchanges; he changed to saying Japanese, presumably after too many people pointed out the korean story was impossible. (The Japanese story was also more or less impossible, they could have made a bit of money maybe even millions but not the $10+bn he claimed)
  - dahdum 4y ago
    They made ~$10-30m from the Japan arb from what I've read, mostly blew it, but it still got Alameda off the ground. The Korean arb was the initial goal but proved too difficult. Both of these arbs were glaringly obvious and talked about constantly, but difficult to pull off due to banking hurdles in both countries.
- duped 4y ago
  The pitch deck you give to Sequioa partners is not a description of your current business. It's a proof of concept that shows how much the market you're entering is worth and a long term vision of how you can carve a significant piece out of it. So you don't go in saying "hey look we can make a trillion dollars doing arbitrage between American, Japanese and Korean exchanges." You go in showing that your work doing the former proved the existence of a massive market for crypto securities and derivatives, and how you're uniquely positioned to capitalize on that market. And if they believe in the existence of that market and the founders are able to execute they'll invest. That's what they mean about investing in founders and teams.

matrix_overload 4y ago

The VC due diligence is not about corporate governance or a viable business model. Everyone does shady stuff to some extent and everyone aims to "exit" before turning in the first profitable quarter. The due diligence is about the founder's connections and the ability to use them to skirt regulatory oversight. This checked out - both Sam and his girlfriend came from well-connected families and so far acted the part (including the massive political donations). Whether it's going to save them remains to be seen. I hope we won't sink to a new low of bailing out Ponzi schemes with taxpayer money, but I wouldn't be surprised too much.

ClumsyPilot 4y ago

Between this, Theranos, Elon getting co-investment and loans in his project to set 44 billion on fire and recent investor letter to Google to cut staff and damage their main engine of innovation You can only conclude that there is a lot of dimb money out there. Some people made big money despite being idiots. Which means I have a chance as well!

nemo44x 4y ago

> how did ftx successfully raise so much vc money recently? Maybe they got to join the FTX polycule if they invested enough. Who wouldn't want to get in on that.

DebtDeflation 4y ago
Everyone can, vicariously, when the leaked SBF-CE tape drops tomorrow. Personally, I plan on staying off the internet all day so I don't accidentally see it.
- nemo44x 4y ago
  Oh god, a disgusting sex tape is just the vomit encrusted cherry on top of this trash fire. There’s got to be a No-nut November joke in there.
fxtentacle 4y ago
I'm pretty sure that doesn't apply here. But if it did, I'd find that impressive, too. Most topmodels never make it to 10 billion USD.

ilamont 4y ago

The venture capitalists at Sequoia—the powerful investors behind Silicon Valley success stories like Google and PayPal—were certainly taken (or taken in) by him. Three months ago, one of the firm’s partners, Michelle Bailhe, offered a breathless take in a firm-sponsored story about SBF: “Of the exchanges that we had met and looked at, some of them had regulatory issues, some of them were already public,” Bailhe wrote. “And then there was Sam.” FTX, Sequoia felt, was “Goldilocks-perfect.” In colorful language, Sequoia partners reveled in their appreciation for his pitch for FTX.com as the center of all monetary transactions. In their own words: “I LOVE THIS FOUNDER,” typed one partner. “I am a 10 out of 10,” pinged another. “YES!!!” exclaimed a third. The firm has since deleted the article. https://www.commonsense.news/p/the-32-billion-crypto-scammer https://www.commonsense.news/p/the-32-billion-crypto-scammer

texaslonghorn5 4y ago

lots of the money came in 2021 and 2022. the audits done in july 2021 were by armanino and prager metis, both of which are trying to expand into the digital asset space and would stand to benefit from continued growth and success by ftx. the implication i am making is that there was no way for the audits to be unbiased. if the audits weren't junk, the company probably wouldn't have been big enough to cause such a mess

camjohnson26 4y ago
People sometimes forget that Enron’s collapse also took down their auditor, Arthur Anderson, which killed their audit business and spun the consulting business into what is now Accenture. The auditors in these situations are often as culpable as the companies.

matwood 4y ago

Or it highlights that VCs care more about relationships to the founders than ideas or abilities. We like to talk about a meritocracy when it's more about who did you room with at Stanford, MIT, etc...

unboxingelf 4y ago

listen to chamath’s explanation on the latest All In podcast, he puts it pretty succinctly.

snarf21 4y ago

How did Theranos?

mradek 4y ago

MIT? Check Connected family? Check QuIrKY AF? Check

oarabbus_ 4y ago

https://decrypt.co/114719/tumblr-blog-linked-ex-alameda-research-ceo-explored-race-science-imperial-chinese-harem-polyamory?amp=1 https://decrypt.co/114719/tumblr-blog-linked-ex-alameda-rese... if a crypto journalist was able to find these tweets and blogs, it would indicate the VCs didn't do their due diligence on the CEO, at the least.

wfaler 4y ago

Honestly, I think any "smart money" managers who invested in this should be ashamed. It's absolutely an indictment of their intelligence. The basics of due diligence is: * How is their record keeping of board decisions & financials? * What board decisions and indemnities exist in those records that may have conflicts of interest or claims from other third parties? (FTX didn't even have a board) * etc.. Furthermore, probably should raise every red flag ever for a reasonably intelligent person if some 20-somethings with a few years of experience claim they have the secret sauce to trade successfully under every possible market regime. It falls on its own implausibility and only reeks of hubris. To understand most market regimes likely to occur, you likely need people in their late 50'ies onboard, or even older (there's a reason Buffett, Soros et al come out relatively unscathed out of most crises, while everyone else bleeds out). This is a result of stupidity meeting easy money.

smegger001 4y ago

it a symptom of underlying economic issues. There is so much economic disparity between the top of the economy and the economic have nots. the 0.001% are running out of places to put money. Money is being poured into iffy startups and new economic vehicles, crypto being at the intersection of those is particularly attractive to those with more money than they know what to do with. place like FTX WeWork and Theranos and more have millions thrown at them with little oversight or due diligence because why not they have to put money somewhere. bond interest rates have been historically low for years to the point where some governments were issuing negative interest rate bonds. If you have hundreds of millions and your alternative is to loose money twice over (once to interest rates and again to inflation) Why not throw it at long shot investments with potentially high returns, especially when you may be able to liquidate your shares before they companies crash.