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Maybe someone can help illuminate a nagging question I've had for quite sometime around this whole FTX debacle: Practically every single VC seed round story I'

Maybe someone can help illuminate a nagging question I've had for quite sometime around this whole FTX debacle: Practically every single VC seed round story I've heard from new/young founders is that the process is nothing short of a colonoscopy into not only their business, but also their professional network, and even their personal lives! I look at the list of institutional investors, from the "big boys" in the VC game, to pension funds and I can't for the life of me believe the current narrative that every level of due diligence checks seemed to fail in this single edge case. From a systems perspective this doesn't make me think "oh what a crazy one off, people must have been sleeping at the wheel", this makes me think "this isn't a bug, this is a feature." So the real question is, how many more proverbial rotten apples are in the basket of VC?

popotamonga 4y ago
My friend had his funding rejected because during the DD the cto did not pickup the phone from a strange number. they wanted to speak privatly to him.
- winstonprivacy 4y ago
  I once had an investor who I thought was a great fit for both me and the business. We clicked on every level. We shared the same goals, philosophy, way of thinking about things. I loved him. A few days before making his decision, he called me at 11pm. I knew exactly what was happening. If I didn't pick up, he probably would think I'm a 9-5'er (which I'm not). If I did, I would probably be getting into a long-term relationship with a guy who considered him more important than my family. He'd probably want me jumping on planes at the last second to show him slides, mentoring his other founders, etc. This wasn't my first deal. I was successful. I decided to not pick up. The deal fell through, predictably. But I couldn't be happier with my decision.
thinkingemote 4y ago
I share the nagging question! The only thing I can think of is that he was "making money" quickly, showing his skills as a trader. This...greed...might have been blinding to the investors. Where angel Investors or VC will gamble with an unknown founder and their untried product, SBF was making money and the product seemed too good to fail?
swyx 4y ago
at least part of the answer is that SBF consciously designed his fundraising process (entering ratcheting commitments with an extremely short time frame) to cause FOMO and waive due diligence the other is the emperor's new clothes effect
stephc_int13 4y ago
It appears that the infamous due diligence process is mostly theatre. - for the LPs to believe that their money is handled by serious/smart/accountable people - for the founders to bend over There is a lot of "storytelling" in the VC business that should be more thoroughly and critically explored by journalists.
zpeti 4y ago
When I sold my smallish venture a year back I got around 400 due diligence questions. I answered them, put the material together. From questions later on it became pretty obvious not one person, not the legal or operations team of the acquirer had look at anything I'd handed over. I think this is a mixture of laziness and also that these due diligences are done for legal liability reasons, i.e. you can look at the materials if there ever is a lawsuit, not before. But this is just an anecdote, this obviously depends on the acquirer, I'm sure plenty of companies do it properly.
- peteradio 4y ago
  There is enough due diligence to cover ass. I think what surprises people is that peoples asses were actually covered. What exactly did e.g. Sequoia see to give them confidence that there would not be significant cost if things went sideways? I guess you can always say its not illegal to invest poorly. But is it illegal to fund a house of cards where your position is to get a good deal on the inside of a potentially lucrative ponzi scheme? I think the whole thing is a good lesson for common (especially young) investors... care about and think in the longterm ... what is your nest-egg invested in? If things go sideways there's not great guarantees of which groups receive a prop-up and which are allowed to fall.
  - Msw242 4y ago
    How many of these VCs used their reputations to pump shit coins (which they got along with equity when they invested in these Ponzis) then sold the shit coins to retail investors? Seems like they sold unregulated securities
- bartread 4y ago
  As you suggest, I'm not sure how typical that is, and it would very much depend on the acquirer. We've made quite a few acquisitions over the years, and there have been other potential acquisitions where we've chosen not to proceed due to something that's come out during DD. That's not to say we've never had any mess to clean up post-acqusition, but it's always been mess that we were aware of either through early conversations or through the DD process.
cle 4y ago
> Practically every single VC seed round story I've heard from new/young founders is that the process is nothing short of a colonoscopy into not only their business, but also their professional network, and even their personal lives! I’ve seen two groups of founders here. One knows how to say the right things, spin data the right way, have the right credentials, and know the right people, to avoid substantive due diligence. The others don’t, and end up getting a colonoscopy and then likely a “you’re too early” or “you’re too far along”. > So the real question is, how many more proverbial rotten apples are in the basket of VC? I don’t have a bird’s eye view, but my few data point me towards most VCs convincing themselves that they’re rigorous, when they ultimately rely on subjective criteria and so are quite vulnerable to con artist founders who know how to make them feel good.
- ethbr0 4y ago
  This is why standardized processes and adherence to them is absolutely critical for risk management. There is always going to be a situation where there's substantial political / personal pressure to skip checks, sometimes from the CEO themselves. Good processes are built to hold the line even when literally everyone is urging everyone else to bypass them. Which is really hard.
  - mrguyorama 4y ago
    VCs with rigorous process get out-competed by the ones that jumped at garbage companies that racked up huge valuations and then cashed out. VC isn't about making good companies, it's about cashing out. There's no value in the business actually being good, only in it being hyped up.
deleted 4y ago
[deleted]
rexreed 4y ago
Due diligence is for the founders and startups that the VCs aren't that excited about. When the VCs really want something, due diligence, especially the sort you mention, and any sort of business plan / model / etc goes out the window. They'll fall over themselves to get a piece of the action in some hot company in some hot market, even if the founders are total jerks, the company has no real business plan or model, and the long term plans are vague. The startup funding game is all about investing in startups as a financial asset, not in startups as a sustainable business. VCs will put you through the "you need traction" "you need a business plan" "we need lots of due diligence" if they aren't that into you or you're an option vs. an opportunity. Venture capital is a hustle, and you have to know how to play the game. Most startup founders play VC as if they're going to a bank and getting a loan and have to justify everything, when VC investing is really about pattern matching and lots of gut reactions, and VCs are investing in what they believe is a chunk of something that will be worth more in the future. The actual business and startup founders are only the side part of that hustle.
- jgalt212 4y ago
  > When the VCs really want something, due diligence, especially the sort you mention, and any sort of business plan / model / etc goes out the window. Indeed. Post FTX, Sequoia not only scrubbed the hagiography of SBF from their site, they also scrubbed a story about how they went from meeting to funding company in 48 hours. Not sure how much due diligence you can do in that time frame.
  - rexreed 4y ago
    Oh Sequoia. The company that put $41M in a single seed round into a company that did... nothing: https://www.businessinsider.com/how-the--did-color-raise-a-crazy-41-million-for-its-first-round-2011-3 https://www.businessinsider.com/how-the--did-color-raise-a-c...
    - hunterhod 4y ago
      Hmm, the article seems to suggest that perhaps Bain put up the majority of that round.
red70 4y ago
- marmadukester39 4y ago
  Whoa - casual racism much? This is cool on HN?
  - gumby 4y ago
    Thankfully the voting suggests not.
- jpmattia 4y ago
  Antisemitism is disgusting in any context, but doubly so on HN.
FollowingTheDao 4y ago
When people are greedy they forgo due diligence. It is how Ponzi scheme always seem to work. And if any one of you here think you are not greedy, please, take a deeper and more honest look at yourself.
mupuff1234 4y ago
The answer is probably that VCs aren't looking for what you think they should be looking for. And technically you could say FTX was a good investment if you got out before the collapse.
- SilasX 4y ago
  The only way to get out of your investment with FTX in time would be if you had negotiated some clause to that effect in your funding round (like warrants/put options on the shares), which no one seems to have done, and which SBF is unlikely to have accepted.
gumby 4y ago
There’s a difference: no seed investors. Alameda was already operating, funded by cash (supposedly?) made from a kind of carry trade on some restricted cryptocurrencies. So ppl were putting money into an already operating business. There’s still no excuse for zero diligence, much less zero oversight (they couldn’t even produce a balance sheet??). But the situations aren’t parallel.
googlryas 4y ago
VCs were already bullish on crypto, and Alameda was already printing money. They thought there was less risk than there was and any delay would let other VCs get in on their spot.
kibwen 4y ago
Go read the infamous Sequoia Capital article and despair at the fact that these wildly wealthy people who comprise the investor class and wield inordinate, unimaginable amounts of unilateral power are just as stupid as the rest of us.
- ryloric 4y ago
  SBF article? It made me wonder if they're stupider, they were too eager to buy into the 'Genius Great Man' trope.
chollida1 4y ago
> Practically every single VC seed round story I've heard from new/young founders is that the process is nothing short of a colonoscopy into not only their business, but also their professional network, and even their personal lives! Really? Y Combinator is famous for its lack of due diligence, and making decisions based on a web form submitted to get to inperson interviews and then a 10 minute meeting to make an investment. And the biggest VC's of the past few years, Tiger Global and SoftBank did almost no diligence. The other big VC's in AZ and Sequoia are also known for moving very quickly and not being very onerous with their due diligence. I guess it could be that most of the VC stories you have heard are from 2nd and 3rd tier VC's who have to be far more thorough?
- raverbashing 4y ago
  The lack of DD in YC I believe is due to them being Angel/A series basically (not sure if the classification even stands here, they're an incubator) You do want more DD to invest in bigger companies
devinegan 4y ago
Check out the NS8 story. They were audited by one of the big firms and still passed and got funding when it was a fraud. Lightspeed was the lead VC. Maybe they are moving a little too fast.
georgeecollins 4y ago
The part of the story I am curious about is that I know in some cases VCs got issues some tokens along with their shares. There is the possibility that they knew they would get enough tokens and be able to dump them to make the deal make sense because the tokens could be instant profit. They say, we lost $x m investment. (PS: the fund is up, we sold $x+y coins) Or it could have just been FOMO. I feel sorry for the Ontario Teacher's Unions. Keep in mind with these frauds the money is coming from insurance company, your school endowment, etc. It's not other people's money.
rdevsrex 4y ago
Well this is part of what creates the conspiracy theory that some state actors were behind FTX. At the very least, the fact that SBF's mom was fixer for the Democrats, means he was likely Epstein level connected with political insiders.
- gamblor956 4y ago
  More conspiratorily, while SBF's mom worked for a Democrat-aligned dark-money PAC, Sam Bankman-Fried himself is rumored to have donated more than a $100 million to Republican dark-money PACs during the general election, and multiple Republican sources confirm that a person in the crypto industry was their "white knight donor" for a number of Senate GOP campaigns.
  - ethbr0 4y ago
    Hope there was a future pardon promise in those handshakes...
- freejazz 4y ago
  Not sure if that rises to the level of sexual blackmail with minors but okay!
gowld 4y ago
iancmceachern 4y ago
In my experience it's a class thing. If you have the type of pedigree where you parents, friends or family can put in $100k plus to allow a founder or two to pay their living expenses while they get it running and secure seed or round A funding. It's always a catch 22, serious investors want one or more of the founders to be full time dedicated to invest, and that founder needs to pay their living expenses while doing so. In my experience the founders that get funded are either people with the pedigree that comes with money, or people that are experts on their field, have worked whole careers in industry and have some money socked away to float themselves for a year or two while they get it going. There is a third category of consultants/freelancers that create products as a thing to work on when consulting is slow, but these are often bootstrapping type things that don't really go looking for money.

popotamonga 4y ago

My friend had his funding rejected because during the DD the cto did not pickup the phone from a strange number. they wanted to speak privatly to him.

winstonprivacy 4y ago
I once had an investor who I thought was a great fit for both me and the business. We clicked on every level. We shared the same goals, philosophy, way of thinking about things. I loved him. A few days before making his decision, he called me at 11pm. I knew exactly what was happening. If I didn't pick up, he probably would think I'm a 9-5'er (which I'm not). If I did, I would probably be getting into a long-term relationship with a guy who considered him more important than my family. He'd probably want me jumping on planes at the last second to show him slides, mentoring his other founders, etc. This wasn't my first deal. I was successful. I decided to not pick up. The deal fell through, predictably. But I couldn't be happier with my decision.

thinkingemote 4y ago

I share the nagging question! The only thing I can think of is that he was "making money" quickly, showing his skills as a trader. This...greed...might have been blinding to the investors. Where angel Investors or VC will gamble with an unknown founder and their untried product, SBF was making money and the product seemed too good to fail?

swyx 4y ago

at least part of the answer is that SBF consciously designed his fundraising process (entering ratcheting commitments with an extremely short time frame) to cause FOMO and waive due diligence the other is the emperor's new clothes effect

stephc_int13 4y ago

It appears that the infamous due diligence process is mostly theatre. - for the LPs to believe that their money is handled by serious/smart/accountable people - for the founders to bend over There is a lot of "storytelling" in the VC business that should be more thoroughly and critically explored by journalists.

zpeti 4y ago

When I sold my smallish venture a year back I got around 400 due diligence questions. I answered them, put the material together. From questions later on it became pretty obvious not one person, not the legal or operations team of the acquirer had look at anything I'd handed over. I think this is a mixture of laziness and also that these due diligences are done for legal liability reasons, i.e. you can look at the materials if there ever is a lawsuit, not before. But this is just an anecdote, this obviously depends on the acquirer, I'm sure plenty of companies do it properly.

peteradio 4y ago
There is enough due diligence to cover ass. I think what surprises people is that peoples asses were actually covered. What exactly did e.g. Sequoia see to give them confidence that there would not be significant cost if things went sideways? I guess you can always say its not illegal to invest poorly. But is it illegal to fund a house of cards where your position is to get a good deal on the inside of a potentially lucrative ponzi scheme? I think the whole thing is a good lesson for common (especially young) investors... care about and think in the longterm ... what is your nest-egg invested in? If things go sideways there's not great guarantees of which groups receive a prop-up and which are allowed to fall.
- Msw242 4y ago
  How many of these VCs used their reputations to pump shit coins (which they got along with equity when they invested in these Ponzis) then sold the shit coins to retail investors? Seems like they sold unregulated securities
bartread 4y ago
As you suggest, I'm not sure how typical that is, and it would very much depend on the acquirer. We've made quite a few acquisitions over the years, and there have been other potential acquisitions where we've chosen not to proceed due to something that's come out during DD. That's not to say we've never had any mess to clean up post-acqusition, but it's always been mess that we were aware of either through early conversations or through the DD process.

cle 4y ago

> Practically every single VC seed round story I've heard from new/young founders is that the process is nothing short of a colonoscopy into not only their business, but also their professional network, and even their personal lives! I’ve seen two groups of founders here. One knows how to say the right things, spin data the right way, have the right credentials, and know the right people, to avoid substantive due diligence. The others don’t, and end up getting a colonoscopy and then likely a “you’re too early” or “you’re too far along”. > So the real question is, how many more proverbial rotten apples are in the basket of VC? I don’t have a bird’s eye view, but my few data point me towards most VCs convincing themselves that they’re rigorous, when they ultimately rely on subjective criteria and so are quite vulnerable to con artist founders who know how to make them feel good.

ethbr0 4y ago
This is why standardized processes and adherence to them is absolutely critical for risk management. There is always going to be a situation where there's substantial political / personal pressure to skip checks, sometimes from the CEO themselves. Good processes are built to hold the line even when literally everyone is urging everyone else to bypass them. Which is really hard.
- mrguyorama 4y ago
  VCs with rigorous process get out-competed by the ones that jumped at garbage companies that racked up huge valuations and then cashed out. VC isn't about making good companies, it's about cashing out. There's no value in the business actually being good, only in it being hyped up.

deleted 4y ago

[deleted]

rexreed 4y ago

Due diligence is for the founders and startups that the VCs aren't that excited about. When the VCs really want something, due diligence, especially the sort you mention, and any sort of business plan / model / etc goes out the window. They'll fall over themselves to get a piece of the action in some hot company in some hot market, even if the founders are total jerks, the company has no real business plan or model, and the long term plans are vague. The startup funding game is all about investing in startups as a financial asset, not in startups as a sustainable business. VCs will put you through the "you need traction" "you need a business plan" "we need lots of due diligence" if they aren't that into you or you're an option vs. an opportunity. Venture capital is a hustle, and you have to know how to play the game. Most startup founders play VC as if they're going to a bank and getting a loan and have to justify everything, when VC investing is really about pattern matching and lots of gut reactions, and VCs are investing in what they believe is a chunk of something that will be worth more in the future. The actual business and startup founders are only the side part of that hustle.

jgalt212 4y ago
> When the VCs really want something, due diligence, especially the sort you mention, and any sort of business plan / model / etc goes out the window. Indeed. Post FTX, Sequoia not only scrubbed the hagiography of SBF from their site, they also scrubbed a story about how they went from meeting to funding company in 48 hours. Not sure how much due diligence you can do in that time frame.
- rexreed 4y ago
  Oh Sequoia. The company that put $41M in a single seed round into a company that did... nothing: https://www.businessinsider.com/how-the--did-color-raise-a-crazy-41-million-for-its-first-round-2011-3 https://www.businessinsider.com/how-the--did-color-raise-a-c...
  - hunterhod 4y ago
    Hmm, the article seems to suggest that perhaps Bain put up the majority of that round.

red70 4y ago

marmadukester39 4y ago
Whoa - casual racism much? This is cool on HN?
- gumby 4y ago
  Thankfully the voting suggests not.
jpmattia 4y ago
Antisemitism is disgusting in any context, but doubly so on HN.

FollowingTheDao 4y ago

When people are greedy they forgo due diligence. It is how Ponzi scheme always seem to work. And if any one of you here think you are not greedy, please, take a deeper and more honest look at yourself.

mupuff1234 4y ago

The answer is probably that VCs aren't looking for what you think they should be looking for. And technically you could say FTX was a good investment if you got out before the collapse.

SilasX 4y ago
The only way to get out of your investment with FTX in time would be if you had negotiated some clause to that effect in your funding round (like warrants/put options on the shares), which no one seems to have done, and which SBF is unlikely to have accepted.

gumby 4y ago

There’s a difference: no seed investors. Alameda was already operating, funded by cash (supposedly?) made from a kind of carry trade on some restricted cryptocurrencies. So ppl were putting money into an already operating business. There’s still no excuse for zero diligence, much less zero oversight (they couldn’t even produce a balance sheet??). But the situations aren’t parallel.

googlryas 4y ago

VCs were already bullish on crypto, and Alameda was already printing money. They thought there was less risk than there was and any delay would let other VCs get in on their spot.

kibwen 4y ago

Go read the infamous Sequoia Capital article and despair at the fact that these wildly wealthy people who comprise the investor class and wield inordinate, unimaginable amounts of unilateral power are just as stupid as the rest of us.

ryloric 4y ago
SBF article? It made me wonder if they're stupider, they were too eager to buy into the 'Genius Great Man' trope.

chollida1 4y ago

> Practically every single VC seed round story I've heard from new/young founders is that the process is nothing short of a colonoscopy into not only their business, but also their professional network, and even their personal lives! Really? Y Combinator is famous for its lack of due diligence, and making decisions based on a web form submitted to get to inperson interviews and then a 10 minute meeting to make an investment. And the biggest VC's of the past few years, Tiger Global and SoftBank did almost no diligence. The other big VC's in AZ and Sequoia are also known for moving very quickly and not being very onerous with their due diligence. I guess it could be that most of the VC stories you have heard are from 2nd and 3rd tier VC's who have to be far more thorough?

raverbashing 4y ago
The lack of DD in YC I believe is due to them being Angel/A series basically (not sure if the classification even stands here, they're an incubator) You do want more DD to invest in bigger companies

devinegan 4y ago

Check out the NS8 story. They were audited by one of the big firms and still passed and got funding when it was a fraud. Lightspeed was the lead VC. Maybe they are moving a little too fast.

georgeecollins 4y ago

The part of the story I am curious about is that I know in some cases VCs got issues some tokens along with their shares. There is the possibility that they knew they would get enough tokens and be able to dump them to make the deal make sense because the tokens could be instant profit. They say, we lost $x m investment. (PS: the fund is up, we sold $x+y coins) Or it could have just been FOMO. I feel sorry for the Ontario Teacher's Unions. Keep in mind with these frauds the money is coming from insurance company, your school endowment, etc. It's not other people's money.

rdevsrex 4y ago

Well this is part of what creates the conspiracy theory that some state actors were behind FTX. At the very least, the fact that SBF's mom was fixer for the Democrats, means he was likely Epstein level connected with political insiders.

gamblor956 4y ago
More conspiratorily, while SBF's mom worked for a Democrat-aligned dark-money PAC, Sam Bankman-Fried himself is rumored to have donated more than a $100 million to Republican dark-money PACs during the general election, and multiple Republican sources confirm that a person in the crypto industry was their "white knight donor" for a number of Senate GOP campaigns.
- ethbr0 4y ago
  Hope there was a future pardon promise in those handshakes...
freejazz 4y ago
Not sure if that rises to the level of sexual blackmail with minors but okay!

gowld 4y ago

iancmceachern 4y ago

In my experience it's a class thing. If you have the type of pedigree where you parents, friends or family can put in $100k plus to allow a founder or two to pay their living expenses while they get it running and secure seed or round A funding. It's always a catch 22, serious investors want one or more of the founders to be full time dedicated to invest, and that founder needs to pay their living expenses while doing so. In my experience the founders that get funded are either people with the pedigree that comes with money, or people that are experts on their field, have worked whole careers in industry and have some money socked away to float themselves for a year or two while they get it going. There is a third category of consultants/freelancers that create products as a thing to work on when consulting is slow, but these are often bootstrapping type things that don't really go looking for money.