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"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]."

OMG - I'm dying here. You really shouldn't have buried that at the bottom of your reply because many will miss it. Perfectly written. I love it.

Somewhat related Soviet joke:

A Westerner arrives in the USSR. Walks absentmindedly along the street, boom, open manhole, falls down, climbs up all covered in sewage, shouts, furious: “What the hell? Couldn’t they have put up a red flag or something like normal people?” A passerby replies: “You’re from the airport?” “Yeah.” “You’ve seen the huge red flag on the roof, right?”

> I do not believe there is any credible theory that any investor could possibly have been unaware of these issues.

I'm not convinced that the issues that caused Binance to back out even existed the last time FTX raised outside capital (March 2022 according to Crunchbase). My understanding is that in March, FTX had a basically normal balance sheet for a crypto exchange, with roughly enough non-FTT assets to balance against its liabilities.

Alameda was an over-leveraged crypto hedge fund, which in hindsight wasn't great news for Alameda's investors or creditors. But there's a world where Alameda goes to zero but FTX is mostly fine. After all, FTX would automatically recalculate margin levels and liquidate assets as needed every 30 seconds. If they did that with Alameda like they would have for an arms length counterparty....I'm not going to say that FTX would have been unscathed - a lot of those loans seem to have been secured by FTT, plus Alameda seems to have made up a lot of FTX's trading volume - but the end result of incinerating billions of dollars' worth of customer deposits wasn't inevitable. IMO, FTX's fate wasn't sealed until its management team built a backdoor into its systems to siphon customers' assets to Alameda. And that probably didn't happen til summer, months after its last funding round.

It appears (although everything is unclear) that the 8bn hole was caused by customer dollar payments for ftx going to alameda as ftx didn’t actually have a bank account. For three years. So unclear it was ever good.

This alone is quite incredible. FTX, as a business, never actually existed. It was all just a smoke screen for his hedge fund.

Employees were stealing from the company, there were no internal controls...the rules for VC are...different. If you were on a Board and this happened on your watch, you would never work on another Board again. If you did this in PE, fired. If you invested in such a public company, very likely fired or irreparable damage to your reputation.

Sequoia are a huge fund, they are one of the doyens of the industry...it isn't even that they failed, they didn't even put in place the mechanism to try to protect their investor's money. It is unbelivable.

I agree with you, but to play devil's advocate:

>Sequoia are a huge fund, they are one of the doyens of the industry...it isn't even that they failed, they didn't even put in place the mechanism to try to protect their investor's money. It is unbelivable.

Don't VCs typically expect 9 of 10 investments to fail, but for the one which succeeds to more than make up for the rest? From the VCs point of view, as long as the allocation to each company is balanced, does it even matter whether an investment resulted in 100% loss due to a scandalous fraud instead of "normal" company failure?

Yes, because the result here is that investor money has been stolen by employees.

Again, if you work at an equity fund and you invest in a company that was obviously fraudulent, your investors don't go: "Oh well, better luck next time...shit happens, amirite?". If this happens in a PE fund, where there is direct oversight, then I would suspect that the investors would remove you as a manager.

The only responsibility you have is to protect your shareholder's interests. Not only was this disregarded but Sequoia gave them the structure that allowed them to steal from their own investors.

I have never seen a situation like this that didn't end up in charges against the fund managers because it is such an egregious failure (this, of course, won't happen here...everyone here has donated far too much money...but I have seen this professionally).

It does matter, the risk calculation gets way worse once you start counting in the possibility of fraud. It's going to be 9/10 if each one of the 10 actually try their hardest to succeed. It's going to be 10/10 if fraud isn't prevented.

> It appears (although everything is unclear) that the 8bn hole was caused by customer dollar payments for ftx going to alameda as ftx didn’t actually have a bank account.

Despite the notional legal structure, I think the key thing is that FTX, FTX.US, Alameda Research, and the other 130 or so entities involved were mostly not, in any meaningful sense, distinct businesses, it was all just three grifters in a trenchcoat.

I wonder if those other reasons simply were the guy's background and pedigree. Silicon Valley is no different than Wall Street in its obsession with having the "right" educational background, having the "right" parents, having the "right" connections and so on. So many doors in corporate hiring can be bypassed with "Went to MIT" and "Stanford parents" and I wonder if they can also be bypassed by founders looking for investment.

That's at least one strong reason - VCs look at the person as much as the business.

Crypto was filled with sleazy car-salesman "investor" types at the time Alameda Research was looking for funding. So when in came someone with a Jane Street background and not a single flashy Ferrari in their driveway, the dam broke on VCs finally being able to pour money into the crypto space on a decent looking founder.

If that's how unsophisticated these VC operations are then I think we'll see a lot of them lose their shirts in the coming macroeconomic environment. Which will consequently make future funding rounds all the more difficult.

VCs only need to roll a crit hit on a 1d20 to stay afloat.

They're not going to lose their shirts, not as long as insanely wealthy people like to gamble.

Unless the Fed blinks.

Just today the Fed governors stated inflation has not been sufficiently curtailed... https://www.cnbc.com/2022/11/17/feds-bullard-says-rate-hikes...

Sure, I'm just curious how we'll deal with interest payments on our debt, especially since our economy has evolved to thrive on low rates. The hikes are necessary, but I think they're going to kill a bunch of BS jobs, meanwhile we'll have to raise taxes to service the debt. Gonna be real interesting.

Nation debt isn't like a personal checkbook. As long as the economy grows just as fast or faster than the debt over time, then they're okay.

Sure, but we made the economy grow by keeping debt cheap. Now debt will be expensive and all signs point to the economy not growing in such an environment.

The closer to an election, the more likely the case

I am slightly baffled by this comment since my first impression of him was exactly "sleazy vibes". Not in the flashy Ferrari sense but because the look seemed to try so hard to be the opposite of flash - the nasty stretched out t-shirts, shorts and forever bed-head hair. It struck me as a contrived and something of a put on. Google "John Blutarsky Animal House." SBF appears to have patterned his look after Jon Belushi's character in that movie. I think you have to make an effort to look like that so consistently, especially when there are cameras around.

I can confirm that this kind of look is not at all atypical in the quantitative prop trading world and it's not contrived.

Well if it's so common as to be a kind of uniform isn't that the very definition of contrived? How else would you explain the phenomenon then, that slobs just naturally gravitate towards prop trading?

Plus both his parents are professors at Stanford Law school. I can see VCs having a natural bias towards "it would be unlikely for someone with this pedigree to operate so completely outside the law".

Unless - hypothetically - some of them were looking for someone who would operate outside the law, but with pedigree and credibility.

There was a lot of money involved. There was a huge network of shell companies to hide it.

VCs, who are supposed to know what due diligence is, looked at some hilariously unprofessional books and said "We like the look of this."

Is it unreasonable to wonder what was going on?

SBF had huge sleaze vibes, so I don't know if your logic applies.

> and not a single flashy Ferrari

the article mentions his $30 million dollar penthouse ... It seems the only place the flashy assets didn't exist was in the press coverage put out by organizations SBF gave money to...

SBF branding himself as an effective altruist and even purposely dressed in the silicon valley "genius" attire. His condo in the bahamas was after he hit it big and needed to be close to Washington to work on crypto regulation.

There's a huge gap between that and the majority of crypto founders at the time.

>the article mentions his $30 million dollar penthouse

the $30M penthouse in the Bahamas that was purchased using investor money and customer funds... he didn't own it at the time he received funding from these big name VCs, did he?

Nice real estate and art send a very different signal than an exotic car, even if they're kind of high-life blingy.

Don’t VC always say they invest in the founder not the company? It’s all about how that person makes them feel. Some argue that is why there is less diversity in VC funded companies.

It's like the "cultural fit" hiring criteria loophole, which allows companies to deliberately cloud their hiring decision-making by incorporating vague and bias-fraught inputs. It's a way that an organization can claim they have measurable, quantitative criteria, while allowing themselves to override that criteria with their gut feeling when they want to.

Just based off that news article with how much the VCs were delighted after a call with SBF while he was playing League of Legends it certainly seems like they base most of their investing off gut feeling and "vibe check" vs actual fiscal due diligence. Which is how charismatic quirky founders like Elizabeth Holmes, Adam Neumann and now SBF keep finagling big round raises.

> FTX’s list of investors spans powerful and well-known investment firms: NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock and Thoma Bravo.

- https://archive.ph/1tjP5

This is an extraordinary number of high-profile companies which either failed to do due diligence, or were knowingly, deliberately doing shady dealings.

Not great to have to choose between incompetence and shadiness at any of those, but those are the two options, and each should be investigated for throwing their [customers'] money into an obvious scam.

There's a third option: FOMO. They didn't want to look stupid later for failing to invest in case FTX turned out to be the next big thing, so they took a gamble.

But doesnt FOMO-driven action require lack of due diligence? You may be right that it was indeed FOMO, but its not the FOMO that caused the error, it's the lack of DD that comes with FOMO.

I think that's a very good point. Though also think if I was doing a sort of PhD dissertation exploring the different aspects of malfeasance vs. incompetence that FOMO might ultimately be found as some flavor of incompetence. Though also have a dotted line in the tree diagram leading over to some branch of malfeasance as well.

That falls under “incompetence”.

This strikes me as unlikely. A VC does not look stupid for passing on an investment, even one that would've been successful. Do you think 90% of that list "looks stupid" for not having invested in Google? These big name VCs reached their status through vision, extreme due diligence, and of course luck; not from FOMOing into investments.

Based on my experience in SV startups, this is simply not true. VCs pay a ton of attention to what other VCs are doing and do in fact include what other VCs are doing as part of their decision-making process.

Well yes obviously businesses pay attention to what the competition is doing.

And there's no question it's much easier for founders to raise capital, after they've raised capital. But this is because of how our financial system works; it's much easier to loan (exchange for equity) money to someone who doesn't need it, than someone who desperately needs it. It's the same reason a billionaire can take out a loan 100x the size that you could ask for, at under 1/10th the rate.

But you're making a leap here by suggesting that VCs will make an investment and bypass due diligence simply because another VC invested. What I've seen in the startup world is confident founders are more likely to raise money, having received funding makes founders more confident thereby making investors confident, but for any significant sum of money due diligence might be expedited, but not skipped.

Temasek is a Singapore Government fund, so that's taxpayer money it lost to a savage grift. If it wasn't a one-party state where the opposition is suppressed, that might be uncomfortable for the government.

What blows my mind is that SBF is going to investors asking for money in his billion dollar "no you can't look at the books" crypto hedge fund while looking like he's playing hookie from his math class and playing video games during the pitch meeting and the supposedly very serious Wall Street types went "Wow! This guy is amazing! All the money he wants and more!".

It was Sequoia that was impressed by him during the pitch where he was playing League of Legends, not Wall St.

the sequioa people had no idea what he was wearing during the pitch, nor did they know at the time that he was gaming. they could only hear his voice.

>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.

Agree that while "they got swept up in the moment" is a reasonable theory (Hanlon's razor and what not), it also seem very plausible that they knew it was risky but not how risky, and felt like there was still a positive expected value because they would be able sell their coins early (I saw a tweet about how a16z is still up 5x on it's crypto investments because of this[1]).

[1] https://twitter.com/mims/status/1592934095117426689

I suspect that's the most plausible, least "evil" theory. Although that still leaves them knowingly gambling that bigger fools, who they intend to take advantage of, will come along later, so I personally wouldn't consider that "good". But I also won't deny it's a dog-eat-dog world at that level and everyone playing at that level is already aware and taking that into account. In that case it just turns out they were the dogs eaten instead of the victors.

A cynical, but not entirely incorrect, take could be that greater fool theory is a pretty critical part of the VC model. The final fool in that process being when they offload to the public markets.

Oh to be clear, I think that line of reasoning (if that is in fact how they felt) is morally questionable at best.

He did not open his books to investors. https://www.nytimes.com/2022/11/11/technology/ftx-investors-...

“Sam Bankman-Fried’s pitch to investors was not much of a pitch: It was a take-it-or-leave-it offer.

“In meetings to raise money for his cryptocurrency exchange FTX over the last year, the entrepreneur left little room for negotiation, two investors said. FTX was his company, Mr. Bankman-Fried told them, and he planned to run it with little oversight. Interested investors should ‘support him and observe,’ one investor who heard the pitch said.”

Is that the whiff of Red Flag perfume I smell?

A meta reply to several of the commentors here is that we're not talking about JoeBob's Angel Investing who got lucky with his bait shack and has a few hundred thousand more than he knows what to do with to throw around. These are nominally the top tech investors in the world, along with lots of other people who should know what they are doing. Investing in a business in a KNOWN risky and volatile area calls for MORE due diligence, not less. If they didn't do it, we are certainly in the position of trying to figure out the exact distribution between stupid and evil. "Oh, poor us, we asked him to show us the books and he said 'no' and we just couldn't help but throw tens of millions of dollars at him" is bullshit. This isn't hopskotch at the local elementary school. The only even remotely sane conclusion to come to in that circumstance is not only "no", but a NO! yelled back over your shoulder as you flee as fast as your feet will take you.

This is failure so profound that your brain is having trouble wrapping itself around it and you are thinking to yourself, surely they knew what they were doing and I'm just not seeing it? No. Have more confidence in yourself and less in others of supposed authority.

This isn't an isolated incident. Theranos had no product. Many investors invest in founders instead of the idea, thinking that good founders know when to pivot. Occasionally, a founder doubles down on a bad idea and hides that they've figured out it was a bad idea from investors, but it is hard to predict if a founder will do this ahead of time.

That said, my own opinion is that anybody who invests in the crypto space is either a scammer or a rube.

I like a good conspiracy theory, but it's unrealistic to expect that the investors knew about this.

If they did, they would know there'd be a 100% chance that it would blow up.

This is some serious balance sheet depravity. This is not like the CEO buying up companies with a conflict of interest, or billing the company for their private jet. All of that is plausibly legit.

When there are no financial controls at all, money is being looted, it will go down.

VC funds normally don't do due diligence so long as some other entity did it in the round, there is legit oversight on the board etc.. in this case, their own controls failed.

All of the funds who invested in FTX need a serious audit of policy.

This is a dereliction of responsibility, not just a 'bad bet' and so heads should roll. They probably won't though.

Who here is going to start a kickstarter for those books?

I mean - who doesn’t love pop up books?

>And that those reasons are probably not good.

what would those be?

Get in a ponzi while the going is good?

Money laundering.

That's always the "next level" explanation for fraud, but how and why? What did Sequoia get out of this? Who's giving them dirty money?

It isn't necessarily that Sequoia (or any of the other VCs) had dirty money to launder. It could have also been that they wanted to use clean money for unclean purposes.

To be clear: I'm just letting my mind wander in response to your question, not saying that's what happened.

I heard George Soros gave $200m to Sequoia to give to FTX to give to antifa to smuggle yellow cake disguised as children's pronouns.

Money laundering -- whatever. Simple greed explains it.

It could be simple greed by incredibly simple-minded VCs or it could be something worse. Somebody asked what the something worse could be, and I replied.

We are learning more and more about all of this each day. There was massive fraud going on within FTX, and I don't think it's terribly far-fetched to believe that it wasn't contained within the company.

Simple greed explains it -- whatever.