Bankruptcy of FTX, collapse fueled by the negligence of venture capital

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There are many victims of the FTX debacle, including retail investors who lost their shirts and above-the-table crypto companies who suffered reputational damage from the fallout.

Venture capitalists, however, are not included.

In fact, other than former FTX CEO Sam Bankman-Fried and his coterie of charlatans, arguably no one deserves more blame for the current disaster than Silicon Valley investors.

In the 11 days since FTX rival Binance began a run on the cryptocurrency exchange, culminating with its ignominious collapse, it has become undeniably clear that prominent tech-focused venture capital firms skipped basic due diligence and risk mitigation steps while lavishing Bankman-Fried with $2 billion. In doing so, they facilitated FTX’s house of cards, allowing the company to grow its customer base, pay for expensive marketing campaigns, and hand out billions with impunity.

A full account of the abandonment of the venture capital community will take time, but all signs point to inexcusably irresponsible behavior on the part of major investors.

Above all, the available evidence strongly suggests that FTX’s finances were an indecipherable wreck, which should have set off all the alarms this side of the Bahamas.

As Fortuneby Luisa Beltran reported, Bankman-Fried relied on messy, unprofessional and incomplete Excel files showing revenues and profits when soliciting venture capital investments, avoiding traditional records such as audited financial statements.

“These are sales documents and do not provide a clear accounting of how FTX valued its various tokens or liabilities when calculating numbers such as ‘net profits,'” Beltran wrote.

Beltran’s reporting mirrors comments published last week by the New York Times from FTX Product Manager Ramnik Arora. According to TimeArora boasted to a journalist in April about the company’s diabolical approach to convincing potential investors of its financial stability, recalling a case where FTX executives assembled a deck of slides within hours.

While dozens of potential investors were unfazed by FTX’s negligence, some were rightly surprised. Semafor, citing a source familiar with the matter, reported on Wednesday that VC titan Andreessen Horowitz transmitted by investing in FTX in part because its partners did not trust Bankman-Fried. Dennis Kelleher, co-founder and CEO of financial reform nonprofit Better Markets, said FTX executives couldn’t answer tough questions about the company’s operations during a meeting with his organization.

“The many crypto investors, enablers, and legitimators weren’t ‘seduced’ by FTX and SBF as they now claim,” Kelleher, a staunch crypto skeptic, written in a statement Sunday. “They were just willing to accept whatever a billionaire with a ‘vision’ says without doing the most basic duty.

diligence or ask the most obvious questions if they thought it would make them rich.

FTX’s new management has confirmed accounts of FTX’s financial negligence, castigate Bankman-Fried and his team in the bankruptcy court filing on Thursday.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial reporting as has occurred here,” wrote FTX’s new CEO John J. Ray III, a lawyer who oversaw the bankruptcy of Enron.

Venture capitalists compounded their mistakes by allowing FTX to operate with virtually no outside oversight.

Rather than demanding FTX board seats as part of their investment, the venture capitalists essentially ceded corporate governance to Bankman-Fried. Bloomberg reported that FTX’s board of directors had three members: Bankman-Fried, former FTX executive Jonathan Cheeseman and an Antigua lawyer specializing in online gambling.

In his bankruptcy court filing on Thursday, Ray wrote that “many FTX Group companies, particularly those organized in Antigua and the Bahamas, lacked proper corporate governance.” (FTX is headquartered in the Bahamas, with affiliates located around the world.)

Had VCs held positions on FTX’s board of directors, chances are they would have identified what appears to be the core issue behind the company’s demise: the decision to lend billions of dollars in client assets to an affiliated trading arm, Alameda Research, which used the money to make risky and illiquid investments.

“I hope what happens from this Enron-like moment in crypto is that whatever loose standards there were about not giving that level of oversight and governance under the ‘investment, they disappear immediately,” David Pakman, managing partner of the blockchain-focused investment firm. CoinFund, says TechCrunch.

Some venture capitalists claimed to have conducted extensive due diligence, attributing the collapse of FTX to the risk-reward nature of venture capital (see: Capital Sequoia, Temasek). Yet such statements defy the mounting evidence that venture capital has failed from start to finish, making it more of an enabler than a victim of FTX.

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Jacob Charpentier

NEW

In a dead end. Players in China will lose access to Blizzard Entertainment titles, including World of Warcraft and Diabloafter the company chose not to renew a license agreement with a longtime partner NetEase, reported the Associated Press. The breakup ends a 14-year partnership that allowed Blizzard to sell games to Chinese customers and comply with regulations set by the republic’s government. The two parties had negotiated the financial and data-sharing terms of their agreement, which is due to expire in January 2023.

Outlook still cloudy. Amazon Web services are extend hiring freeze in the first quarter of 2023 and asking managers to weed out underperforming employees from overstaffed teams, a source with knowledge of the situation said. Fortune. The cost-cutting steps follow AWS posting its slowest quarter of revenue growth on record, largely due to slowing business spending amid global economic uncertainty. AWS leaders should not order layoffs.

Putting his affairs in order. Cryptocurrency lender BlockFi plans to file for bankruptcy in a few days, the last collateral damage of FTX‘s, Bloomberg reported on Wednesday. BlockFi, which said it held nearly $4 billion in client assets this summer, halted withdrawals and new lending this week amid the fallout from FTX. BlockFi secured a $400 million revolving line of credit from FTX in July and loaned the trading arm of the crypto exchange an undetermined amount.

Ride through the storm. Nvidia job mixed fiscal results in the third quarter Wednesday, beating analysts’ revenue forecasts but falling short of profit projections, CNBC reported. The chipmaker totaled $5.9 billion in revenue, down 17% year-on-year, following a sharp drop in gaming-related sales. Nvidia’s data center business jumped 31%, helping to offset declines in other departments fueled by a slowdown in global chip demand.

FOOD FOR THOUGHT

Shot in Dublin. Silicon Valley isn’t the only tech hub feeling the effects of industry layoffs. The FinancialTimes reported on Thursday that Ireland’s capital of Dublin, an area that has branched out into high-tech jobs, could see a significant drop in its workforce following cuts to MetaTwitter, Bandaged, and other companies. Similar to its California counterpart, Dublin has seen a jobs and housing boom fueled in recent years by an influx of high-tech companies, many of which have made Ireland their European headquarters. However, some local officials and analysts say the start of widespread layoffs illustrates the need to diversify Dublin’s economy.

From article:

The short term hit will mean the loss of hundreds of jobs in Ireland. Still, some here think that less dependence on industry is not a bad thing for a country sometimes dubbed the “Silicon Valley” of Europe.

“Ireland has really bet the farm on the future of technology . . . almost at the expense of everything else,” said Mark O’Connell, executive chairman and founder of OCO Global, a consultancy focused on trade and investment “It’s not nice for people losing their jobs… but for other sectors that have been overshadowed by this, I think it can be a good rebalancing perhaps.”

IN CASE YOU MISSED IT

FTX’s Founder Is Unfolding Before Our Eyes, And It’s Not Prettyby Jeff John Roberts

A crypto security CEO did business with Sam Bankman-Fried and sent a team to the Bahamas. He was shocked by the lack of interest in FTX’s security checks and big ideas: “Maybe we’ll buy Goldman Sachs”by Shawn Tully

3 Reasons Huge Tech Layoffs Don’t Mean A Recession Is Imminent, Says Goldmanby Prarthana Prakash

Elon Musk Picked a Successor as Tesla CEO: Here Are the Best Candidates for the Top Jobby Christiaan Hetzner

Elon Musk says he will replace himself as Twitter CEO ‘over time’ as he defends Tesla’s $55 billion salary packageby Randall Chase and The Associated Press

Musk’s reckless layoffs show ‘he’s not really in control of what’s important’ and threat of bankruptcy is credible, ex-Twitter chairman saysby Bloomberg

Trump may have declared his 2024 presidential bid, but Facebook is still banning himby David Klepper and The Associated Press

BEFORE YOU LEAVE

The ultimate super host. Are you looking for a place to sleep in the Castro? Try the private, sunny room in San Francisco’s home Airbnb founder Brian Chesky. In a bit of money marketing where his mouth is, the head of the vacation rental company has began announcing a guest suite his home, Fortune‘s Sophie Mellor reported on Thursday. Chesky’s announcement comes amid Airbnb’s unveiling of new tools designed to make it easier for landlords to rent their cushions on the app, which now has around 4 million hosts worldwide. In his attempt to serve as a welcoming host, Chesky offered to bake his guests homemade cookies, take them for walks in nearby parks, or take them to the gym. He did, however, issue a clear rule for guests: must accept dogs.

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