Post summary (feel free to suggest edits!): Linkpost to an article by Rohit Krishnan, a former hedge fund manager. Haydn highlights key excerpts, including one claiming that “This isn’t Enron, where you had extremely smart folk hide beautifully constructed fictions in their publicly released financial statements. This is Dumb Enron, where someone “trust me bro”-ed their way to a $32 Billion valuation.”
They mention that “the list of investors in FTX [was] a who’s who of the investing world” and while “VCs don’t really do forensic accounting” there were still plenty of red flags they should have checked. Eg. basics like if FTX had an accountant, management team, back office, board, lent money to the CEO, or how intertwined FTX and Alameda were. The author has had investments 1/10th the size of what some major investors had in FTX, and still required a company audit, with most of these questions taking “half an hour max”.
(If you’d like to see more summaries of top EA and LW forum posts, check out the Weekly Summaries series.)
As an early stage VC, checklists we and others use typically cover all the basics such as: who is on the board, what requires board consent, what is the past history of investor updates, what conflicts of interest exist and mechanisms to resolve them etc
All things that should have, if press reports are accurate, provided ample red flags prior to an investment, even before getting into forensic accounting etc.
Fear of missing out on a competitive round can drive normally savvy investors to skip or discount results of the normal dd process.
Your work and background seems valuable and impressive, and is far superior to me in VC. I would like to learn more from you.
As a comments on your statements taken in isolation:
what requires board consent, what is the past history of investor updates, what conflicts of interest exist and mechanisms to resolve them etc
It is surprising if an early-VC looked at things like board, board consent. I expect the main thing they would look at is team.
Certainly in tech, boards are usually not respected, even in later larger companies, much less a small early stage project. Are you conflating board and board control, with founder/lead team dynamics?
All things that should have, if press reports are accurate, provided ample red flags prior to an investment, even before getting into forensic accounting etc.
In my opinion, most projects would bomb this, including Apple, Facebook, etc. (modulo the claimed romantic/sexual relationships, and even then that’s not clear).
Fear of missing out on a competitive round can drive normally savvy investors to skip or discount results of the normal dd process.
I understand the most negative narratives of the VC investment in FTX (“I LOVE THIS FOUNDER”).
At the same time, it’s not clear it’s ex ante terrible. It was clear what they were investing in, and that was almost no control or visibility into the organization.
Most elite/top/successful founding teams want exactly the arrangement SBF achieved, because VC control or influence is seen as (strongly) net negative. If this is true, this cannot be a signal or red flag.
I do agree in this post as the likes of Theranos, WeWork and Now FTX is like a pattern of some sorts. It’s like we as a society is unable to have multiple people thinking effectively in the world of money that is why utopian visions easily sweeps the wide swats of the business landscape..
A similar pattern in some sense is how bad ideas in former USSR and Germany where either communism or nazism got easily inserted to the larger community through lies.
Human OS is seemingly ill equipped when promises of a better future is narrated by highly ambitious, but fraudulent individuals. Only few can really see through the future or discover the gaps that will lead to horror.
Post summary (feel free to suggest edits!):
Linkpost to an article by Rohit Krishnan, a former hedge fund manager. Haydn highlights key excerpts, including one claiming that “This isn’t Enron, where you had extremely smart folk hide beautifully constructed fictions in their publicly released financial statements. This is Dumb Enron, where someone “trust me bro”-ed their way to a $32 Billion valuation.”
They mention that “the list of investors in FTX [was] a who’s who of the investing world” and while “VCs don’t really do forensic accounting” there were still plenty of red flags they should have checked. Eg. basics like if FTX had an accountant, management team, back office, board, lent money to the CEO, or how intertwined FTX and Alameda were. The author has had investments 1/10th the size of what some major investors had in FTX, and still required a company audit, with most of these questions taking “half an hour max”.
(If you’d like to see more summaries of top EA and LW forum posts, check out the Weekly Summaries series.)
As an early stage VC, checklists we and others use typically cover all the basics such as: who is on the board, what requires board consent, what is the past history of investor updates, what conflicts of interest exist and mechanisms to resolve them etc
All things that should have, if press reports are accurate, provided ample red flags prior to an investment, even before getting into forensic accounting etc.
Fear of missing out on a competitive round can drive normally savvy investors to skip or discount results of the normal dd process.
Your work and background seems valuable and impressive, and is far superior to me in VC. I would like to learn more from you.
As a comments on your statements taken in isolation:
It is surprising if an early-VC looked at things like board, board consent. I expect the main thing they would look at is team.
Certainly in tech, boards are usually not respected, even in later larger companies, much less a small early stage project. Are you conflating board and board control, with founder/lead team dynamics?
In my opinion, most projects would bomb this, including Apple, Facebook, etc. (modulo the claimed romantic/sexual relationships, and even then that’s not clear).
I understand the most negative narratives of the VC investment in FTX (“I LOVE THIS FOUNDER”).
At the same time, it’s not clear it’s ex ante terrible. It was clear what they were investing in, and that was almost no control or visibility into the organization.
Most elite/top/successful founding teams want exactly the arrangement SBF achieved, because VC control or influence is seen as (strongly) net negative. If this is true, this cannot be a signal or red flag.
I do agree in this post as the likes of Theranos, WeWork and Now FTX is like a pattern of some sorts. It’s like we as a society is unable to have multiple people thinking effectively in the world of money that is why utopian visions easily sweeps the wide swats of the business landscape..
A similar pattern in some sense is how bad ideas in former USSR and Germany where either communism or nazism got easily inserted to the larger community through lies.
Human OS is seemingly ill equipped when promises of a better future is narrated by highly ambitious, but fraudulent individuals. Only few can really see through the future or discover the gaps that will lead to horror.