Within the common business phrase ESG, which stands for Environmental, Social and Governance, one of the letters should have sounded the alarm about FTX.
It is the letter G which stands for Governance or Good Governance Practices.
This could mean a diverse C-suite and investor pool that welcomes people from different social and economic backgrounds as well as ethnic and gender minorities around one table. Put another way, it means avoiding one-size-fits-all among those who write big investment checks so business owners and entrepreneurs can see their ideas and visions flourish.
Unfortunately, there weren’t enough G’s in the check signature of fallen FTX founder Sam Bankman-Fried, who stunned the entire industry without asking anyone the hard questions.
stand on effective altruism
Big investors have been impressed by Bankman-Fried’s bravura, “I know what I’m doing” and “I’m different” attitude.
Bankman-Fried took a stance nourished by the contemporary philosophy of effective philanthropy pervasive in Silicon Valley and at prestigious universities. EA’s ideology emphasizes that “the best can be achieved by choosing to make as much money as possible while trying everything”. Earning and giving is the basic mantra of the community.
The FTX debacle shows that people who sign checks are motivated by people who look like them, who went to the same schools as them, who have the same socioeconomic background as them, who share the facts. If you are different, you are almost out of luck.
The problem with this is that this approach creates a lot of bankman frieds. The crypto industry works with them.
After this fall, the crypto space closed ranks and the message that came out is that one bad apple doesn’t mean other apples and trees are bad. Under this rule, Bankman-Fried is an isolated case, a single bad actor, and the show must go on as if nothing happened.
But what does the crypto industry need to challenge itself? Falling over ten bankman-frieds at the same time?
Elon Musk calls for “ineffective altruism”.
Visionary entrepreneur Elon Musk, CEO of Tesla (TSLA) – GET THE FREE REPORT He pointed the finger at the issue when he poked fun at venture capital firm Sequoia Capital, one of Silicon Valley’s kingmakers and a key investor in FTX.
“SBF is ineffective philanthropy but he thought he would say he was in effective philanthropy. Simple misunderstanding,” the billionaire said on Twitter, referring to Bankman-Fried’s initials.
Here is a partial report of a meeting between Bankman-Fried and Sequoia Capital in July 2021. FTX wanted to raise funds and Sequoia felt the opportunity to do business with Wonder Boy was too good to pass up.
The report is based on an article by Sequoia-commissioned journalist Adam Fischer. The article, published last September, was published on the company’s website under the headline “We Help the Daring Build Legendary Companies.” It has since been removed.
“Some of the exchanges that we met and looked at had regulatory issues, some of which were already public,” Michele Baillehe, a “young gun” at Sequoia Capital, told Fischer. “And then there was Sam.”
FTX and Bankman-Fried were “Goldilocks-perfect” for Sequoia.
“We had a great meeting with Sam, but I remember Alfred’s last question [Lin] asked: “Everything you build is great, but what is your long-term vision for FTX?” Fischer recounts. Lynn is an experienced partner at Sequoia.
“Back then, SBF told Sequoia about the so-called super app, ‘I want FTX to be a place where you can do whatever you want with your next dollar. You can buy bitcoins. You can send any currency to a friend. You can send money to the US from anywhere in the world. You can buy a banana. Within FTX, you can do anything with your money.’”
Fischer continued, “All of a sudden, the chat window pops up on Sequoia’s page on Zoom with partners. “I love this founder,” typed one partner. “I’m 10 out of 10,” pinged another. did. ‘YES SIR!!!’ shouted the third.
Risk management is the biggest loser
The die was cast from the start. Bankman-Fried preached to the faithful. The question seemed more like how much Sequoia would write on the check.
Nobody asked Bankman-Fried the difficult questions. Here are some of those the company might ask:
– How do you plan to build the infrastructure for your global app?
– What will make your platform compelling enough for people to switch to another?
Last but not least:
– Is there just one scenario where what you are selling us will fail?
An honest answer to this last question would reveal the potential risks to the company. But at that day’s meeting, risk management suffered big losses. Everyone seemed happy and eager to be in the same boat.
In October 2021, Sequoia signed a large check for FTX valued at $25 billion. Three months later, that valuation rose to $32 billion. We wrote on TheStreet on February 1, 2022, the day after the announcement:
“The news will no doubt raise questions about the formation of a bubble in the cryptosphere: FTX Trading, one of the largest cryptocurrency exchanges, posted a $7 billion valuation gain in the three months following the cryptocurrency market crash.”
“While FTX’s new valuation is a sign of VC investors’ confidence in the cryptosphere, it will not comfort critics who see a crypto bubble.”
Sequoia did not immediately respond to requests for comment.
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