SBF Saga & “The Process” Breakdown

Sam Bankman-Fried, the founder of FTX and Alameda Research, has been found guilty and is likely going to spend time in jail. There is no shortage of hot takes and explainers about SBF and his crimes. However, when I think about SBF and FTX, this story—more so than that of Elizabeth Holmes and her saga—is a reminder of the systematic breakdown of the startup and venture funding “process.”

Forgive me, if this sounds like you have read this before —- because you have. 

Last year, when I wrote about FTX (and compared it to Enron), I pointed out that when the market is hot, FOMO beats diligence. “When you have deal fever and a severe case of FOMO, you choose to believe anything that helps you convince yourself to do the deal,” is what I wrote then, and my thoughts remain unchanged.

Even the best venture investors are not immune to falling prey to FOMO, willing to throw caution to the wind. Sequoia Capital, which has literally helped build Silicon Valley, is a perfect example. It is unclear how in-depth the diligence process was, or how Sequoia convinced themselves to invest a whopping amount of money in a company without a board. The company’s revenues and growth rate were so staggering that they prompted a firm like Sequoia to discard caution.

Their eagerness to do this deal is evident—you just have to look at this little tidbit in Going Infinite, where author Michael Lewis notes that SBF took $200 million from Sequoia for FTX and, in turn, decided to invest $200 million from Alameda Research in one of Sequoia’s funds. For as long as I have covered Silicon Valley, I have been told time and again that Sequoia is a rare Sand Hill Road partnership that is very selective about who it allows to invest in its funds. And yet, they had no problems accepting a crypto hedge fund of limited provenance.

For those of us old enough to remember, Sequoia famously missed out on investing in Facebook (read David Kirkpatrick’s The Facebook Effect for the gory details). SBF was, perhaps hastily in hindsight and definitely incorrectly, compared to Mark Zuckerberg. “It is hard not to wonder how that episode colored their judgment.

No matter how you look at it, this was a failure of the ‘process’ of fiscal and corporate responsibility. It was a reminder that, although Silicon Valley is about disruption, it is still shackled by its own dogmas. “His eccentricities were viewed as evidence of competence, instead of as either neutral or red flags,” Dan Primack, a veteran of the VC industry, wrote in his newsletter. Nothing has changed, nor is it likely to. As Primack correctly noted, “FOMO continues to outweigh FOF (fear of fraud).” There will be another SBF or someone like that. Because he will look the part. 

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Highly Recommended:

Bloomberg produced a 107-minute documentary that gives you a good overview of the entire Sam Bankman-Fried sage, minus the sentencing. It is worth watching.

Reviewed:

Michael Lewis got played by his protagonist, writes Fortune’s Jeff John Roberts, who himself was played by SBF and called him the new Warren Buffett. His review of ‘Going Infinite’ is worth reading. Molly White, a well-regarded crypto skeptic, doesn’t pull any punches in her review either. Scott Aaronson, whose blog I enjoy tremendously, has an alternative take on Michael Lewis’ book and SBF, where he asks, “What if?” Worth Reading!

I didn’t read the book — I listened to it as an audiobook, and all I can say is this: it is not Lewis’s finest work. And I have not changed my mind — SBF knew what he was doing and there is no justification for going over the line!