Venture capital’s role in the collapse of FTX
Yahoo Finance's Alexandra Semenova breaks down how venture capital played a role in the rise and fall of FTX.
Video transcript
[AUDIO LOGO]
[MUSIC PLAYING]
BRADLEY TUSK: You have a $600, $700 series A fund, you can't write $2 or $3 million checks in that case. You got to write $10 million checks, $20 million checks, which means the valuation has to be inflated. And then all across the chain through every successive round all the way through growth equity, everything remains inflated. It finally hits the public markets. And then the markets, usually correctly, slash the value by 60%, 70% because what they got wasn't reflecting reality at all.
ALEXANDRA SEMENOVA: That was Bradley Tusk on how VCs rushed to fund companies. Let's focus in on their role now. It appears justice is finally catching up to Sam Bankman-Fried. The disgraced founder and ex-CEO of FTX is in jail in the Bahamas, a facility described as rat infested and overcrowded. He faces a wave of charges in the US, including wire fraud, conspiracy, and money laundering.
But while he appears responsible for the destruction of FTX, there are others who share the blame. And the story of FTX is also a story of venture capital carelessness. VCs showered the crypto exchange and its founder with money through generous rounds of funding while failing to demand that proper protections were in place. Sequoia Capital, SoftBank, and Tiger Global, some of the world's most sophisticated investors, all made that mistake. Sequoia wrote down an entire $210 million investment in FTX, while SoftBank and Tiger Global also reportedly lost tens of millions of dollars.
VCs and other investors awarded FTX with an estimated $1.8 billion in funding over the last three years. That's according to data from CB Insights. Swelling industry assets in recent years placed pressure on investors to compete for deals, and that furious pace of activity meant that investors may not have been doing proper due diligence. In addition to an unprecedented bull market that led VCs to shell out and destroy billions of dollars in investor assets, venture capitalists also may have made a questionable judgment using an industry process called pattern matching, evaluating startups and founders based on patterns that have been successful before.
In SBF, they saw a young man who was quirky, in a t-shirt, with moppy hair, who went to MIT, someone who fits the profile of other founders. So what might the collapse of FTX teach us in the venture capital industry? The attention that is unraveling has placed venture capitalists and raised questions about their due diligence process as they scramble to allocate capital and make them more cautious in identifying flaws before they fund companies.
It also underscores the problem with an outdated process matching-- of pattern matching, which looks at founders and brings into focus the ability to execute, the ability to execute far more than their pedigree, excuse me. Now we turn to another chapter of crypto, a story called Influencers.