Tech Money Fueled FTX’s Rise. The Crash Exposes Deep Flaws in VC
Among the last people to realize that the cryptocurrency exchange FTX was a financial time bomb were the company's own investors. On Nov. 7 — as troubling signs began to emerge, customers were withdrawing money and the founder was tweeting unconvincingly that “assets are fine” — a broker of startup stock made inquiries to FTX's venture capitalists and other shareholders to see if anyone wanted to sell, according to correspondences seen by Bloomberg. No one did.
A transaction probably wouldn't have gone through anyway, given how quickly FTX hurtled toward bankruptcy after that, but the fact that the offer was declined indicates how ill-equipped investors were to assess the company's toxicity. This highlights a long-running flaw in venture capital: Technology investors are drawn to the idea of funding the next PayPal, but many lack the expertise needed to evaluate the legal and financial risks associated with so-called fintech businesses.
There's a legacy of venture-backed fintech scandals and collapses. They include Lending Club and OnDeck Capital's shady loans, Greensill Capital's risky debt, LendUp's allegedly predatory payday loans, Fast and Xinja Bank's unsustainable business models and Reali's economically fragile mortgage product.
In the case of FTX, Sam Bankman-Fried built a pair of successful crypto exchanges similar to Binance or Coinbase Global Inc.'s but with an immensely risky twist. He owned a separate company, Alameda Research, that was conducting trades using money customers deposited into FTX, according to the Wall Street Journal. On top of that, Alameda's assets were built on a token sold by FTX, according to Coindesk.
The Coindesk article, published last week, was the first alarm for many. It prompted a
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