On 22 September last year, a fascinating article appeared on the website of Sequoia Capital, one of the leading venture capital firms in Silicon Valley. (It trades under the motto: “We help the daring build legendary companies.”) The article in question was a breezily readable piece about a tech wunderkind who had recently flashed on to the company’s radar screen. His name was Sam Bankman-Fried (henceforth known as SBF) and he was the founder of Alameda Research, a hedge fund specialising in cryptocurrency, and FTX, a spectacularly growing and profitable exchange that enabled holders of crypto assets to trade efficiently and freely.
Today, that glowing tribute to this young genius is nowhere to be found on Sequoia’s website. Why? Because only the other day a New York jury convicted him of fraud and conspiracy to launder money in a crushing verdict that could keep the lad in prison for decades – and perhaps also whet the appetite of US authorities for bringing the crypto sector to heel. In the end, about $8bn of FTX’s investors’ money was missing. The verdict has also mightily embarrassed the top-tier venture capitalists who were mesmerised by SBF’s ambitious fantasies – to the point where the lead sucker, Sequoia, felt obliged on 10 November to bury the online evidence of its delusions by removing the profile from its website.
Fortunately, the internet has a very good memory in the shape of the Wayback Machine, which had thoughtfully archived Sequoia’s glowing testimonial for SBF for our delectation. And, boy, does it make for delightful reading.
What it reveals is that Sequoia was slow to catch up with SBF, but when it did it fell heavily for his shtick. He had originally started by creating a hedge fund – Alameda Research – which was making money from crypto arbitrage, ie the different prices at which cryptocurrencies were sold in different jurisdictions. But because trading cryptocurrencies across frontiers was a hassle-intensive business, SBF had the idea of creating a crypto exchange, FTX, that would make such trading seamless. And from the word go, it boomed. The Sequoia people had looked at crypto exchanges but concluded that all of them had “regulatory issues”. FTX, though, was “Goldilocks-perfect. There was no concerted effort to skirt the law, no Zuckerbergian diktat demanding that things be broken. And, yet, FTX wasn’t waiting to get permission to innovate. The company had based itself offshore precisely because it aspired to build an advanced risk engine that would support all sorts of hedging strategies. SBF himself seemed to be bred for the role of crypto exchange founder and CEO. Not only had he been a top trader at a top firm – and, thus, the ideal customer – but both his parents were lawyers.”
So the researchers organised a Zoom call between SBF and some of Sequoia’s senior partners. Apparently, it went like a bomb. “SBF looked relaxed as he answered questions, talking, as he usually does, in complete paragraphs about topics of extreme complexity. Ramnik Arora, FTX’s head of product and another ex-Facebook engineer, remembers the meeting clearly: ‘We’re getting all these questions from Sequoia toward the end. He’s absolutely fantastic.’” So they asked SBF for his “long-term vision for FTX”.
His vision was for “FTX to be a place where you can do anything you want with your next dollar. You can buy bitcoin. You can send money in whatever currency to any friend anywhere in the world. You can buy a banana. You can do anything you want with your money from inside FTX.”
At which point, the transcript of the Zoom chat function revealed that the eminent Sequoia partners went bananas. “‘I LOVE THIS FOUNDER,’ typed one. ‘I am a 10 out of 10,’ pinged another. ‘YES!!!’ exclaimed a third.” After that, it seems to have been only a formality for Sequoia to invest more than $200m in FTX, an investment that the company has now written down to $0.
So how did Sequoia fall for it? Fomo (fear of missing out) is part of the explanation. As tech commentator Om Malik puts it: “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.” Venture capital, the financial engine that drives Silicon Valley, is chronically vulnerable to outbreaks of the disease. In The New New Thing, Michael Lewis’s book about the first internet boom, he tells of a venture capitalist who killed himself after Jim Clark, the founder of Netscape, refused to allow him to invest in the company.
In that context, Sequoia’s failure to invest in Facebook obviously rankled and may have led to wishful thinking. After SBF’s conviction, Alfred Lin, the guy who led the company’s investment into FTX, said that “the verdict confirmed that SBF misled and deceived so many, from customers and employees to business partners and investors, including myself and Sequoia”. FTX’s collapse “had prompted Sequoia to extensively review its due diligence process”. Translation: stable door securely locked… until next time.
What I’ve been reading
Twitter quitter
Tech writer Benedict Evans has been on Twitter since 2007. He’s written a blogpost explaining why he is leaving.
War on TikTok
An extraordinary blogpost by Scott Galloway on the widening gap between how western political establishments view the Israel-Hamas conflict and how young people see it.
Money makers
A marvellous essay by Sherry Turkle on the ideology of Silicon Valley.
