Sam Bankman-Fried’s pitch to investors wasn’t really a pitch: it was a take or leave offer.
During meetings to raise money for his cryptocurrency exchange FTX over the past year, the entrepreneur left little room for negotiation, two investors said. FTX was his business, Mr. Bankman-Fried told them, and he intended to run it with little oversight. Interested investors should “support and observe him,” said one investor who heard the pitch.
They responded by giving him $500 million early this year, valuing the privately owned FTX at $32 billion.
This week, Mr. Bankman-Fried met with investors again, but with a different tone. FTX had collapsed overnight, putting billions of dollars in customer funds at risk, triggering a slew of government investigations, and plunging crypto markets into chaos. He was sorry, he said. He messed up. Without a bailout, FTX could fail.
It was a humbling fall for 30-year-old Bankman-Fried, who had built a reputation as an iconoclastic prodigy who could multitask effortlessly and slept on a beanbag chair in the office. Still, more than 80 investors went along with his vision, pouring nearly $2 billion into FTX in just two years.
Now investors are also being criticized for letting Mr. Bankman-Fried oversee so little. It was the most dramatic example in recent history of what happens when so-called visionary founders get a lot of money with few obligations.
The events showed that even the top investors — whose money has evaporated in FTX — can miss the mark greatly, said Kevin Werbach, a professor of business at the University of Pennsylvania’s Wharton School.
“You can look like a genius taking successful big bets,” he said, “but sooner or later you’re going to crash spectacularly if you weren’t really diligent.”
On Friday, facing an $8 billion cash shortfall and struggling to raise funds, FTX filed for bankruptcy. Mr. Bankman-Fried stepped down as CEO. The Justice Department and the Securities and Exchange Commission are investigating whether FTX has misappropriated client funds to support a separate trading firm, Alameda Research, which was also founded by Mr. Bankman-Fried.
FTX’s list of investors includes powerful and well-known investment companies: NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock and Thoma Bravo.
Some of FTX’s investors declined to comment or did not respond to requests.
Four FTX investors, who declined to be identified, said they were shocked by the company’s sudden collapse. They said they had thoroughly examined the company’s financial records, which showed that it was a healthy, growing company that provided an easy-to-use platform for people to buy, sell and store crypto. And they were completely in the dark about FTX’s possible self-handling with Alameda, they said.
Investing in FTX gave them some of the hottest start-up in an emerging industry that promised to grow as big as smartphone apps or the internet itself. Many investors had expressed their support for the deal. Sequoia even published a radiant profile of Mr. Bankman-Fried on its website.
Now the deal represents a big black eye.
Paradigm, a crypto-focused venture fund that put $278 million in FTX, said in a letter to its own backers on Wednesday that the investment was likely worthless. Sequoia said in a statement it estimated its $213 million investment in FTX at $0. The venture capital arm of the Ontario Teachers’ Pension Plan, which put $95 million into FTX, said in a statement, “Not all investments in this early-stage asset class are performing as expected.”
FTX’s lack of oversight also left investors unaware of what happened this week when Mr. Bankman-Fried tried to find a rescue plan at the last minute.
“The full nature and magnitude of this risk is unknown at this time,” Sequoia wrote. FTX’s liquidity shortfall “will take many months to fully understand,” Paradigm said.
Mr Bankman-Fried, who did not immediately respond to a request for comment, had never made it a secret that he was pushing the tradition with his nose.
In an interview with The New York Times in April, Ramnik Arora, one of FTX’s top executives, described a video meeting between Mr. Bankman-Fried and partners at a top corporation last year. During the meeting, Mr. Bankman-Fried gave a well-received presentation while simultaneously playing a video game.
“He played League of Legends at the same time throughout the partner meeting,” said Mr. Arora.
Prior to another investor meeting, Mr. Arora, the investors asked Mr. Bankman-Fried to put together a slide deck. The entrepreneur put the presentation together in about a few hours.
“There’s no formatting anywhere, fonts are everywhere,” said Mr. Arora. “You can just feel discomfort — on both sides — because the investors are saying, ‘How the hell are we going to see a card game that clearly no one has spent time on?'”
Still, investors were not offended. For years they had abandoned the deals-making practices that gave them control over a company and protected their investments. It was a way to get the best deals as money poured in from all over the world to fast-growing start-ups. Last year’s overlapping investment mania in cryptocurrencies, stocks and start-up valuations reinforced the trend.
Some FTX investors saw the company as a way to dive into cryptocurrency investments without buying volatile tokens. Others saw FTX as a safer bet than Binance, one of the largest crypto exchanges, since FTX pushed for a regulatory regime in Washington, while Binance has come under fire for its secrecy and circumventing financial regulations around the world. .
Above all, the investors emphasized that venture capital is designed to take large risks that often fail.
But even by the frothy standards of 2021, Mr. Bankman-Fried of investors extreme. Despite raising $2 billion, he remained the majority shareholder of the company. No investors have joined FTX’s board of directors, which consisted of Mr. Bankman-Fried, an FTX employee and an attorney. (An investor advisory board had no functional control over the company.) The company has not disclosed to investors the nature of its dealings with Alameda Research, Mr. Bankman-Fried’s separate crypto trading operation.
Mr. Bankman-Fried was so averse to outside input that investors who ventured to suggest that a more experienced executive lead the company would likely be banned from future funding rounds, one investor said.
In an April interview with Bloomberg, Mr. Bankman-Fried accused venture capital investors of making deals based on fear of missing out, rather than financial models. “As if all models are made up, right?” he said.
In return, investors showered Mr. Bankman-Fried with fawning praise. Orlando Bravo, whose company, Thoma Bravo, invested $150 million in FTX, said at a conference in September that despite his misgivings about the overall crypto industry, he believed that Mr. Bankman-Fried was “one of the best entrepreneurs.” whom he had met.
The Sequoia Profile explained that Mr. Bankman-Fried “lives his life by a calculus of altruistic impact.” During a video call with the FTX founder, according to the profile, Sequoia’s partners reacted excitedly to each other in the chat. “I LOVE THIS FOUNDER,” wrote one partner.
This week Sequoia replaced the article with an update. “A liquidity crisis has created a solvency risk for FTX and its future is uncertain,” it said.
At the end of Mr. Bankman-Fried’s conversation with investors this week, several accused him of hiding details about FTX’s dealings with Alameda Research and asked for more information, one person in the conversation said. He dodged the questions and ended the conversation.
