By Max Milano (Tech Writer)
Another year, another batch of tech turkeys. 2022 brought us a bumper crop of massive tech failures and incredibly bad tech investment decisions that have many questioning if this whole Silicon Valley thing is nothing more than a gigantic Ponzi scheme.
A Ponzi scheme powered by the likes of Softbank and Sequoia Capital and their dubious fondness for funding tech startups with shockingly little due diligence or oversight, and in the case of FTX, complete disregard for the laws of financial gravity.
2022's tech turkeys include the usual suspects like Meta, still mortally wounded by Apple's privacy rules, pouring billions of dollars into a Metaverse that no one wants but that may or might not have practical applications in the future.
Another top tech turkey of 2022 nominee, Amazon, sank billions into Alexa and never asked itself if it should.
Then Elon Musk out Eloned himself in 2022 with his disastrous Twitter purchase. A purchase so insanely ill-conceived and ill-managed that rumors of the whole thing being a Saudi-backed plot to quelch freedom of speech in the Middle East are starting to make more sense because, from a business point of view, the Twitter purchase so far has been a masterclass in how to crater a once fairly respectable tech company in the fastest time possible, and at the cost of several billion dollars of other people's money, plus some 14.5 billion in Tesla stock, sold at a time when Tesla shares are tracking downward (having lost 46% of their value so far this year).
But even Musk has yet to beat the FTX collapse, a monument to sheer fiscal irresponsibility from people who are paid to know better. Or are they doing exactly what they set out to do? To take the money and run? That's why the winner of this year's Top Tech Turkey goes to FTX & Alameda Capital and its VC enablers at Sequoia Capital.
Welcome To The Top Tech Turkey Of 2022. Buckle Up. You're In For A Bumpy Ride!
The FTX & Alameda Capital Bust
They finally did it. As if Theranos or WeWork wasn't enough, reckless tech venture capitalists (oops!) did it again with FTX. But this time, they may have finally broken the very system they thrive on and left everyone wondering if this Silicon Valley thing isn't a giant Ponzi scheme after all.
The FTX fallout is so monumental in its lack of oversight and essential due diligence from tech venture capital firms that some are left wondering if this implosion wasn't some pre-planned Iran-Contra-style scheme to keep assistance flowing to Ukraine in case of a major midterms defeat or even a ruse to usher in government oversight into the shady world of crypto exchanges.
Since a lot of digital ink has been spent on this subject already, we’ll limit our focus to just a couple of the most egregious examples of lack of due diligence, disregard for risk management, and turning a blind eye to what was, in essence, the dictionary definition of a Ponzi scheme.
But wait, there's more. The FTX drama also includes rampant nepotism, straight-up graft, plus a "hack" that siphoned the last millions of FTX customers' money left after the collapse to presumably fund the guilty parties' escape to a place without extradition treaties. But anyone left holding the bag can’t say they weren’t warned!
FTX’s Chief Executive Officer Described Their Operations As A Textbook Ponzi Scheme Six Months Before The Crash (To Bloomberg!).
Back in April 2022, FTX's Chief Executive Officer and then crypto billionaire Sam Bankman-Fried spoke to Bloomberg’s opinion columnist Matt Levine on the Odd Lots podcast to talk about how FTX was making money in the world of "decentralized finance," aka "Defi." Sam Bankman-Fried explained that they relied on "yield farming." Matt asked Sam exactly how yield farming worked and, to his surprise, was treated to what could only be described as the textbook definition of a Ponzi scheme. After some nervous laughter, Matt didn't mince words and responded:
"I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business, and it's pretty good."
Matt rightly pointed out that what FTX called yield farming didn't require any economic purpose. I.E., people were putting money into FTX's black box, so others also put money in, and then the "smart" ones put money in with the expectation of a pump and dump in the near future and not being the last fool standing with nothing. To this, Sam Bankman-Fried (SBF to his friends) muttered something akin to "it may be a Ponzi scheme in your world, but in my world, it isn't. You just don't understand how crypto works." Ok, Sam.
SBF And Alameda Research Were Using FTX In An 'Infinite Money' Scheme.
Sam Bankman-Fried owned two main businesses: FTX (crypto exchange) and Alameda Research (trading firm). These two firms were supposed to be run independently from each other, but in practice, the relationships between the two entities were a lot more incestuous than that, to say the least. And we're not even saying this just because Caroline Ellison, the 28-year-old CEO of Alameda Research, was in an alleged polyamorous relationship with Sam Bankman-Fried and other FTX company officers or because she routinely gave interviews where she cavalierly announced that she "used very little math" at her job and that Alameda Research's strategy was to use "a lot of elementary school math" and "being comfortable with risk." She also didn't shy away from announcing things that went directly against the laws of financial gravity, like not bothering with setting up stop losses because get this, they were "not a great risk management tool" (because stop losses are for boomers, presumably?).
And these weren't even Alameda Capitals' biggest corporate sins. One question was, where did FTX end and Alameda Research start? Or were they just the same entity all along? Financial statements obtained after the fallout have revealed that Sam Bankman-Fried secretly transferred billions of FTX customer funds to Alameda Research to cover their trade losses. But wait. There's more.
Alameda Research owned assets that amounted to $14.6 billion. Their single largest assets were $3.66 billion of "unlocked FTT" plus a $2.16 billion pile of "FTT collateral." This meant that 40% of Alameda Capital's assets were made up of FTT tokens. The issue is that FTT tokens were controlled and managed by FTX. This meant that FTX could "print them out of thin air." Since Sam Bankman-Fried owned both companies, he could easily loan or sell these tokens to Alameda Research at highly favorable rates, if not outright gifting them indirectly through other companies via loans that never got paid back. Basically, giving tokens from himself to himself to balloon Alameda's asset value for basically nothing and using this perceived value to obtain VC funding rounds.
Where Were The Adults In The Room? Or Were They In On It All Along?
Everyone knows Silicon Valley is littered with the craters of fast-imploding startups that grew too fast without having the fundamentals in place. This is all fueled by the sugar rush of easy VC money in the sums of hundreds of millions of series A funding based, more often than not, on some abstract idea about "disrupting" X industry and less (very much less) on the business's fundamentals.
As a matter of fact, VCs in Silicon Valley have demonstrated a preference for funding startups with no clear path to revenue over more "boring" startups with transparent balance sheets growing at a "slow" pace.
One has to wonder if series A rounds have become the product itself, and if these startups with dodgy fundamentals are just the necessary vehicles used to lure late-round investors in order to cash out and make a profit off the earlier rounds. Guess who's left holding the bag?
Theranos famously faced a big pass from VCs that valued a peer-reviewed scientific analysis of its fundamentals. But that didn't prevent it from still acquiring 1.4 billion of funding from non-scientific VC firms and others like Rupert Murdoch and the Cox Enterprises and even Walgreens, who should have known better but perhaps looked the other way based on fear of "missing out on the next big thing."
So, history repeats itself with FTX leaving us yet again with a pair of "contrite" twentysomething CEOs that in the recent past shouldn't have been trusted with the family SUV, let alone their customers' billions.
So, billions of dollars of customers’ and investors’ money down the drain later (and in Theranos' case, lives put at risk), there's only a tiny sliver of justice. Theranos' CEO has just been given an 11-year sentence in Federal prison, and the FTX top brass is allegedly under house arrest in the Bahamas and will probably face stateside charges (if they don’t manage to skip town with all that “hacked” money). Are these the corporate "job creators" we insist on rewarding with tax breaks?
Where did we go wrong? Is it all due to bad parenting? Did all the baby yoga and participation trophies get to their millennial heads and lead them to believe that the laws of financial gravity did not apply to them?
Or Is There Something More Sinister At Play?
At least in FTX's case, there's ample evidence that Sam Bankman-Fried's parents are at least partially in on the grift since the Bahamian authorities have disclosed that Bankman-Fried and his associates own at least 19 properties in the Bahamas with an estimated value of nearly $121 million purchased with FTX funds and that his parents, Stanford University law professors Joseph Bankman and Barbara Fried, are reportedly listed as signatories of one or more of those luxury beach houses.
But where are the VCs at Sequoia Capital now? The ones who famously clamored, "I LOVE THIS FOUNDER," "I am a 10 out of 10," and "YES!!!" after sitting through a Zoom call with Bankman-Fried while he played League of Legends while discussing a series B funding round.
Where are the VCs that showered FTX with $210 million in funding without even looking at FTX's balance sheets? After FTX's collapse, Sequoia Capital apologized and informed investors that their position in FTX had been marked down to zero and that they would now work on improving their due diligence. A bit late for that.
Is anyone at Sequoia Capital going to get punished for this bad bet that could have been easily avoided had someone bothered to do the appropriate risk assessment and, God forbid, look up FTX's balance sheet to discover a gaping 8-billion-dollar hole?
Most probably not, because perhaps these are not bad bets after all. Since the name of the game in Silicon Valley for a long time now has been to over-hype tech startups with a series A, then push the founders to use the money to "grow fast" by any means possible, and then repackage the whole thing out to new investors in the B and C rounds, so that the original investors get their money out plus huge profits back from the series A. It's the latecomers on later rounds that are left with the hot potato.
This has been "best practice" for a while now. Still, as the word gets out and when VC firms that have backed infamous imploding startups like Theranos and FTX start attracting lousy press, they go into full spin mode to try to control the narrative, both on the uber-hyped way up, and particularly on the sad and “contrite” way down.
One of the biggest culprits of this PR game has been Sequoia capital, with a series of now-deleted sugary fluff pieces about how Bankman-Fried was the second coming of J.P. Morgan. But the internet doesn't forget. You can read one of the fluff pieces here. Spoiler alert. It aged like milk.
A lie repeated a million times starts to sound like the truth. That is the mantra nowadays coming out of VC firms in Silicon Valley. Because when the series A IS the product, VC firms must defend their false narrative at all costs. Until the truth gets out, and there's a run on the bank, or the free money dries up due to raising interest rates, leaving the taxpayer and later less well-connected investors holding the bag (again) during the next big tech bust. But hey, that's capitalism for you, socialize the losses because we're too big to fail and who wants "pesky" regulations, particularly in the brave new crypto world anyway?
Max Milano is a Tech writer and the author of Hollywood Expats.