FTX and The Spiritual Pain of Institutions
Recessions are when people typically feel pain. Losing money is more akin to emotional pain than physical pain. When you lose your money because an institution (that was supposed to hold trust) collapses, I'd liken it more to spiritual pain. As Junbin once referenced:
"Printed on the back of every United States Dollar, “IN GOD WE TRUST”, have evolved to nothing but meaningless words that define our blind trust towards the inept politicians the public elects."
With the collapse of FTX, an important institution in the crypto world went under. The public has loss trust in the leaders of even the centralized and regulated exchanges. In FTX they trusted, and now they feel the pain.
I asked my roommates to explain what happened and here's the gist I got:
When Luna (a crypto currency) crashed, Alameda (a hedge fund started by Sam Bankman-Fried aka SBF, the CEO of FTX) lost a lot of money. It needed to fill the holes in its pockets and stop bleeding, and so they took on leverage. Conveniently this debt was provided by FTX, which is also run by SBF. FTX is a centralized exchange for cryptocurrency. FTX provided this capital by giving out consumers' money and then they "hedged" the bet by using their own token as collateral. Because they control the supply of this token, they essentially control its price as well. When Alameda recently crashed , so did FTX and their customers' money... which isn't FDIC insured by the way. This was gross neglect, as SBF had explicitly stated that FTX did not engage in giving out their consumers' money without their permission.
Among the investors in FTX are Paradigm, Sequoia Capital, Thoma Bravo, SoftBank, Ribbit Capital, Insight Partners, Third Point, Lightspeed Venture Partners, Altimeter, BOND, NEA, Coinbase Ventures, Willoughby Capital, 40North, Senator Investment Group, Sino Global Capital, Multicoin, the Paul Tudor Jones family, Izzy Englander, Alan Howard, VanEck, Hudson River Trading, and Circle.
That's a long list of some of the most impressive investors in venture and private equity. Someone sent me a really really funny memo by Sequoia about FTX.
Welcome to the beautiful world of VC. Where an investor like me trusts Sequoia to diligence and on the occasion, we run into this. I have a job offer at Insight Partners so I'm keen to ask the MD's about this situation (or maybe I shouldn't).
Anyhow, Sequoia recently took down an article that they had previously *updated* on FTX. Here's the link of the article I somehow copy pasted before they took it down... for the curious.
Regardless, the markets are shitting itself and it's not only crypto. Fintech layoffs are happening left and right -- Stripe laid off 14% of its employees, Chime laid off 12%, and Meta not only laid off ~13% but also lost incredible market share. Free money and the Fed + Wall Street yelling about the incoming recession... means that we will have a recession to. Economies are efficient at gauging prices for what people think they are and prices seem like they should be going down. I recently pulled out my stake in crypto. Maybe this is the dumb investor in me pulling out when things bottom, but things are going to get bad and I'd rather keep what I have and put it in a place I can understand (like food). At this stage in my life though, I think I'd rather invest in myself than in markets or for any real monetary return. A couple grand spent on world travel and other forms of learning might have a larger ROIC than a passive couple hundred bucks returned through an index fund.
I hope the VCs are feeling the pain... not just on their balance sheets but on their spirit. People will once again ask of their institutions, in God do we trust or is His will the invisible hand that builds it up to let it fall.
On another note, I'm excited to be building a new venture now. While Series A and beyond are significantly down in valuations and will have lots of dry powder, pre-seed and seed folks are rather un-cyclical investors. A unit-economic profitable business that is ready to scale and kill it while the rest of the world is panicking is going to be lots of fun. I've always to be the one building through a recession, like a military CEO. Obviously I'm not making many hard decisions like laying off over 10% of my workforce and slashing costs everywhere possible, but nevertheless it's going to be significantly different going forward than the boom of the last decade.