Professional investors consider it a badge of honor that they didn’t fall for FTX's marketing hype.
Some investors weren't so lucky. Among those snagged by the FTX debacle are some of the largest and most sophisticated investors in the crypto space: Sequoia Capital, SoftBank, Tiger Global and BlackRock. Collectively, these venture capitalists poured billions of dollars into FTX.
Angel investor Maja Vujinovic and venture capitalist Yida Gao saw the warning signs and proceeded accordingly. While others were going gaga over FTX, they did a hard pass on the firm and/or its native FTT token.
Why’d they do it?
On Jan. 5, Vujinovic, CEO of OGroup, a blockchain and artificial-intelligence advisory firm, and Gao, founder of early stage VC firm Shima Capital, joined Crypto DeFined and provided some insight into that very question. They also offered a few tips to startups interested in catching their eye in a positive way.
Five takeaways from the Vujinovic and Gao interview (edited for clarity):
- Too many VCs invested in FTX without doing their homework. “What SBF did very well was what I consider their 'red velvet rope' strategy,” said Gao. “You put up a red velvet rope, say, ‘Hey, everything’s amazing inside. There’s a big party. If you want to get in, these are the terms.’ Because supply was very limited, there was a lot of demand. Some investors took that bet.”
To be fair to those investors. Gao said there are other reasons the smart money decided to invest in FTX: "Typically the companies that look a little different, the founders who act a little different, (are the ones) that achieve the massive returns." Because of that, Gao said, "investors put a blind eye to some of the more traditional, typical diligence items.”
In Gao's case, he had a chance to invest in FTX’s native token, FTT, when it was selling for about 20 cents. But he passed because Gao said he saw an “inherent conflict of interest” between Alameda as a market maker and FTX as an exchange.
Vujinovic said she passed on FTX because of Sam Bankman-Fried's "character," including his seeming ability to dismiss risk. Additionally, Vujinovic said his fast-talking manner and his self-perception as the smartest guy in the room did not convey so well. Vujinovic said she also passed on investing in BlockFi because “when I said to (CEO) Zac (Prince): ‘Hey, you should start hiring risk management,’ he said, ‘Hey, basically you don’t know what you’re talking about.’’
BlockFi and FTX didn’t respond to a request for comment.
- VCs should talk about their mistakes with FTX. To prevent a repeat of the FTX debacle, Congress could dialog with VCs to learn more about how they research an investment. By engaging directly with VCs, Vujinovic said Congress could learn a lot about FTX specifically, and the crypto world more broadly: "Why wouldn’t they question the VCs and say, ‘Hey, could you show us the actual due diligence you did on FTX?’“ she mused, adding: There are some basic things that were missing in their FTX due diligence, she notes, and "that makes me question the stability of some of the largest VCs in this space.”
- Bear market aside, it’s not necessarily a bad time for start-ups to seek funding. Gao believes there’s “still a lot of dry powder for funds raised over the last 12 to 18 months,” and venture-capital firms still need to invest that money.
“VCs who came in here (and) wanted to invest in a lot of companies… got burned and have left,” Gao pointed out. “The investors that are staying in, who have been in it for a while, are going to be able to do better because the competition is lower now. Same is true for founders. There are fewer founders in the space relative to last year.”
- Vujinovic and Gao are on the lookout for nimble, trustworthy startups to back. “In this bear market, it’s (the start-up) founders who can be very scrappy… who understand how to really get a lot (done) with a little who are going to do well,” said Gao. He is currently focused on web3 gaming and cross-chain infrastructure projects.
Gao added that there is still an "ample amount of opportunity in this space. We’re actually spending a lot of time thinking about incubating companies in this bear market. It’s easier to hire top talent, and you can have longer runways with the capital you’ve raised." Why all this matters: "There’s more time to build the unicorns of the next cycle.”
As for Vujinovic, she's keeping an eye peeled for startups that understand the importance of risk management. “Without trust, this industry is not going to get back on its feet very quickly because it lost trust with a lot of people,” she said. “Trust starts with risk management.” Vujinovic is interested in funding on-chain games, decentralized energy projects and ventures that have the potential to disrupt social media.
- Professional investors have a role to play in promoting trust and responsibility as it concerns crypto. The way Vujinovic sees it, crypto has great potential to change everybody’s life: "In the next few years, the biggest challenge will be how to unlock the benefits of this technology … while also balancing the real risks that this technology poses. Blockchain can be good and bad. Crypto can be prone to scammers. There’s a lot of responsibility on VCs, there’s a lot of responsibility on regulators, there’s a lot of responsibility on those of us who have been in this space for a while to advocate (for) a good use of technology.”