How Did So Much ‘Smart Money’ Get Tangled Up in FTX?

For much of this year’s rolling crypto crash, Sam Bankman-Fried and his FTX Exchange — until last week the second largest in the world — looked like the white knight charging in to save the day. 

The 30-year-old crypto kingpin offered to prop up peers reeling from the collapse, including bankrupt crypto banks Voyager and Celsius as well as BlockFi, another exchange. But last week, when Bankman-Fried could not raise $8 billion to fill a massive hole in his own balance sheet, critics could be forgiven for wondering whether he was trying to save himself all along — and why investors didn’t notice. 

There was certainly plenty of smart money along for FTX’s wild ride — notably Sequoia Capital, SoftBank, and Tiger Global, among the most sophisticated investors in the world. Sequoia said it has written down its entire $210 million investment, and SoftBank is reported to have lost $100 million. Tiger Global lost about $38 million, according to an individual familiar with the situation.

Millennium Management’s Izzy Englander and Brevan Howard’s Alan Howard were also counted among FTX’s gold-plated investors. Even the Ontario Teachers’ Pension Plan said it ponied up $95 million, though a statement on its web site did not say whether it was writing the investment off. 

All told, investors plowed $1.9 billion into FTX since 2019, according to PitchBook.

“We are in the business of taking risk,” Sequoia wrote in a letter to its limited partners, saying it had written down its FTX investments to zero. Sequoia also said it does “extensive research and thorough diligence on every investment we make.”

But critics scoff at that notion. “The many crypto investors, enablers and legitimizers weren't ‘seduced’ by FTX and SBF [Bankman-Fried's nickname]. They were just willing to accept whatever a billionaire with a ‘vision’ said without doing the most basic due diligence or asking the most obvious questions if they thought it would make them rich,” Dennis Kelleher, president and CEO of Better Markets, said in a statement Monday. Kelleher said his firm had been offered “seven figures” by FTX, but his team met with FTX and Bankman-Fried, and “when we asked tough factual questions that were not answered satisfactorily, it really didn’t take much to see that there wasn’t much to that ‘vision’ other than hope, smoke, and the desire to make a quick buck (in fact, lots and lots of bucks).”

In the end, FTX was not too big to fail. After learning that the exchange was using customer deposits to trade in a related hedge fund vehicle called Alameda Research, the investors who’d bankrolled Bankman-Fried’s climb refused to bail him out. 

That left FTX Group, with its numerous associated companies, no other choice but to file for bankruptcy on Friday — almost a year to the day after crypto prices peaked. Since then, Bitcoin has fallen from $69,000 to under $17,000, including a 20 percent drop on the FTX news last week.

Tiger Global first invested in FTX in a Series A round in 2019, which raised only $8 million, but the hedge fund would go on to invest in two more rounds. Others in the Series A round included SoftBank, Lightspeed Venture Partners, Temasek, and Binance Labs. (Binance — now the largest crypto exchange — backed out of a deal to buy FTX last week, leading to the bankruptcy.)

Crypto began to take off during the pandemic, and by July 2021, FTX was able to raise $1 billion, with additional brand name investors including Dan Loeb’s Third Point Ventures, Coinbase Ventures, and Thoma Bravo.

At that time, Englander and Howard also got in on the action. (Spokespeople for Englander and Howard declined to comment.)

In October, FTX went to the well again, raising another $420 million that would put the firm’s value at a stunning $24.5 billion. Tiger Global was in that round, as was Lightspeed, Temasek, and a new hedge fund — Senator Investment Group — along with dozens of others.

The biggest fundraising round occurred in January, just as crypto was beginning its descent. According to PitchBook, the $500 million Series C, which valued FTX at $32.5 billion, attracted investors SoftBank, Lux Capital, Tiger Global, Lightspeed, and Temasek, among others.

“With venture investing, there’s always a chance an investment goes to zero,” Coinbase tweeted in response to the FTX debacle. Third Point declined to comment, while spokespeople for Lightspeed, Lux Capital, Senator, SoftBank, Temasek, and Thoma Bravo did not provide a comment by press time. 

On paper, FTX looked good. Its revenue reportedly soared more than 1,000 percent in 2021 to $1.02 billion from $89 million the prior year, according to a leaked investor deck that CNBC obtained. FTX claimed net income of $388 million last year, up from just $17 million a year earlier, according to CNBC. 

However, potential investors who asked pointed questions were told to “take it or leave it,” according to the New York Times.

Other skeptics say they risked losing their jobs by talking their firms out of investing in FTX. 

“FTX caused me real pain last year. For my day job, I was able to kill an investment in the company, but doing so almost cost me big,” tweeted an anonymous account called The Kook Report that talked about the difficulty of going against the “cult of personality.” 

“It's like the telephone game,” said Herb Greenberg, the former journalist and short seller analyst who is now a senior editor for Empire Financial Research. “What I learned doing research and dealing with [hedge funds] is that while everybody gives lip service to originality and research, in the end they prefer to be where their pals are, assuming THEY did the work,” he tweeted.

As Better Markets’ Kelleher believes, due diligence may have gone by the wayside for many firms during peak VC fever in 2021. Tiger Global, for one, was criticized that year in a blog post by Everett Randle, a partner at the Founders Fund, for doing so many deals that its due diligence was lacking. Tiger Global has denied the accusation.

There were plenty of warning signs about FTX. A 2019 lawsuit brought in federal court against FTX, Alameda, Bankman-Fried, and other executives by an entity called “Bitcoin Manipulation Abatement LLC” accused the defendants of manipulating crypto markets, according to a recent NBC report, which said “numerous cryptocurrency traders” lost $150 million as a result. The suit was dismissed with prejudice, indicating a deal was struck, after the company sought to have it thrown out, NBC reported.

In September media reports that FTX was on the cusp of another big capital raise — suggested to be $1 billion — failed to materialize.

Bankman-Fried, FTX, Alameda Research, and other executives are now reportedly under investigation by the Securities and Exchange Commission and the Department of Justice. California regulators have said they are also probing the firm’s collapse. 

“I'm really sorry that we ended up here,” Bankman-Fried tweeted last Friday.