Sam Bankman-Fried and Those Who Believed in Him

This past June, two partners at the venture capital giant Sequoia did a podcast on VC investing in the midst of a bear market. The markets were swooning and crypto oriented assets were not immune. A year earlier, Sequoia had invested $215 million in the cryptocurrency exchange FTX,  at a valuation of over $32 billion, and the interviewer wanted to know how FTX and its founder Sam Bankman-Fried were holding up.

Michelle Bailhe, 29 years old, and one of the two partners at Sequoia responsible for FTX, said this ( to see it live, go to minute 46 in the podcast link above):

It’s tough. The SEC has hired 50 new crypto enforcement lawyers. It’s a bummer of course. There are things that should be prosecuted but what I struggle with is that it's hard for crypto founders, many who want to do the right thing and will only be sued if they do something wrong rather than being told that this is the framework and here are the rules that apply to you. 

We live in a world of gray areas where they (the founders) don’t really know. Am I a commodity, am I a security, should I register as an exchange and what am I exchanging? These are legitimate questions but the really big bummer is that it doesn't matter. If you hurt people you will get sued for it and it will not end up well. That is why we did a podcast with Sam and his New Year resolution was stay ahead of the rules – just follow the rules even though there is no clarity, do the right thing so you don't end up in these situations. 

What a bummer indeed. What was once $215 million is now worth zero. Because as it turns out, the rules of financial markets do apply to Sam Bankman-Fried, not to mention the hundreds of employees who had their savings locked up in the now bankrupt outfit. What is truly astonishing though is how Sequoia – perhaps the best regarded of the Silicon Valley VC firms, with a track record that includes Apple, Google and Instagram – and other experienced investors could get caught in Bankman-Fried’s web of illusion in the first place. 

I do not know much about crypto, but I have observed a fair number of financial blow ups in the past 20 years and there is a simple way to describe what happened to FTX: there was a run on the bank. SBF, as he liked to be called, is 30 years old and he styles himself as a new era financier, with his short pants, crazy hair and a love for souped up video games, but he was, at his root, not all that different from the middle aged men in suits at Bear Stearns and Lehman: he borrowed short and lent long. Namely he took crypto monies that clients deployed on his platform –  and that could be recalled at a moment’s notice –  and invested in longer dated hard to sell instruments. As long as he held the confidence and trust of the market, all was well and fine. But when people wanted their money/crypto back, he had nothing to give them. Now, he has gone from being worth over $15 billion to owing a lot of people a lot of money. 

Perhaps we should not be that surprised that Bailhe, the Sequoia partner behind their FTX stake, was frustrated that lawyers at the SEC were going to scrutinize SBF and that it was unfair to hold such a visionary to the rules and frameworks of modern day finance. 

She is 29 years old. Her professional arc is impressive: before Sequoia she worked at Google, and her first job coming out of Brown – where she was a commencement speaker – was at McKinsey. No doubt she is as smart as they come. But it is also true that in 2008, she was in high school. This, more or less, is her first experience in a market panic, and while she may have thought that FTX represented the future of money, she missed the fact that FTX was only as good as SBF’s ability to keep spinning his tall tales.

Until yesterday, if you googled around the web for an origin story of how Sam Bankman-Fried and FTX came to be, the longest, most in depth piece to be found was on Sequoia’s website. It runs 10,000 words, a commissioned story produced by a former tech journalist based in San Francisco. 

SBF, as he is widely known, is presented as a financial messiah on a mission to make billions of dollars in order to give away billions of dollars and, if he has to spend all day and night in front of a computer screen in an office park in the Bahamas – catching cat naps on his ever present bean bag – so be it. The piece is titled Sam Bankman-Fried Has a Saviour Complex. Maybe You Should Too. It is slavish and beyond parody. Surprisingly, the piece stayed up on Sequoia’s website for quite some time, as the FTX saga played itself out.

Midday yesterday,  Sequoia finally took it down. Instead of a gauzy picture of SBF, with red arrows of light shooting out of his afro – there is this announcement. 

FTX.COM is a cryptocurrency exchange. It offers derivatives, options and volatility products, tokenized stocks, prediction markets, leveraged tokens and an OTC desk.  Update: November 9, 2022 A liquidity crunch has created solvency risk for FTX and its future is uncertain.

The only part worth quoting is the section where SBF makes his pitch for cash to Sequoia partners in a Zoom call – a little more than a year ago. That a firm of such stature and repute would allow its portfolio managers to be portrayed in such a manner — on their own website! — is pretty remarkable. 

Suddenly the chat window on Sequoia’s side of the Zoom lights up with partners freaking out. I LOVE THIS FOUNDER typed one partner. I am a 10 out of 10 pinged another. YES!!! exclaimed a third. What Sequoia was reacting to was the scale of SBF’s vision. It wasn’t a story about how we might use fintech in the future, or crypto, or a new kind of bank. It was a vision about the future of money itself – with a total addressable market of every person on the planet. We were incredibly impressed, Bailhe says. It was one of those your hair is blown back kind of meetings.

Perhaps more impressive was that during the entire meeting, SBF was video gaming League of Legends.

Back to the story: 

Not only that says Arora (a colleague of SBF’s who was sitting next to him during the meeting) but League of Legends is the kind of multiplayer online battle arena video game where every four minutes or so tactical maneuvering is punctuated by ten second of action known as a gank – gamer slang for gang killing – where you and your team gang up on an enemy. “There is a fight that happens basically,” says Arora, who was watching over SBF’s shoulder as he answered the final question from Sequoia, “and I am like this guy is in a fucking gank.”

It's a cliche, but in this case it's true: you can’t make this stuff up. You could make a pretty good movie though, assuming Jonah Hill is available. A pudgy 30 year old guy in shorts, playing a video game shakes down the most respected VC outfit in Silicon Valley for $215 million in about an hour.  

It's too early to tell what the final outcome will be. Recent reporting suggests that SBF was funneling customer assets from FTX, to SBF’s trading firm – Alameda Securities. That is the kind of conduct that sends you to jail, as anyone of those 50 crypto enforcement lawyers at the SEC that Bailhe was complaining about, will tell you. 

The other Sequoia partner who was interviewed on the podcast was Shaun Maguire, who would seem to be a bit older than Bailhe, in his mid 30s. On Sequoia’s website he presents himself as an entrepreneur who has founded five companies and has a PhD in quantum gravity. 

I like high-IQ founders. But even more important to me is someone that’s just irrationally motivated, he is quoted in his corporate bio. 

At the time of the podcast, this past July, markets were in turmoil, crypto in particular. A few weeks earlier, FTX had signed an agreement to buy BlockFi, a lender of crypto currency that was in financial straits. 

The host of the podcast had a question – and a pretty good one in retrospect. 

In such a volatile market, does it make sense for FTX to act like a savior for these types of risky companies, she asked politely.

Maguire scoffed. I quote his response at length, but to get the true essence of the absurdity of him comparing Sam Bankman-Fried to Warren Buffett, you should go to the podcast link, and pick it up at 49 minutes. Regarding Maguire, and his colleague on the podcast, it is the language that gets you. Lots of likes, bummers, meandering sentences, cloudy historical recall – remember: these are partners at the country’s leading VC firm.

Anyway, back to Maguire, answering the question: 

I saw a good tweet about this today – that the best analogy is Berkshire Hathaway. Like Sam and FTX are the Berkshire Hathaway of this space because Berkshire in 2008 bailed out Goldman Sachs and like one other bank, I can’t remember the details. Those were amazing moves – if the entire banking industry collapsed if Goldman would have fallen then Berkshire would have lost everything and we all would have been doomed. Berkshire was in this situation where it helped protect the entire global economy and they actually made money while doing it. They got good terms and invested in super high quality assets that were facing a perfect storm of doom and they stopped the doom. Its similar with FTX.  

A lot of these lending protocols (BlockFi) have a great book of assets but have a short term liquidity crunch so it makes a ton of sense to give your stamp of approval and your brand trust and also make a great financial deal for you – this has been happening since the beginning of  banks, it's been other banks and governments that step in to stop bank runs. Crypto does not have the same tools so I am very grateful to Sam. 

I can’t wait for the movie.