Sequoia Capital lost $115 million investing in FTX. Partner Alfred Lin says they’d do it again.
From Bloomberg:
“I looked at the work we did 15 different ways,” Lin said Thursday at the Bloomberg Technology Summit. “We probably would have made the investment again.”
Sequoia’s business lies in trusting founders and taking calculated risks, he said, and the lesson learned is sometimes the investments won’t deliver.
“It stinks,” he said. Then again, the $115 million investment Sequoia lost on FTX was just 2% to 3% of its global growth fund, he said, adding that the firm was “still very excited about the concepts of crypto.”
Alfred Lin is a legend. But here’s why I think he’s wrong…
A venture capital firm investing a substantial sum should do due diligence. They owe it to the people who trusted them to invest their money.
Even a cursory diligence process should’ve uncovered huge problems at FTX. Those problems would easily be enough to stop any investment in the company.
From a CNBC report:
[New FTX CEO John] Ray, who helped shepherd Enron through its own bankruptcy, minced no words about the state of the company or the behavior of the former executive team, describing it as one of the worst examples of corporate controls he’d ever encountered. It was a damning remark from someone who has 40 years of legal and restructuring experience.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
The losses for investors may reach as high as $8 billion. But with nonexistent or deficient accounting, auditing and disbursement systems, it will take Ray and his forensic investigators “some time” to uncover the truth.
VC’s with a strong diligence process log into a company’s Quickbooks. They make sure the numbers add up.
They also comb through bank statements, looking for unusual expenses. The odd employee mansion would certainly qualify.
The big firms that invested in FTX, like Sequoia and Softbank, have large teams of people and massive budgets. They can easily afford a few accountants and lawyers to dig through financials.
I know firms that do this when they’re investing $500,000. Surely Sequoia’s nine digit investment should trigger at least the same level of diligence.
Without diligence, a VC’s investors have no security for their money. The firm also gets a reputation as light on diligence, which will have every huckster beating a path to their door.
So what happened to Sequoia and all the other top firms that put their money with this criminal?
They succumbed to FOMO, just like everyone else. After all, if they took time for diligence, they might lose out on the deal!
FOMO is the ultimate killer of investment returns. It gets us rushing headfirst into rotten investments, incinerating our capital.
We have to be willing to miss deals. We have to maintain standards.
Since an angel investor like me doesn’t have the right to deeply diligence a startup’s books, I partner with lead investors I trust. I know their diligence process is thorough and I can rely on it.
It’s okay to make mistakes, in investing or anything else. But we have to learn from them.
The lesson of FTX is that no matter how special a deal seems, always kick the tires.
Do you agree with Alfred Lin? Leave a comment and let us know!
The next blog will be on Wednesday, July 5. Have a great holiday weekend, everyone! 🎆
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