The best venture firms in the world stand to lose billions in the FTX collapse. But one man saw through Sam Bankman-Fried.
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His name is Alexander Pack. Pack planned to invest millions in FTX, until the red flags started to mount.
Pack, managing partner of Dragonfly Capital at the time and currently of Hack.vc, was bewitched by SBF at first. From a new report in Fortune:
“He seemed like one of the smartest people I’ve ever met…He looks different from everybody else; he thinks different from them. So yeah, I was very taken with him. We all were. That’s why we spent so much time and were so interested in it.”
For all SBF’s charisma, warning signs began to appear. The profits of his trading firm, Alameda Research, were dropping bit by bit.
It turned out SBF wasn’t focused on the business he was pitching Pack. Instead, he was working on a new crypto exchange called FTX.
[Pack] was interested in SBF’s new exchange, but Bankman-Fried balked and supposedly told Pack he couldn’t invest in the separate business. Bankman-Fried, he says, haggled, telling Pack he would have to pay more if he wanted exposure. “And that was a big red flag, obviously for our investment,” Pack said.
Pack was right to take this as a huge red flag. A founder who’s distracted from day one isn’t a good bet.
SBF also became increasingly secretive:
“He wouldn’t tell us who [the investors] were because he didn’t want us to talk to them,” Pack said.
Bankman-Fried thought if the seed investors knew he was considering taking venture funding, the seed investors might redeem their money, Pack said.
Pack asked him how he would deal with the situation. “And Sam said, ‘Oh, I probably just won’t tell them at all. You know, we’ll keep it secret. We’ll figure out some way to keep it secret.’”
Pack realized that the FTX founder could easily keep valuable information from him as well. “That was definitely one of the flags,” he said.
Pack is 100% right that if SBF will deceive his existing investors, he’ll deceive Pack too.
What’s more, existing investors should be your biggest cheerleaders! You should be begging prospective investors to talk to them and find out how great you are.
And why would those early investors want to sell if the company was doing well?
In all, we have a picture of a distracted, unscrupulous founder. With hundreds of deals available at any given time, why choose this one?
Pack was considering investing just a couple of million dollars. But he appears to have done more diligence than the giant firms that put in hundreds of millions!
Those big firms have huge teams to diligence a company backward and forward. But they were outmaneuvered by little old Pack.
The lessons for founders and investors are clear.
Founders must be focused and keep their financials tight. And investors should be wary of distracted, secretive, and unscrupulous entrepreneurs.
What do you think of the FTX collapse? Leave a comment below and let me know!
More on tech:
Tiger Global Losing $185 Million a Day
Where Did Sequoia Go Wrong on FTX?
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Photo: FTX CEO Sam Bankman-Fried
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