IEX 196: FTX - New Disasters, Same Lessons
The latest tech blowouts at FTX stands tall amongst the other tech industry woes, but are the lessons still the same?
The past weeks have been like the downslope of a roller coaster ride - stomach churning and hair raising in equal parts. Facebook aka Meta shed 11,000 people. Twitter had it's own Musk induced bloodbath, losing half its workforce. Masayoshi Son's Vision Fund lost $10 bn in a quarter, and none of those came close to being the biggest blow out bad news for Tech in November. No, that came from the collapse of FTX and the fall from grace of SBF aka Sam Bankman-Fried. He was worth over $20 billion at the start of the year. He was hobnobbing with the Clintons, Katy Perry and Tom Brady in summer. FTX was among the top 2 crypto exchanges, and sponsoring stadiums, and signing mega endorsement deals. But in a span of barely over a week it all collapsed to nothing.
In comparison, the Meta layoffs seem tame. But this is a defining moment for Zuckerberg. Facebook has only seen growth till now, but this a big pivot on the metaverse. You must have seen the ads about virtual experiences and real life impact. But its valuation which peaked at above $1tn in late 2021, is now under $300bn. Meanwhile at Twitter, Elon Musk is forcing a fork - you're either hardcore Twitter or you're out. About half of Twitter's employees decided they weren't hardcore enough. Whatever the outcome, the next few months are likely to be a wild ride for Twitter. Masayoshi Son's Vision Fund had even recently burnt its fingers with WeWork, but this is a fresh round of losses thanks to investment in DoorDash and other companies . And now he owes $4.7bn personally to Softbank, and will be stepping aside to focus on Arm.
But of course the big story remains the FTX collapse. A lot has been written about this - from the shenanigans between CZ, the owner of Binance, and SBF, to the now discovered lack of governance, and poor decision making behind the scenes. SBF also ran Alameda research, a crypto trading firm and there was little or no governance in how money flowed between them. SBF used FTX funds for Alameda's investments, which were made in crypto businesses that were listing on FTX. Not only setting up a conflict of interest but also creating an extremely unstable structure that was unable to withstand a run. This also extended to his partners such as Sequoia - where he invested money in funds, as they in turn invested in FTX. (They weren't the only ones). As you can expect once that Pandora's box is opened a swarm of unsavoury news comes pouring out.
At the end of the day, the takeaways are largely the same. Here are my top 4:
(1) Any new breakthrough technology can create an apparent money making machine, which will draw all manner of 'get rich quick' opportunists. I recently spoke with a colleague about attending crypto events and I asked her what was the percentage of 'change-the-world' people vs 'get-rich-quick' people. She said the ratio was low enough, but the worst of the lot were get-rich-quick people masquerading as change-the-world people. Bankman-Fried's interview with Vox is crushingly cynical - he openly expresses that he said a lot of "dumb shit" when talking about being ethical, and how instead he believes in classifying the world into winners and losers.
(2) The smartest and most glib amongst them will reel in a bunch of institutional investors who are chronic FOMO sufferers. Whether it's SBF, or Adam Newmann (WeWork), the stories are the same - large, institutional funds that somehow fall prey to the charisma of the individual and forget all that they know and preach about governance and checks. In a now-deleted infamous Sequoia Capital blog, there is talk about how the investors were blown away by the fact that SBF was playing a video game during the pitch. At times like this it makes me think that the reason AI will take over is not because it's better than humans, but it is less likely to be so vulnerable to these basic human flaws. This piece references the excellent word 'bezzle' coined by Galbraith, in the context of the Vision Fund's losses.
(3) Warren Buffet's words always come back periodically. When the tide goes out, you can see who's been swimming naked. As the tide goes out of the market, the exposed aren’t just the crypto bros, they also include all the SPAC listings - including genuinely good technology companies such as Babylon. Remember, the technology industry has lost $7.4 tn of value this year.
(4) There is always a tendency to blame technology for this kind of upheaval - right from the dot.com bust - but look closely: it's not the tech but the financial system behind that that is almost always the problem - in a perpetual cycle of over valuation and correction. Blaming the tech is like blaming the railroads for the robber barons. Blockchain, crypto, tokens, and NFTs will all survive and flourish in time but many business models designed to turn a fast buck will come and go in the meanwhile. But by all accounts, there may be a hiatus in the crypto stampede. A crypto winter, or if the naysayers are to be believed, a crypto ice-age.
And if you want to read about it, here’s a bunch of pieces to wander through. The last one is revealing and disturbing in equal measure.
How Binance pulled the rug out (NYT)
Meanwhile, there's a hack at FTX (WSJ)
The rise and fall of Bankman-Fried (WSJ)
Bankman-Fried profile (Wikipedia)
FTX held 1bn liquid assets against 9bn liabilities (FT)
SBF - many issues behind the scenes (FT)
FTX and SBF invested $45m in Sky Bridge, which in turn listed on the FTX: (FT)
SBF - May 2022 interview (FT)
SBF a BBC Profile (BBC)
Is this a Crypto contagion? (Economist) Or a Crypto ICE Age? (Medium)
Some benefits of a crypto slump - environment, chip shortage, banks’ costs.
SBF - a look at Alameda research
FTX blowout (FT)
FTX impact on crypto industry (Economist)
How seasoned investors missed the red flags (Bloomberg)
The rippling impact of the FTX crash
Binance’s CZ (Chengpang Zhao) looks to pick up the pieces (FT)
Alameda Research created many risks for FTX (FT)
Possible prosecution for SBF (WSJ)
Is this the end of crypto?
Inside story of SBF and FTX (WSJ)
SBF explains himself (or tries to) (Vox)
Other Reading
Data & Football: What the data from the group stage tells us about World Cup chances. Good news for Spain and England, thanks to xG. (The Economist)
Borderless World (Cup): 59 players at the World Cup have chosen to play football for a different country from the one they were born in. (Quartz)
Gamification - thoughts on how to manufacture fun. Streaks, levelling up, points, and leaderboards are common in many products and service experiences. Note - a lot of the current models have inbuilt roadblocks - unintended consequences abound. Be warned. (Economist)
Information: Why do candidates use election denial in the US? Answer - because fake news works! (Bloomberg)
Data for Good: A truly innovative use of crowdsourced smartphone data - the accelerometer data when aggregated from users crossing bridges provides cues as to the need for repairs for the bridges. Given the recent history of bridges collapsing in different parts of the world, this seems particularly timely. (MIT Technology Review)
Healthcare: Dr. Dilip Mahalanobis' simple innovation of using oral hydration was a big deal in healthcare but he spent most of his life outside the limelight. (FT)
Innovation 2022: What are the best inventions and innovations of 2022? This is Time Magazine's list. (Time)
Reinventing cars: A ‘second living room’, over the air updates, and a software driven experience. Is this the future of cars? (Economist)