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FTX post-mortem: Revisiting signs that all was not right

In retrospect, details about FTX and former CEO Sam Bankman-Fried’s spending habits raise questions about what investors knew and how they justified FTX’s behavior.

When investors piled into FTX in a Series C funding round that valued the company at $32 billion in January, they had plenty of reasons to be hopeful. Last year, the crypto exchange’s revenue reportedly swelled to more than $1 billion and the company was said to have generated net income of $388 million.

But well before FTX’s implosion this week, there was mounting evidence—both public and private—that painted a picture of a company that spent money in unorthodox and risky ways. On Friday, the company announced that it had filed for bankruptcy and that founder and CEO Sam Bankman-Fried had resigned.

  • Mixed finances. FTX’s web of financial relationships is now a central part of the fallout. The company announced that it had filed for Chapter 11 bankruptcy protection alongside related parties such as FTX US, trading firm Alameda Research and around 130 FTX-affiliated entities.

    VC investors were given an audited 2021 financial statement that described relationships between FTX and “related parties” that total more than $250 million, Semafor reported. The report raises questions as to how much investors knew about the financial ties between FTX and other entities.

    FTX’s $400 million funding round in January was backed by the Ontario Teachers’ Pension Plan, Insight Partners, SoftBank’s Vision Fund 2, NEA, Lightspeed and others.

  • Lending and startup investing. Over the summer, Bankman-Fried drew comparisons to legendary financier J.P. Morgan after he stepped in to prevent the collapse of crypto startups Voyager Digital and BlockFi. Voyager received a credit facility for $200 million and 15,000 bitcoin from Alameda. BlockFi secured a $400 million credit line from FTX that also included an option for FTX to buy the company.

    Neither rescue mission appears to have worked. Voyager, which had a deal to be acquired out of bankruptcy by FTX US, is now looking for another buyer. BlockFi halted customer withdrawals this week, citing uncertainty around the situation at FTX and Alameda.

    FTX launched a venture arm with $2 billion last year that was fully funded by FTX and Bankman-Fried, FTX Ventures head Amy Wu told PitchBook at the time. FTX Ventures was willfully hands-off in its own approach to investment oversight: “We don’t mind if you’re anon. We won’t ask you to present in front of an investment committee,” the firm wrote in a launch statement. Wu has resigned from FTX Ventures, The Information reported on Friday.

    Outside of the crypto world, it’s rare for startups to invest in other startups, let alone to make large loans to companies on the brink of collapse. How investors justified this behavior remains an open question.

  • Costly, long-term advertising contracts. FTX spent big on marketing aimed primarily at young male audiences. It purchased the arena naming rights of the Miami Heat NBA team in a 19-year deal that cost $135 million. FTX’s logo also zoomed around Formula 1 tracks on Mercedes. Tom Brady was both a spokesman and an investor. The company’s Super Bowl commercial with comedian Larry David has become a punchline for the crypto exchange’s demise.

    The mayor’s office of Miami-Dade County told The New York Times that it would “explore all legal remedies” should FTX fail to make its payments in the Miami Heat arena deal.

  • Political spending. Bankman-Fried donated nearly $40 million to political candidates in the current election cycle. The money went primarily to Democrats as well as a political action committee called Protect Our Future. Bankman-Fried is one of many crypto leaders who has lobbied for favorable regulation for the industry.

It’s easy to play Monday morning quarterback, but these and other details raise questions about whether FTX investors took adequate steps to protect their LPs’ investments. Undoubtedly, the bankruptcy proceedings will provide more clarity on what investors knew about FTX’s sprawling financials.

Featured image by picture alliance/Getty Images

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