How Sam Bankman-Fried Seduced Blue Chip Investors

It was a surprise phone call from an old university professor that propelled private equity investor Orlando Bravo to become one of the most prominent and vocal supporters of Sam Bankman-Fried and his crypto trading firm FTX.

The call came from Joseph Bankman, a Stanford University law and economics professor who had taught Bravo in the late 1990s. Back in mid-2021, Bravo’s $122 billion private equity firm Thoma Bravo opened an office in Miami, the city where Bankman’s son Sam had just paid $135 million for a 19-year naming rights deal with the local NBA team.

Bankman told Bravo his son is seeking guidance on philanthropic projects in Miami to further his mission of “effective altruism.” It was only after they spoke that Bravo learned that Bankman-Fried was also in the process of raising a $900 million Series B funding round valued at $18 billion with a who’s who of investors including Sequoia Capital, BlackRock and Apply SoftBank. He quickly called Bankman back for an introduction and a path into the deal, which progressed quickly and would be the largest fundraiser in crypto exchange history.

When Bravo and a partner Tre Sayle began due diligence for the funding round, they were surprised by FTX’s numbers. The two-year-old start-up, run by a relatively small team of young traders, was on track to generate over $200 million in operating profit for the year, unprecedented margins for an early-stage growth company that typically does would lose money. Bravo was overwhelmed. Thoma Bravo invested more than $125 million in the round in June 2021 and became one of FTX’s biggest supporters.

Thoma Bravo is just one of the blue-chip investors, including Singapore state-owned fund Temasek, Tiger Global and the Ontario Teachers’ Pension Plan, whose backing helped lend credence to Bankman-Fried’s business empire before it collapsed this week due to Concerns suddenly collapsed over his ties to his own trading group, Alameda Research.

Since its launch in 2019, FTX has raised $1.8 billion and was last valued at $32 billion. Its shareholders include some of the world’s most respected hedge fund managers, including Alan Howard of Brevan Howard Asset Management, Izzy Englander of Millennium Management and the family of Paul Tudor Jones.

Now that FTX has filed for bankruptcy, their investments appear to have been completely wiped out. Investors like Sequoia, SoftBank and Paradigm, which was co-founded by former Sequoia partner Matt Huang, have zeroed out their stakes in the company, wiping out hundreds of millions of dollars in value.

These investors are faced with tough questions from their own clients about how they got it so wrong, why they didn’t request seats on FTX’s board, and if they ever really understood how the company makes money.

It shouldn’t end like this. Investors said that the eccentric 30-year-old founder of FTX, who presented himself as the acceptable face of a Wild West industry, was able to stem from people from more traditional finance backgrounds’ desire to invest in cryptocurrencies, as well as their fear , missing out, capitalizing on the next big thing.

California-based Sequoia, an early supporter of Google, PayPal and WhatsApp, invested $210 million in FTX and went on to become one of Bankman-Fried’s biggest cheerleaders.

In September she released a long and flattering piece about the FTX boss, who said the firm was wooed by his “vision about the future of money itself – with a fully addressable market for every person on the entire planet”. His “intellect is as great as it is intimidating,” gushed the profile, which was deleted this week as Sequoia zeroed its investment in FTX.

“We were seduced,” said a top investor who has invested heavily in FTX. In hindsight, he thinks that when his firm interviewed Bankman-Fried ahead of the investment, it “should have focused more on details about the crypto exchange’s governance and financial controls” — rather than its founder’s snowball profile. Investor due diligence at FTX, he added, is only as good as the questions its executives asked the young entrepreneur, whose company was being feverishly courted by the world’s largest funds and banks at the time.

The investor said he had some reservations during initial discussions with Bankman-Fried, including the way the entrepreneur was “acting” and feeling that he believed everyone else in the financial world was “idiots.”

“I wouldn’t have touched him,” he added, but it wasn’t his final decision.

A venture capitalist who invested in FTX said that due diligence did not reveal the high leverage in the deal – investors were only shown the quarter-end balance sheet and the leverage was not on it.

Mainstream money managers have scrambled to delve into cryptocurrencies to attract clients interested in the sector. The pressure is so intense that an executive at a major financial institution said his firm even briefly discussed buying FTX as part of an internal push to “get bigger in crypto.” But the idea was scrapped because of the “highly speculative nature of the business model and the underlying assets,” he added.

It’s common in venture capital for investors to ask for a seat on the board of a portfolio company, but at FTX none of the investors had board representation.

After the quick rounds of negotiations, FTX’s only board members were Bankman-Fried, FTX chairman Jonathan Cheesman, who later left, and a single outside director, an attorney based in Antigua and Barbuda, the company’s headquarters.

Orlando Bravo would become one of Wall Street’s most vocal supporters of Bankman-Fried and an advocate for cryptocurrencies and FTX. He believed the company had the potential to oust some of the world’s largest banks, a future championed by its founder. Bankman-Fried even stated last year that buying Goldman Sachs is “not at all out of the question” if FTX becomes the largest crypto exchange.

Multicoin Capital, a crypto hedge fund, told its investors this week that its exposures are numerous. Its funds had been invested in FTX and the company also used the company to trade crypto. Multicoin was able to withdraw a quarter of its total assets from FTX before suspending withdrawals, but told investors this week that about 10 percent of the fund’s assets are stuck.

The firm was also an active trader of the FTT token, which appears to have been part of FTX’s demise. It sold the FTT tokens during a slump this week, but the fund was unable to withdraw the assets. Multicoin said Solana, a Bankman-Fried-affiliated cryptocurrency, is its largest single investment position. The token’s value dropped as Bankman-Fried sold tokens to try to support his trading empire.

Solana has lost 45 percent of its value over the past week.

“[All] Multicoin’s operating units, funds and employees are doing well,” co-founder Kyle Samani told the Financial Times.

Even as a string of cryptocurrency exchange failures this year led to growing pessimism in the industry, many investors maintained their optimism about FTX.

In September, Bravo said he was withdrawing the company from new crypto investments due to concerns about the industry’s business practices – but maintained high expectations for FTX.

He said at an investment conference in Cannes that the company would be “a big winner” and described Bankman-Fried as “one of the best entrepreneurs” he’s met.

Additional reporting from Mercedes Ruehl in Singapore and Kaye Wiggins in London

https://www.ft.com/content/67b1899f-4b1f-4676-b264-0d19e205d64e How Sam Bankman-Fried Seduced Blue Chip Investors

Adam Bradshaw

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