FTX vs. Amazon
The difference is clearer in hindsight
Guess posting for, Rohit Krishnan writes,
Venture investors invest in growth. Which means, necessarily, most of the diligence is to figure out if the growth is sustainable. Which means, most of the work would’ve been to check things like (in the case of FTX) trade volumes, and margins, and unit economics per trade, combined with maybe the types of customer base, trader personas, and institutional interest. All of which would’ve looked great, obviously. It’s a crypto exchange during a trade boom and insane volatility. Hence, as Dror Poleg says:
Given the opportunity, most of FTX's investors would do exactly the same thing tomorrow. Their job is not to avoid failure; it is to avoid missing out on the biggest success.
As of now, we know that Jeff Bezos was an outstanding entrepreneur, and Sam Bankman-Fried was a phony. But this is hindsight. How easy was it to spot this at the time?
For several years after Amazon was founded, I was a Jeff Bezos skeptic. My line was that for Amazon to compete with Wal-Mart, Amazon had to master logistics. For Wal-Mart to compete with Amazon, Wal-Mart just needed a web site.
To my surprise, Amazon was able to master logistics before Wal-Mart figured out online sales. And along the way, Amazon was able to master cloud computing as well. It is a remarkable story.
Venture investing is a bit like book publishing. Most books fail. A few succeed spectacularly, and publishers have a hard time predicting those.
For most of us, having an investment go bad and losing everything is a Type I error. We try really hard to avoid that, and we worry less about missing out on a great investment. Venture capitalists seem to treat missing out on a great investment as a Type I error. They try hard to avoid that, and they worry less about having an investment go bad and losing everything.
Most corporations run as vetocracies. That is, if an idea is rejected by any executive, the idea will not be tried. For a long time, I have seen this as rational. People who propose risky projects within large corporations have very little skin in the game relative to the resources of the corporation.
It is probably the case that no ordinary corporation would have backed SBF. Someone in the vetocracy would have spotted the red flags. But by the same token, it is unlikely that Steve Jobs or Jeff Bezos would have gotten past a vetocracy.
Somewhere in the ecosystem there have to be organizations that are not vetocracies. Venture funds fill that niche.
I mostly blame other institutions for not acting as a check on SBF. The business press would be near the top of my list of institutions that were lazy and corrupt.