Tech Money Fueled FTX’s Rise. The Crash Exposes Deep Flaws in VC
Venture capitalists were ill-equipped to identify or fix major flaws in the financial model.
Among the last people to realize that the cryptocurrency exchange FTX was a financial time bomb were the company’s own investors. On Nov. 7 — as troubling signs began to emerge, customers were withdrawing money and the founder was tweeting unconvincingly that “assets are fine” — a broker of startup stock made inquiries to FTX’s venture capitalists and other shareholders to see if anyone wanted to sell, according to correspondences seen by Bloomberg. No one did.
A transaction probably wouldn’t have gone through anyway, given how quickly FTX hurtled toward bankruptcy after that, but the fact that the offer was declined indicates how ill-equipped investors were to assess the company’s toxicity. This highlights a long-running flaw in venture capital: Technology investors are drawn to the idea of funding the next PayPal, but many lack the expertise needed to evaluate the legal and financial risks associated with so-called fintech businesses.