Sam Bankman-Fried exposed the woke capitalist elite for the fools they are
In the end, he was found guilty on seven counts. But Sam Bankman-Fried, founder of the crypto currency exchange FTX, and once the youngest multi-billionaire on the planet, will have to wait until March for sentencing. He may well spend the rest of his life behind bars.
But as the dust now settles, one point has become increasingly clear. It is not just SBF, as he was known to acolytes, who should have been on trial. It should have been much of the flawed, phoney venture capital (VC) industry.
High on sanctimony, blinded by woke posturing, and desperate for world-changing businesses rather than those which simply provide products and services people want, the investment funds that backed FTX have displayed terrible judgment.
The developed world needs patient, carefully-applied capital and investment more than ever. Instead it is seeing vast sums being poured into firms the VC industry doesn’t understand.
As the evidence piled up, the verdict looked less and less in doubt. On Thursday, Bankman-Fried was found guilty on all counts of defrauding his customers in a Manhattan federal court. An empire that, at its peak, was valued at $32bn, is now worthless.
Bankman-Fried got rich faster than almost anyone in history, acquiring an estimated $26bn in personal wealth and featuring on countless magazine covers. Now, he could face up to 110 years in prison. It is an epic scandal, and one that could take many more years to completely unravel.
But despite the verdict, there are harder questions that still have to be answered. Bankman-Fried was feted by the world’s political elite. At one point, he shared a stage with both Bill Clinton and Tony Blair, politicians who still wield great influence behind the scenes.
Major venture capital firms backed FTX, a company set up by someone not yet 30, scruffily dressed and rumoured to have a limited attention span, which was based offshore with no proper board of directors and no proper auditors. It had red flags all over it.
The miracle is that it managed to raise any kind of cash at all, never mind hit a valuation of more than $30bn.
The VC industry has lost its way. Next week, WeWork, the shared office space company, is expected to file for bankruptcy. At its peak, it was valued by its backers at $47bn.
“Our mission is to elevate the world’s consciousness,” it wrote, in a summary of its mission when it was raising extra cash in 2019. “Philosophically, we believe in bringing comfort and happiness to the workplace.”
True, its offices were famous for free snacks and calm, safe spaces, but it has not brought “comfort” or, come to think of it, “happiness” to its investors.
The buy-now-pay-later start-up Klarna, has seen its value plummet from $45bn at its peak to just a fraction of that now.
Beyond Meat, another company which received significant backing from the VC industry and promises to save the world by cutting out the carbon emissions involved in traditional meat production, has crashed, this week announcing its second round of job cuts this year.
The $13bn it was worth at its peak has turned into less than $1bn today. While the VC industry will always take risks, which sometimes pay off though often will not, it keeps backing disastrously bad businesses.
Part of the problem is that many funds appear so consumed by woke politics that they base decisions as much on an investment’s ability to virtue-signal as to create products and services for customers, or provide decent returns for its investors.
FTX championed “effective altruism”, the philosophy that explores how individuals can maximise their philanthropic impact, with Bankman-Fried donating huge sums to predominantly left-leaning political causes. Bankman-Fried contributed more than $70m to election campaigns in less than 18 months.
WeWork preached the virtues of flexible, employee-centric working, creating offices that were more like creches than places to get stuff done. Beyond Meat argued that by “shifting from animal to plant-based meat, we can positively affect the planet, the environment, the climate and even ourselves.” And so on.
Bankman-Fried’s actions were inexcusable. But it is also now clear that the VC industry suffers from three major flaws.
First, it over-values “weirdness”. There was always an element of truth in the idea that great entrepreneurs, just like most individuals who massively over-perform in any field of human endeavour, can be slightly odd.
The result? The risk that VC houses will conclude any shambolic weirdo who walks through the door is a genius, and start writing a cheque based on little more than guesswork.
Second, it often lacks a clear picture on what is happening inside the companies it invests in. Throughout the FTX trial, it was obvious that Bankman-Fried himself was in the dark as to the sums of money flowing through the exchanges he was meant to be managing.
The funds that backed him had even less. Very often, they just don’t know enough about what they are buying into.
Finally, the industry chases outsized returns. A 30pc or 40pc profit won’t do. It wants ideas that will change the world, and generate five or ten-fold returns. That makes it an easy prey for hucksters and fantasists with grand ambitions but insufficient substance to back them up.
The world now needs more incremental, measured investment. It needs capital to be deployed carefully, to build better supply chains, renew infrastructure, establish how to reduce carbon emissions without sacrificing growth, and to improve productivity and output.
But the VC industry is incapable of providing that. Indeed, most of the leading players seem to have forgotten why capitalism is the best economic system we have.
If that lesson is not relearned very quickly, Bankman-Fried won’t be the last founder to spend time behind bars, and it may not be long before the VC industry is once again under fire.
