Investors Who Put $2 Billion Into FTX Face Scrutiny, Too

Sam Bankman-Fried’s pitch to investors was not much of a pitch: It was a take-it-or-leave-it offer.

In meetings to raise money for his cryptocurrency exchange FTX over the last year, the entrepreneur left little room for negotiation, two investors said. FTX was his company, Mr. Bankman-Fried told them, and he planned to run it with little oversight. Interested investors should “support him and observe,” one investor who heard the pitch said.

They responded by giving him $500 million early this year, valuing the privately held FTX at $32 billion.

This week, Mr. Bankman-Fried met with investors again — but with a different tone. FTX had collapsed overnight, putting billions of dollars in customer funds in jeopardy, setting off a slew of government investigations and thrusting the crypto markets into chaos. He was sorry, he said. He had messed up. Without a bailout, FTX could fail.

It was a humbling fall for Mr. Bankman-Fried, 30, who had cultivated a reputation as an iconoclastic wunderkind who could multitask effortlessly and slept on a beanbag at the office. Yet more than 80 investors went along with his vision, pouring nearly $2 billion into FTX in just two years.

Now investors are under scrutiny, too, for enabling Mr. Bankman-Fried with so little oversight. It was the most dramatic example in recent history of what happens when so-called visionary founders are given lots of money with few strings attached.

The events showed that even the top investors — whose money in FTX has vaporized — can wildly miss the mark, said Kevin Werbach, a professor of business at the Wharton School of the University of Pennsylvania.

“You can look like a genius making successful big bets,” he said, “but sooner or later you’ll crash spectacularly if you weren’t doing real diligence.”

On Friday, FTX, facing a cash shortfall of $8 billion and scrambling to drum up money, filed for bankruptcy. Mr. Bankman-Fried resigned as chief executive. The Justice Department and the Securities and Exchange Commission are examining whether FTX improperly used customer funds to prop up a separate trading firm, Alameda Research, which Mr. Bankman-Fried also founded.

FTX’s list of investors spans powerful and well-known investment firms: NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock and Thoma Bravo.

Some of FTX’s investors declined to comment or did not respond to requests.

Four FTX investors, who declined to be identified, said they were shocked by the company’s sudden collapse. They said they had properly researched the company’s financials, which showed a healthy, growing business that provided an easy-to-use platform for people to buy, sell and store crypto. And they were completely in the dark about FTX’s possible self-dealing with Alameda, they said.

Investing in FTX gave them a piece of the hottest start-up in an emerging sector that promised to be as big as smartphone apps or the internet itself. Many investors had trumpeted their support of the deal. Sequoia even published a glowing profile of Mr. Bankman-Fried to its website.

Now the deal represents a major black eye.

Paradigm, a crypto-focused venture fund that put $278 million into FTX, told its own backers in a letter on Wednesday that the investment was likely worthless. Sequoia said in a statement that it valued its $213 million investment in FTX at $0. The venture capital arm of the Ontario Teachers’ Pension Plan, which put $95 million into FTX, said in a statement, “Not all of the investments in this early-stage asset class perform to expectations.”

FTX’s lack of oversight also left investors out of the loop about what happened this week as Mr. Bankman-Fried tried to find a last-minute bailout.

“The full nature and extent of this risk is not known at this time,” Sequoia wrote. FTX’s liquidity shortfall “will take many months to fully understand,” Paradigm said.

Mr. Bankman-Fried, who did not immediately respond to a request for comment, had never made it a secret that he thumbed his nose at tradition.

In an interview with The New York Times in April, Ramnik Arora, one of FTX’s top executives, described a video meeting last year between Mr. Bankman-Fried and partners at a top venture firm. In the meeting, Mr. Bankman-Fried delivered a well-received presentation while simultaneously playing a video game.

“The entire partner meeting, he was playing League of Legends at the same time,” Mr. Arora said.

Before another investor meeting, Mr. Arora said, the investors asked Mr. Bankman-Fried to put together a slide deck. The entrepreneur threw the presentation together in about a couple of hours.

“There’s no formatting anywhere, fonts are everywhere,” Mr. Arora said. “You can just feel discomfort — both sides — because the investors are like, ‘How the hell are we being shown a deck that clearly no one spent any time on?’”

Still, investors weren’t offended. For years, they had been loosening deal-making practices that gave them control over a company and protected their investments. It was a way to get into the best deals as money from all over the world flooded into high-growth start-ups. Last year’s overlapping investment manias in cryptocurrencies, equities and start-up valuations intensified the trend.

Some of FTX’s investors viewed the company as a way to dip a toe in cryptocurrency investing without buying volatile tokens. Others saw FTX as a safer bet than Binance, one of the largest crypto exchanges, since FTX had pushed to establish a regulatory regime in Washington while Binance has come under fire for its secrecy and for skirting financial regulations around the world.

Above all, the investors emphasized that venture capital is designed to take big risks that often fail.

But even by 2021’s frothy standards, Mr. Bankman-Fried’s latitude from investors was extreme. Despite raising $2 billion, he remained the majority owner of the company. No investors joined FTX’s board of directors, which was made up of Mr. Bankman-Fried, an FTX employee and a lawyer. (An advisory board of investors had no functional control over the company.) The company did not tell investors the nature of its business with Alameda Research, Mr. Bankman-Fried’s separate crypto trading operation.

Mr. Bankman-Fried was so averse to outside input that investors who dared suggest that a more experienced executive run the company were likely to be shut out of future rounds of funding, one investor said.

In an April interview with Bloomberg, Mr. Bankman-Fried accused venture capital investors of doing deals based on a fear of missing out, rather than financial models. “Like all the models are made up, right?” he said.

In return, investors showered Mr. Bankman-Fried with fawning praise. Orlando Bravo, whose firm, Thoma Bravo, invested $150 million into FTX, said at a conference in September that, despite his misgivings about the overall crypto industry, he believed Mr. Bankman-Fried was “one of the best entrepreneurs” he had met.

The Sequoia profile explained that Mr. Bankman-Fried “lives his life by a calculus of altruistic impact.” During a video call with the FTX founder, the profile said, Sequoia’s partners commented excitedly to one another in the chat. “I LOVE THIS FOUNDER,” one partner wrote.

This week, Sequoia replaced the article with an update. “A liquidity crunch has created solvency risk for FTX and its future is uncertain,” it said.

At the end of Mr. Bankman-Fried’s call with investors this week, several accused him of hiding details of FTX’s dealings with Alameda Research and asked for more information, a person on the call said. He sidestepped the questions and ended the conversation.