404. Due Diligence Not Found
November 2022 was a bad month for investors, irrespective of whether you're in crypto or traditional investments like stocks or commodities.
The collapse of FTX and its knock-on effect on the crypto ecosystem revealed a terrifying pattern of investment where hedge funds, billionaires, wealth funds and possibly even your grandparents were throwing money at an exchange with financial controls so weak they make Lehman brothers look fiscally responsible.
Tech stocks are in the toilet. Many crypto firms and platforms are teetering on the edge of bankruptcy. BlockFi recently filed for bankruptcy not long before it, Celsius, filed for bankruptcy too.
It all raises a bigger question: does anyone do due diligence anymore? It seems investors are pouring money onto these companies based on face value. What do they say about books? Never judge them by their covers. In the case of crypto platforms, the pages inside said books are rotten and deteriorating, the contents barely legible.
A quick look into the books of FTX would have produced some red flags. But, no. It's crypto. I hear you can make big "gainz" and buy lambos. Get in; we are going to the moon in our rocket Lambo. HODL!
It's crazy to think that once upon a time, investors would send accountants to look over the books, bankers to check that assets claimed to be owned existed, and lawyers to check nothing litigious or nasty was hiding in contracts or elsewhere. Now you pitch over Zoom, and they ask for your bank account details to deposit the funds.
Sequoia Capital gave Sam Bankman-Fried of FTX $214 million, despite the fact he was playing League of Legends during his pitch to them. It has since issued an apology and promised stricter checks in light of its demise, but $214 million isn't pocket change. Sequoia just handed it over without some basic due diligence is mindblowing to me.
And the reason I single out Sequoia Capital is that they're one of the biggest and most respected investment firms around.
They have invested in some serious successes, including:
- PayPal
- YouTube
- Zoom
Now, part of the problem here could have been cheap money. Record low-interest rates provided cheap money. But that would be an easy thing to blame. The real problem is FOMO. Looking into how investors like Sequoia make investments, you can see first mover advantage is their go-to strategy because the landscape can be quite competitive.
It's a known fact many companies will fail—the failure rate for VC-funded startups is around 75%. The promise of the next Facebook or Twitter fuels these funds to keep throwing money around like it's confetti. It's not about making the right investment; it's throwing money at a wall and seeing what sticks. You only have to strike gold once to compensate for previously failed investments.
I find it ironic that banks do more due diligence when applying for a home loan or credit card than these capital investment firms worth billions do when deciding to front tens of millions in capital for startups. The 2022 timeline is unreal.
Posted Using LeoFinance Beta