FTX Collapse Will Reverberate Throughout The VC World For A Long Time

The sudden rise and fall of FTX seemingly caught everyone by surprise. However, as fast as it happened, the effects of FTX’s collapse are not just sudden, but likely will be continuous and long-lasting.

For perspective, Theranos had raised about $1.3 billion in funding and had a $10 billion valuation at its peak before the walls came tumbling down and a story started to unfold that everyone still talks about now and gave us a movie.

By comparison, FTX and FTX US had raised a combined $2.2 billion at a $32 billion valuation and $8 billion valuation, respectively, before everything fell apart.

Investors

With valuations that large, it’s unsurprising that some of the largest names in VC and investing took part.

Fellow crypto exchange Binance was one of the company’s first lead investors, taking part in a round of undisclosed value in late 2019, according to Crunchbase data.

Rounds became much more significant quickly for the failed crypto exchange. In July 2021, Sequoia Capital took the lead in a $1 billion round, FTX’s largest round.

That round had dozens of investors, including big names like NEA, Lightspeed Venture Partners, Insight Partners, Temasek, SoftBank Vision Fund, Thoma Bravo, SoftBank Vision Fund 2, Coinbase Ventures, Ribbit Capital, Multicoin Capital, Paradigm and Altimeter.

Just three months later, FTX swept up another $420 million-plus, again led by Sequoia and also the Ontario Teachers’ Pension Plan.

Then came its $400 million Series C at a $32 billion valuation earlier this year — with many of the same participants again: Temasek, Paradigm, Ontario Teachers’ Pension Plan Board, NEA, IVP, SoftBank Vision Fund 2, Lightspeed Venture Partners, Steadview Capital, Tiger Global and Insight Partners, among others.

Facing facts

Many of those investors already are willing to face reality. It’s been reported Sequoia and Paradigm have written down their stakes to zero. The Ontario Teachers’ Pension Plan Board said the $95 million it invested in FTX should have “limited impact on the plan, given this investment represents less than 0.05% of our total net assets.”

Others seem ready for a more prolonged fight, as it has been reported some VC firms are considering suing Sam Bankman-Fried for alleged fraud — although that seems like a Hail Mary to try to save face.

What does seem certain is that FTX’s collapse will not be forgotten by New Year’s. Such a fall from grace that involves so many marquee names in venture will likely have a ripple effect when those same firms look at their next Web3 or crypto investment. How eager will they be for that investment? How eager will their LPs be to see another deal in crypto? It may even affect their due diligence process outside of crypto deals.

Even crypto-specific firms like Paradigm and Multicoin Capital could suffer from a type of “post-FTX syndrome” when looking at their next crypto deal.

The effects of FTX’s fall will be long lasting — and you can bet there will be a movie made.

Alameda’s far reach

Aside from the FTX collapse’s effect on big-name venture firms, it also likely will have a significant impact on the crypto and Web3 ecosystem Bankman-Fried sought to foster.

Earlier this week, we talked about the nearly 50 investments FTX Ventures made this year since announcing its first $2 billion funding in January. Those rounds in total raised nearly $3 billion for burgeoning startups, with FTX Ventures leading some of the biggest of those deals.

However, Bankman-Fried’s other trading firm Alameda Research — also in bankruptcy — was a prolific investor in the crypto startup scene.

Per Crunchbase data, starting in 2019 the firm made 180 investments. In 2021 alone, the firm completed 100 deals. Those investments totaled $2.3 billion. This year, Alameda Research slowed that pace, making only 55 investments, but those totaled $2.1 billion.

It is important to note Alameda Research did not invest that amount, but rather simply took stake in rounds that totaled that amount.

However, it was an investor, and it is never ideal for a young startup — many of Alameda Research’s deals were seed and pre-seed rounds — to have an early investor declare bankruptcy.

Alameda Research also led or co-led 30 of those rounds, including some large ones such as: Toronto-based crypto-asset management tool 3Commas’ $37 million Series B in September, Chicago-based automated crypto investing platform Stacked’s $35 million Series A last December, and a $40 million venture round in Switzerland-based decentralized premier brokerage protocol Oxygen.org.

Bankman-Fried’s reach went well beyond a failed exchange. He touched many in the crypto startup ecosystem who shared his similar vision. Now time will tell how damaging his help will turn out to be.

Illustration: Dom Guzman

Correction: An earlier version of this story misidentified an investor.

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