Looking back, 2022 It was a great year for some investors and not in a good way. Mistakes made during its development period over the past two years have led to many articles, but this year’s worst case was that of bankrupt and disgraced crypto exchange FTX.
Indeed, as we write this, the company’s founder, Sam Bankman-Fried, is being extradited from the Bahamas to the United States, where he faces eight criminal charges. Investors have simply watched the company’s value evaporate from $32 billion to zero in a short period of time over the past few months. Like a rocking head, “Okay, how did I get here?” They may have asked themselves.
Well, one big reason was that FOMO often supersedes due diligence. For a while, the V in VC appeared to stand for “vibes”—the founders’ vibe became more important than their product.
Unfortunately, FTX is just the latest in this line of failures. We can revisit companies like WeWork and Theranos, or look at the list of billionaires and wannabes lining up to be part of Elon Musk’s supposed $44 billion venture into Twitter. Even Mook tried hard to get out of the deal before it closed in October.
As Axios editor Dan Primack reported last week in the Pro Rata newsletter, while some investors think Musk has done a reasonable job of cutting costs, others worry about how to explain his involvement to their investment committees. Maybe they should have thought about that before Did they throw their money at the deal?
All of this points to the broader problem with investing these days. We don’t want to paint the entire industry with the same brush, but it’s fair to say that some investors have erred on the side of caution because they feel it’s a better idea to rally for the shiny new thing.
Obviously, investing should be getting to know the team, checking the books (as much as possible) and pushing them to try the idea. You should never sign checks because all the cool kids are doing it – that’s never a good approach to investing millions of dollars.
We spoke to a few investors to get an inside look at how due diligence and investment practices have been undermined lately, and what investors who may have fallen victim to chasing the next big thing can learn from this year’s mega-mistakes.
Did we learn anything?
There are a number of issues here, and the venture capitalists we spoke with stressed that some investing firms (and investors) need to be more disciplined, especially when spending other people’s money.