How marquee venture capital firms lost billions on FTX despite red flags

FOMO can override fundamental diligence when deals are branded as "hot."

Multiple unnamed VCs told the FT they were "seduced" by SBF’s celebrity and failed to probe governance or financial controls; one admitted leverage was hidden because only quarter-end balance sheets were shown.

Why: In overheated markets the fear of missing the next Google outweighs the discipline of verifying unit economics or control structures.

"with hindsight, he thinks that when his firm questioned SBF before investing, they should have focused more on the details about the crypto exchange's governance and financial controls, rather than being blinded by its founder's snowballing celebrity profile"

Accepting zero board seats removes the primary lever VCs have to protect capital.

Despite putting in hundreds of millions, no investor obtained a board seat; the three-person board was SBF, a former exec, and an Antiguan gaming lawyer.

Why: Board representation is the standard mechanism for oversight and fiduciary enforcement in private markets.

"it is normal for VC investors to ask for a seat on a portfolio company's board in order to monitor their investment and to have some control"

Charismatic founders can weaponize sloppiness as a signal of genius.

SBF pitched while playing video games, dressed like an "unruly toddler," and once produced a PowerPoint in a few hours with mixed fonts; investors read this as genius non-conformity rather than incompetence.

Why: Silicon Valley culture often conflates eccentricity with breakthrough insight, lowering skepticism.

"Sam allegedly said to them while dressed like an unruly toddler and playing video games... the partners had the wool pulled over their eyes by Sam"

Grand TAM narratives can justify any valuation if the story is big enough.

Sequoia’s internal memo framed FTX not as a crypto brokerage but as a "super app" for the future of money with a TAM of "every person on the entire planet"—plus monkeys who like bananas.

Why: Venture math becomes unfalsifiable when the addressable market is literally everyone.

"it was a vision about the future of money itself, with a total addressable market of every person on the entire planet"

Concentrated losses may look small to VCs but create systemic reputational risk.

Sequoia’s $210 million exposure was <3 % of one fund, yet their public endorsement conferred respectability that lured retail users who lost far higher percentages of net worth.

Why: Brand-name backing acts as a signal of safety to less sophisticated counterparties.

"these high-profile investors gave a certain respectability to FTX, a respectability that it didn't deserve"

Founder-friendly, high-velocity strategies sacrifice scrutiny for speed.

Tiger Global closed one deal per day and paid Bain >$100 M annually for research yet still missed the red flags; their brand was explicitly "move fast, do less DD."

Why: In competitive rounds, incremental diligence can be the difference between winning and losing the allocation.

"Tiger Global... had a reputation for being a founder-friendly investor who moved fast and did less due diligence than other investors"

Investors may favor firms that appear to seek regulation over those that dodge it.

VCs viewed FTX as safer than Binance because FTX lobbied in Washington while Binance "dodged financial regulations around the world."

Why: Perceived regulatory legitimacy lowers headline risk for institutional LPs.

"They often viewed FTX as a safer bet than Binance since FTX had pushed to establish some sort of regulatory regime in Washington"

Venture portfolios are designed to absorb binary failures, but reputational damage is non-diversifiable.

VC funds expect most bets to go to zero; FTX’s wipe-out is manageable in dollar terms yet catastrophic for credibility during fundraising.

Why: LPs judge GPs on judgment and process, not just outcomes, when deciding on re-ups.

"Venture capital is actually designed to take big risks that often fail"