Why Blackrock invested in FTX
What is common between FTX, ThreeArrows Capital, WeWork, Nikola, and Theranos?
They were all heralded as revolutions, run by ‘geniuses’. All of them had a lot of hype, much of it was built by the billions of dollars poured in by investors. And all of that crashed, causing massive losses to investors. Many of these investors were ordinary retail investors like you or me.
One of the biggest reasons that people invested their money into FTX was the amount of money invested by Blackrock and other smart money executives in FTX. If all these very smart people (who get paid to invest correctly) thought FTX was worth investing in, then maybe there was something there. If these industry leaders could be fooled, what chance do normal investors like you or I have?
Blackrock investment into FTX- 24 Million USD
Sequoia Capital investment into FTX- 214 Million USD
Amount FTX owed to top 50 creditors- 3 Billion USD
In today’s post, I will cover some of the reasons that the so-called ‘smart money’ invests in so many stupid companies. If nothing else, I hope that after today you will understand the need for critical thinking, and why relying on social proof and appeals to authority are a bad idea for tech. And no, it’s not just that these companies pulled very elegant cons.
Sound like a good time? Let’s get right into it.
Key Highlights
- Ignorance- This going to shock a lot of you because these big names have a halo of competence attached to them. However, as someone who actually has worked with startups in Deep-Tech, I can tell you that most investors know absolutely nothing about the field they invest in. Let me tell you a personal story to drive this story home. I once consulted with a startup that reached out to me about improving its pipeline. I looked through their data and ran some tests, and told them that using Deep Learning was inefficient for their needs. I suggested a simpler architecture, which would scale and generalize with their needs much better. They told me (verbatim), “We used this Architecture because our investors put more money into us when we say we use Deep Learning”. In the end, they ended up with a solution that was far more complicated than it had to be because the investors like to hear buzzwords and trendy technologies in the pitch decks.
- Lack of Due Diligence- You probably don’t believe me. These companies are investing millions. No way they don’t do their research. And if you think like that, you’re normal. However, take a second to expand your money and become woke. These millions are only a fraction of the amount of money that they have in their investment funds. Sequoia’s investment into FTX US was less than 1% of its SCGE fund. They invest in countless firms. All they need is for one startup to return 100x the amount, and their losses are wiped out. These 100x returns are possible because they are investing in startups early. Thus, the due diligence is often quite surface-level. They can afford to eat a few losses.
- Euphoria- I covered how so many LinkedIn Intellectuals were going crazy about ChatGPT would replace every one. And in a turn that will absolutely shock you, investors have been investing in any startup that uses ‘Generative Models’ because of ChatGPT, even though most are not good businesses. These big-brain VPs are just as human as us. They will also get swept up by misinformation and hype.
- They don’t care about the business- This is something I really want you to understand. Many times, these investors don’t really care about the business. Why? Because they are just chasing the exit. They only invest in a company in hopes of selling their investments at a higher price. The startup will go through round after round funding, where different investors will enter and exit. In the end, the company will IPO (with a lot of fanfare and hype). At this point, these investors would have exited, and the only ones left holding overpriced stocks are the retail investors (us).
If you want to understand this process in more detail, check out the article below. It goes into the ‘blitzscaling’ process that these ‘revolutionary’ tech and crypto companies use to grow to obscene valuations (never forget, WeWork was valued at 47 Billion USD). Understanding it is key to understanding how so many companies cross the billion-dollar valuation without ever turning a profit.
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