If you want to understand how big a deal the FTX collapse is, you should talk to David pakman, a venture capitalist. After 14 years with the investment firm Venrock, pakman, who led Venrock's investment in the digital collectibles company Dapper Labs, leaned into his passion for digital assets and last year joined the now seven-year-oldcryptocurrencies venture
His timing was either very good or very bad. Indeed, in part because CoinFund was an early investor in the collapsing FTX, we asked pakman to jump on the phone with us today to talk about this very wild week, one that began with high-flying FTX on the ropes, and which ended with bankrupt FTX. TheExcerpts of that conversation are edited lightly for length and clarity.
The last time we spoke, the NFT wave was just starting. One of the largest exchanges in the world just declared bankruptcy. It is declaring Chapter 11 for 130 more companies. What do you think about this?
It's terrible on a lot of levels. It was a tragedy that could have been avoided. flawed human decision-making is to blame for the failure of the company. The main business is doing well. Even in a bear market it is profitable and growing. It was not a victim of the macro environment. Its leadership made a lot of terrible decisions and did things wrong. The tragedy is how avoidable it was and how many people will be affected by it.
The reputational harm to the entire industry comes from questions like, "Aren't this a scammy place with scammy people?" It will take a long time to dig out of the mess that this company is in. There are positive things.
Do you think positives are?
The technology did not fail and theBlockchains did not fail. The smart contracts weren't broken. We know everything we need to know about the tech behind the coin. It wouldn't be the same if this was a meltdown because of flawed software design, or a big hack that hurt people. The long-term promise of the software is still there. People make mistakes. There have been a couple of big human-generated mistakes this year.
There are a lot of stories about what happened. What do you say about it?
I don't know what they did or didn't do FTX and the trading desk owned by Sam Bankman-Fried had a relationship that was not known to all shareholders, employees, or customers. FTX took FTT, which is their token that was held in a lot of money by Alameda, and they took big loans against it. They took a volatile asset and pledged it as security.
Imagine if a board of corporate executives or investors knew about that. What would happen if FTT goes down by half? It happens in the digital currency with high frequencies. Why are we giving this asset to someone? 50% of the asset is held by our biggest rival. If they dump it in the market, what would happen?
Borrowing against it was not a good idea. They took the proceeds of the borrowing and invested them in high-liquidity assets like BlockFi, which FTX recently bought. They wouldn't be able to quickly sell out of those if they had to return the money. They may have used customer funds to loan it to their trading arm. If they knew about it, they wouldn't know about it.
It was mind blowing that there wasn't a board. Firms that are included are your firm.
The investment that the firm made in FTX was a long time ago, before my time, and it is a small amount. The cap table is barely occupied by us. We did not have anyFTT token.
I think you have a question about the governance of the company. There is a standard set of governance that every entrepreneur agrees to when they take venture capital, which is: there is going to be a board; the board is going to be made up of investors and Whenever you want to issue new shares, you have to get the board's approval, so that you can't do it without the knowledge of the board.
It's mind-blowing that no of that was present here. I hope that the level of oversight and governance that was not given as part of investing is gone immediately.
Everything is very close to one another. Genesis has about $175 million dollars locked in its FTX account, so Digital Currency Group is giving it a $140 million equity injection. Is this going to get worse? How much of your own investment portfolio is being impacted by FTX?
What is the impact on us at coinfund? We had a small investment in this company from one of our funds and we didn't own any of FTX's assets. I don't think any of us know the full long-term impact of what's happening here because there's a little bit of a domino effect. When companies and investors have assets at FTX, how many other funds will it take to get those funds back? It is assumed that the entire thing goes into a massive bankruptcy proceeding that takes a long time to untangle. There will be uncertainty about when you get money back and how much you get.
Most of the startup that we invest in are not trading on FTX. FTX provided a launching pad for token to become liquid, and then either making a market for those token or at least providing a place for them to trade and provide liquidity. One of the largest places where FTX was traded was due to the fact that it needed to become liquid at some point in the future. You lost that now.
What does that do to your day-to-day business? After closing a $300 million fund, CoinFund filed paperwork with the SEC to raise a new $250 million fund. Will you need to place a pin in that? I'm pretty sure that this debacle has people worried.
We talked to a lot of people. Most people are handling it. They are asking what happened here.
Late-stage capital is going to freeze up here. The dust has to be cleared. Capital is not likely to be attracted to tragedies like this.
There is an impact on startup valuations immediately. One way to evaluate startup is to look at similar companies. FTX was one of the best star comps in the world. We are worth X if FTX is worth 40 billion. Late-stage valuations are immediately impacted.
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