Last week, many investors were left speechless after FTX’s valuation went from $32 billion to zero in one minute in New York. VCs wondered, “What the hell happened?” And they still wonder, “Wait – did I do something wrong? Is it me?”
Why yes, actually it is you.
People are led to believe that investors are, for the most part, bright, data-driven people who carefully examine the financial underpinnings of the companies they invest in. There is little room for emotions such as jealousy or the fear of missing out (FOMO). Of course not. And these people investing billions of dollars certainly have their eye on the ball, right?
Well, not exactly.
In a surprisingly honest tweet today, former SoftBank COO Marcelo Claure, who stepped down in late January after a reported battle over pay, had this to say about the FTX fiasco:
This is from the same man whose former company also invested heavily in WeWork, another spectacular example of poor investor judgment. Steve Jobs once said, “Everything around you that you call life was made up by people who weren’t smarter than you.” Jobs talked about building products at the time, but apparently this also applies to the people who fund the startup ecosystem.
While it’s good that Claure was so open, honest and thoughtful, maybe we should all remember that investors aren’t smarter than anyone else. They are humans after all and their classic lack of self-awareness coupled with the myopia of adventure enthusiasts may be the problem. Most of the investors and the founders they invest in are white males, and you get double points if you went to Stanford, Harvard, or MIT. These people are handed the mantle of genius in everything they do and touch. It is rarely, if ever, predicted that the next Warren Buffet will be a black man.
Black founders constantly describe the higher bar they are expected to meet compared to their white counterparts. This bar is long and wide, stretching from acting and music to banking and venture capital. In an interview with gotechbusiness.com last year, Bambee HR founder Allen Jones described his experience as a gay black man trying to raise money in Silicon Valley:
They take bets they consider a bit safer – entrepreneurs who look like a certain profile – white, cis-gender men who come from Stanford and Harvard who fit the profile of confidence. They have a kind of anti-bias determination built in, so they automatically get the benefit of the doubt for those pedigrees and those profiles.
Jade Kearney, founder of She Matters, an app aimed at connecting women of color with healthcare professionals related to postpartum health issues, told gotechbusiness.com in February how she encountered all kinds of obstacles beyond what startup founders faced when she went search for financing. “The whole thing is crazy and challenging,” she said. “So when we’re in the room, obviously we’ve been able to overcome all the hurdles to get there, and we’re usually one or two in the room. So to say you’re here, you’re [unique], and we’re not going to give you money, it’s crazy, really. It is much.”
Private market investors seem to operate less like venture capitalists and more like vibe capitalists – giving money to people who look like them, sound like them and are generally just like them. This leads them to take risks – of course, because that’s what investing is all about – but not so much in the companies that actually pass the due diligence. Instead, they target those who pass their respective vibe checks. There is no balance. There is no honesty. And there is no genius in that.
Last year, companies founded only by women raised just $7.7 billion – or 2.4% – of total investment, according to PitchBook. That number skyrocketed to $49.1 billion for mixed-gender teams, demonstrating how a man’s presence can seemingly double or even triple a woman’s worth. As of October 15, only 1.9% of total funding had been raised by all-female teams.
The numbers are so bleak, it’s sad. In the third quarter, Black Founders raised a measly $187 million. To put that in perspective, disgraced WeWork founder Adam Neumann raised $350 million from a16z for an idea that hasn’t even launched yet.
Investors know that women and minorities outperform when it comes to investing and building companies, but that’s never really been the point of this game, right? They enjoy playing games with each other, circling each other, falling up and down and laughing when the markets crash as they meet for drinks and talk about how they will get them back on their feet. The key here is that she nothing but want to interact with each other.
When Sam Bankman-Fried (until recently CEO of FTX) launches his next company, people will defend the investors who are again throwing millions at him. “He’s proven he can build a billion-dollar company, he takes risks, he’s just a kid, we all make mistakes.” This speech was written by the devil we’ve all come to know. Women and minorities are not allowed to take risks, be children and sometimes just make a mess.
Sequoia has already zeroed out its own $200 million investment in FTX. That number, too, is more than what Black founders received this third quarter, and it’s rare for a company founded by a Black person to be worth more than $10 billion, let alone $32 billion. Meanwhile Softbank revealed days ago that it had a nearly $100 million position in FTX, which it has written down to zero. Meanwhile, Sam is doing it now a letter by letter countdownone tweet at a time, toward what it looks like another confession. So far, he’s typed “What happened,” and hadn’t reached “d” at the time of publication.
Ultimately, we are dealing with this ubiquitous myth that investors are risk averse. This is not true. They like to take risks, but only on white men who meet their narrow criteria. It’s part of the thrill. And they don’t have to fund minorities or women, as no law or legislation dictates. Forget the cries and the calls; this is all about vibes, remember? A white person could play video games at an investor call or come to a meeting dressed as SpongeBob’s pineapple house and probably still take home a check.