Minting FOMO

"FOMO" has gone full circle. The abbreviation (Fear Of Missing Out) was first coined by a venture capitalist in a 2004 Harvard magazine piece. Now in 2022 with the collapse of  cryptocurrency exchange FTX, we are seeing the extent to which the venture and broader investment world was captured by FOMO.

FTX entered into bankruptcy last Friday, reportedly holding $US900m in easily sellable assets against $US9b in liabilities. Most of its assets were illiquid crypto tokens and venture investments. A key balance sheet entry of -$US8b labelled “fiat@’ account” represented funds “accidentally” shifted to its related trading unit, according to the Financial Times. 

The end for FTX came when industry publication CoinDesk reported that the largest exposure of FTX's trading house, Alameda, was the crypto token generated by FTX, called FTT. This led rival exchange Binance to announce it was selling its FTT tokens, which in turn trigered a stampede to the exit. 

“The whole operation was run by a gang of kids in the Bahamas,” an anonymous source told  CoinDesk.

Venture investors had reportedly sunk nearly $US2 billion into FTX and it looks like some of them cut corners on their due diligence to get exposure to what was perceived to be an exciting and rapidly rising company.

FTX founder Sam Bankman-Fried (SBF) made no secret of the fact that he was in the business of capitalising on FOMO. 

Back in April 2022, SBF explained to Bloomberg in a lengthy interview how creating a "box" and assigning an arbitrary value to it could bring in more investors at higher prices:

"And now all of a sudden everyone's like, wow, people just decide to put $200 million in the box. This is a pretty cool box, right? Like this is a valuable box as demonstrated by all the money that people have apparently decided should be in the box. And who are we to say that they're wrong about that? Like, you know, this is, I mean boxes can be great. Look, I love boxes as much as the next guy. And so what happens now? All of a sudden people are kind of recalibrating like, well, $20 million, that's it? Like that market cap for this box? And it's been like 48 hours and it already is $200 million, including from like sophisticated players in it. They're like, come on, that's too low."

That "box" scenario, representative of various crypto/token offerings, in itself is a classic case of FOMO - investors clamouring to participate despite there being no fundamental value ("This box is worth zero obviously... But on the other hand, if everyone kind of now thinks that this box token is worth about a billion dollar market cap", SBF continues).

SBF was engaging in the FOMO game at multiple levels - he called venture capitalists out for "FOMOing" and chasing down the things others were chattering about.

And you're kinda like, the answer is no, we haven't invested in it, but you know, that's not a good answer given what question your LPs just asked. So instead you're like, oh boy, you're gonna be excited about what we have done and/or will do. And then you find a way to get into that token and/or company. And all the while you're like, how do we justify? Is this a good investment? Like all the models are made up, right? 

And it seems SBF took advantage of that insight.

There are reports that SBF played League of Legends while presenting to investors and a representative of his firm allegedly told investor Chamath Palihapitiya's team “go f**k yourself” in response to the seemingly sensible suggestion that he establish a board of directors in conjunction with a capital raising. 

The only two directors of FTX besides the founder were an employee and a lawyer based in Antigua and Barbuda. Not exactly the kind of oversight investors should be satisfied with when investing nearly $US2 billion.

The former Chief Operating Officer of Softbank, Marcelo Claure, declared on Twitter in the wake of the FTX collapse that "it taught me one more time that we should NEVER invest because of FOMO and we should always 100% understand what we are investing in. I totally failed here on both". SoftBank had invested nearly $US100 million in FTX according to reports.

On the other hand, Sequoia Capital put $US150m into FTX (in an earlier round than Softbank) and says it did run a rigorous diligence process when it invested. From Sequoia's point of view, "we are in the business of taking risk".

FTX is a great reminder to all of us to have an understanding of the risks we take.