📶 FTX was even worse than you think

Hola 👋

Turns out FTX was a bigger dumpster fire than we all thought.

A group of debtors released a document over the weekend detailing all of thew shady things that went on behind closed doors leading up to the blowup. We’ll give our two cents on why this matters in the venture market and what happens next.

We’ve also got six links we like, a gold mine of the best articles on the internet, plus we need your help writing our next article on VC takeaways.

If you think we’re right, wrong, way wrong on any of the stories this week, let us know in the comment section.

Yesterday in Venture

New FTX report details incompetence prior to collapse

Over the weekend, a group of 100 entities released a 43-page document outlining internal issues at FTX leading up to its collapse.

Private keys only kept on AWS, no running list of active employees, and invoices being approved via emoji, misplacing (tens of millions worth of) assets. These are things you might expect from a startup. This was all happening at FTX.

Except it wasn’t a startup.

It was valued as a multi-billion dollar company.

Why it matters: FTX was a dumpster fire. That’s not important anymore, and it should have been obvious long before its collapse.

The problem is that this wasn’t discovered until it was too late, and that is what is driving change.

Mistakes are part of being an investor; especially at the earliest stages, your returns are driven by the power law, and most of the companies you back will not drive returns for the fund.

At the same time, your ability to be a good investor hinges on your reputation.

If your portfolio companies publicly embarrass themselves commit fraud to the extent that FTX did, it directly damages the reputation of everybody that supported the company up to that point. Even the best of the best were caught up in the FTX collapse, and they are still actively trying to undo the damage of their involvement.

An investors’ job is to uncover blind spots, and this was forgotten over the past 2-3 years when hype-cycle investing forced investors to bypass diligence just to get into competitive rounds.

This was already changing as fundraising markets cooled off, but the FTX saga was the final straw.

What happens next: Diligence cycles will become more drawn out, and investors will be able to dive deep into companies at their own pace. This seems pretty obvious at this point.

We expect reference calls to become a larger emphasis in the diligence process, and we’ve talked to some funds that won’t write a check before 40 references have been made.

If you’re an investor, you can clean up your process by creating a VC checklist that runs through what you need covered before you can push anything forward. This helps align with founders, and you can share the checklist with founding teams so they can learn what institutional investors ask for within a data room.

If you’re a founder, your goal is to make it as easy as possible for investors. The cleaner your data room, the better your odds of success.

Comb through this VC checklist guide, answer these questions for your company, and organize files into a Google Drive or Notion page that can be easily shareable.

Whether you’re an investor, founder, or employee, look through this red flag checklist to make sure you’re covering all of your bases and not risking your reputation in order to get a deal done.

Together with Morning Brew

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Links We Like

➡️ What to Watch in AI: Mario Gabriele from the Generalist shares ten companies to keep an eye on

🎤 ChatGPT Prompts for Startups: 15 prompts founders can use in their workflow

📝 Investor Updates in Hard Times: NFX details how founders can communicate the good news and the bad to their cap table

⚖️ Long and Short of Investing: David Einhorn drops game on Invest Like the Best

📺 The Streaming Book: A free and chart-filled mini-book on where we are in the Streaming Wars, have been, and will go

📖 Moneyscoop’s Tax Guide: I’m not the only one that hasn’t done taxes yet, right?

Have an article you like that we should include in this section? Let us know by responding to this email.

What We’re Learning

Recreating VC takeaways blog post

Last June we wrote this post about honest takeaways from working in venture capital. It got good feedback.

We’re adding to it this year and already have 25 new takeaways. We’re adding a few more and want your input.

If anybody has any feedback on what life is actually like in VC, let us know in the comments or shoot a reply to this email. Bonus points the more non-obvious it is.

Tweet of the Week

Blog post goldmine 🏆

Read this is you want to go down a rabbit hole.

Tons of good recommendations from smart people in here.

Together with Brex

Wait … you guys manage your spend?

Obvious statement alert: managing invoices and team spend is a nightmare.

Chasing down receipts, uploading to a spreadsheet, sending to another team to approve, and reimbursing your employees sounds … super fun.

Brex takes this archaic process from the Stone Ages to the modern era by giving finance teams the tools they need to operate. Dashboards, automations, integrations, and financial modeling instead of manual work that makes you want to reconsider jobs.

Give your finance team the tools they need to operate in today’s world.

Question of the Week

Deeptech valuations by round 📶

This is a good question all investors should be asking within different subsectors of the startup market. Cooley has a great resource for analyzing startup trends they see within legal documents, but they don’t break it out by sector.

If anybody has good insights here, shoot us a reply or let us know in the comments.

Thanks for reading this far and giving us a little bit of your attention this week.

Feel free to unsubscribe whenever this stops becoming valuable to you.

- Clay and Tyler