Investor describes Sam Bankman-Fried’s ‘catastrophic’ risk appetite

Serious concerns about the methods of operation of the founder of the failed FTX exchange Sam Bankman-Fried emerged even before the platform’s founding. CNBC told Hack VC managing partner Alexander Pack about it.

I was the first VC to try to invest in SBF, 4 years ago, well before FTX had even launched. I shared some of my story with CNBC, but there is more — a lot more.

Here’s what I learned, and why I passed on investing based on suspicion of deception and reckless risk-taking. https://t.co/nnXEVGjoud

— Alexander Pack (@alpackaP) November 17, 2022

The investor met Bankman-Fried in 2018. The entrepreneur was then seeking external financing for the trading firm he had founded, Alameda Research. Pack was the co-founder of Dragonfly Capital — a well-known venture capital firm in the crypto industry with a $100 million fund.

The investor described the founder of Alameda and FTX as ‘incredibly smart and charismatic’:

«I was charmed by him during the first month [of our interactions], until he showed us everything».

According to Pack, he and his team, over roughly six months, met with Bankman-Fried more than ten times. But after thorough due diligence they all came to a single conclusion:

«Having spent months with him, we understood that his risk appetite was catastrophic. We looked at it and saw warning bells — the risks for investments were too high».

One of the ‘red flags’ for them was the Alameda balance sheet showing “unusually large losses of $10 million, and in a short period”. Pack said they could not determine the nature of the losses: whether it was a trading mistake, a string of misses, or fraud.

Another troubling warning for the investor was that Bankman-Fried concealed the existence of the FTX exchange. He and his team discovered that Alameda “is burning through significant financial resources to fund” the platform. In response to the question, the entrepreneur replied rather flippantly, recalls the investor:

«I don’t remember telling you that I have an idea for an exchange. So I spend most of my time on it, neglecting the core business».

Pack stressed that overall for the proposed investments a “picture of enormous risk” was emerging — Bankman-Fried disclosed or withheld large amounts of data at his discretion.

«He never showed Alameda’s books to any potential investor — that’s where all the bad things happened», — said the Dragonfly co-founder.

In the August 2020 thread, Bankman-Fried laid out his version of events. Pack confirmed that the entrepreneur had in mind the deal they discussed.

3) They expressed excitement about Alameda, and desire to help it grow. They understood the business. Alameda has never taken an external investor, but this seemed like a good opportunity.

So the talks went on for a few months, and finally got to terms.

— SBF (@SBF_FTX) August 6, 2020

«They showed interest in Alameda and a desire to help it grow. They understood the business. Alameda has never taken external investor, and this seemed like a good opportunity», — commented the founder of the trading firm.

According to Bankman-Fried, the investors’ final offer amounted to a third of the project’s valuation, and the team rejected it.

Pack said that after the deal collapsed Bankman-Fried did not allow his involvement in investments in his projects. He shared the story with some VC colleagues, but did not bring it to light.

Looking back on his dealings with the entrepreneur, Pack noted a premonition of the FTX collapse:

«It was clear four years ago — the guy was hiding serious things and taking great risks with other people’s money. Now he seems to have done the same on a larger catastrophic scale».

FTX, Alameda and about 130 affiliated firms filed for bankruptcy on November 11.

The liquidity crisis at the exchange emerged after Binance CEO Changpeng Zhao announced liquidating the company’s position in the FTX token (FTT). The decision was reportedly taken after CoinDesk’s investigation, which found a large share of the digital asset on Alameda’s balance sheet.

Coin Metrics experts suggested that a possible cause of the collapse could be ‘large financial support’ that it provided to the trading company in Q2 2022.

The new FTX CEO John Ray blamed the former leadership of the exchange for concealing the illicit use of customer funds, ‘a complete failure of corporate governance’ and granting Alameda ‘secret’ preferences.

According to Bankman-Fried, the assets of FTX and Alameda are valued at $1 billion, and liabilities amount to $8 billion.

Bloomberg’s analysts previously described a similar valuation and deemed it ‘unlikely’ that customers’ and investors’ funds could be returned.

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