The last few weeks have been particularly volatile for crypto — even by its own standards. In a matter of days, the space has seen one of the biggest players, FTX, plunge into bankruptcy from a valuation of $32 billion. Not only that, more drama is coming to the limelight as the layers of the onion are peeled.

Forget for a minute that the crypto exchange held just $900 million in liquid assets against $9bn of liabilities or that its accounting firm was in the metaverse. All this while the founder was going about pretending to be a philanthropist using clients’ money and even making political donations to earn clout.

That barely scratches the surface of a far deeper rot in the company, which will make for a great (and pretty damning) book or movie. But it also deepens the cracks in the broader crypto space, which has shown little intention to introspect.

Where all the evangelists of decentralised assets used to rally together at any good news, most seem to have gone mum and not uttered a word about the fraud that has become systemic to the industry. Some have actually turned further fringe and are seeking refuge in conspiracy theories like how the Federal Reserve or evil centralised authorities were behind this saga.

‘Genius’ is no excuse for the lack of corporate governance, a phenomenon that has only intensified over the last decade

Others are putting the blame squarely on Sam Bankman-Fried, the CEO of FTX. Not that he was innocent at all, but it belies a broader problem with startups — that of enablement and a lack of accountability.

Venture capital (VC) as an industry is built around the cult of the founder, i.e. one brilliant man (because women-founded companies get barely two per cent of the total investments) can figure out things on his own. To ensure he gets there, the investors are usually willing to look away for as long as possible. So what if they are fudging numbers a bit or maybe engaging in casual sexual harassment once in a while?

But the problem is that the “fake it till you make it” doesn’t always work. When things go south, and bad publicity chases the company for all its shenanigans, the same investors are often the first ones to throw the founder under the bus. Like Sequoia did with FTX by writing off the investment. As if that’d undo how the VC had written odes in praise of Bankman-Fried or enabled him to get to this point in the first place.

VC as an industry is built around the cult of the founder — one brilliant man who can figure out things on his own — and to ensure he gets there, the investors are usually willing to look away for as long as possible

It reminds me of Sultana Daku, the legendary dacoit from the United Provinces in the 1920s. After finally getting caught by the Brits, he was sentenced to death and was granted one last wish. He wanted to see his mother and when she came, Sultana bit her ear till it bled and said: “if you had stopped me the first time I stole an egg instead of covering it up, I wouldn’t have gotten to this point.”

Unlike Sultana, the founders can just wait for the controversy to subside a bit and then make a comeback. Like WeWork’s Adam Neumann did with his new startup, Flow, raising $350 million from Andresseen Horowitz — putting the ghosts of the past aside. FTX’s Bankman-Fried is even luckier as he won’t even have to wait for the issue to be forgotten. Barely days after the revelations of massive fraud, he is actually expected to speak at the New York Times’ Dealbook Summit next week.

It would have been hilarious if it weren’t so sad (and criminal) as the man has ripped thousands of people off their hard-earned savings. Admittedly, FTX was an extreme case of fraud, but the lack of governance and controls in startups is a much broader problem — enabled further by the culture that heavily prizes the cult of a brilliant founder.

This is obviously not to downplay the importance of founders in early stage startups or that they shouldn’t be smart. But that ‘genius’ is no excuse for the lack of corporate governance, a phenomenon that has only intensified over the last decade. For example, around 47pc of all the 2021 tech initial public offerings in the US had dual-class shares — creating a lopsided voting structure.

Early stage startups are understandably unstructured with a ‘move fast, bring things’ approach, for which they need a high degree of freedom. But after reaching a certain scale, especially where the public’s money is concerned, it’s not unreasonable to expect investors to help lay down the frameworks for governance and create some sort of controls. Or at least be willing to introspect why and where things went wrong instead of just casting everything as “celebrating failure”, even when the failure in question was accounting fraud.

Published in Dawn, The Business and Finance Weekly, November 28th, 2022

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