Last week, many investors were left with egg on their faces after FTX’s valuation went from $32 billion to zero in a New York minute. VCs were left wondering, “What the hell happened?” And they’re still wondering, “Wait — did I do something wrong? Is it me?”
Why yes, actually, it is you.
People are led to believe that, for the most part, investors are clear-eyed, data-driven people who carefully explore the financial underpinnings of the companies they invest in. There is little room for emotions like jealousy or the fear of missing out (FOMO). Of course not. And these people investing billions of dollars surely 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:
I have been reflecting personally on the whole FTX fiasco and 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.
— Marcelo Claure (@marceloclaure) November 12, 2022
This is from the same guy whose former firm also invested significant money in WeWork, another spectacular example of poor judgment on the part of investors. Steve Jobs once said, “Everything around you that you call life was made up by people that were no smarter than you.” At the time, Jobs was talking about building products, but evidently, this also applies to the people funding the startup ecosystem.
While it’s good that Claure was so open, honest and reflective, perhaps we should all remember that investors are not any smarter than anyone else. They’re human after all, and their classic lack of self-awareness combined with venture enthusiasts’ myopia is perhaps the problem. Most investors and the founders in whom they invest are white men, and you get double points if you went to Stanford, Harvard or MIT. These folks are handed the mantle of genius in all that they do and touch. The next Warren Buffet is rarely if ever, predicted to be a Black man.
Black founders continually describe the higher bar they are expected to meet compared to their white counterparts. This bar is tall and wide, and stretches from acting and music to banking and venture capital. In an interview with TechCrunch last year, Bambee HR founder Allen Jones described his experience as a gay Black man trying to get funding in Silicon Valley:
They take bets that they deem as a bit safer — entrepreneurs that look like a certain profile — white, cis-gender males that come from Stanford and Harvard that match the profile of confidence. They have kind of built in an anti-bias determination around, so they automatically get the benefit of the doubt to 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 TechCrunch in February how she ran into all sorts of obstacles that were over and above what startup founders faced when she went looking for funding. “The whole thing is crazy and challenging,” she said. “So if we’re in the room, we’ve clearly been able to jump over all of the hurdles to get there, and we’re usually one or two in the space. So then to say you’ve gotten here, you’re [unique], and we’re not going to give you money, it’s crazy, it really is. It’s a lot.”
Private-market investors seemingly operate less as venture capitalists and more like vibe capitalists — giving money to people who look like them, sound like them, and are, overall, just like them. This leads them to take risks — naturally, as that is what the investing game is about — but not so much in the companies that actually pass due diligence. Instead, they skew toward the ones that pass their respective vibe checks. There is no balance. There is no fairness. And therein lies no genius.
Last year, companies founded only by women raised just $7.7 billion — or 2.4% — of overall investments, according to PitchBook. That number skyrocketed to $49.1 billion for mixed-gendered teams, showing how the presence of a man can seemingly double, or even triple, the value of a woman. As of October 15, only 1.9% of total funding had been raised by all-women teams.
The numbers are so dismal, it’s sad. In Q3, Black founders raised a measly $187 million. To put that into perspective, disgraced WeWork founder Adam Neumann picked up $350 million just 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 has never really been the point of this game, has it? They like 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 bull them up again. The key here is that they only want to involve themselves with each other.
When Sam Bankman-Fried (CEO of FTX until recently) launches his next company, people will defend the investors who once again throw millions at him. “He has proven he can build a billion-dollar company, he takes risks, he’s just a kid, we all mess up sometimes.” This speech was written by the devil we all have come to know. Women and minorities do not get to take risks, be kids and just mess up sometimes.
Already, Sequoia has marked its own $200 million investment in FTX down to zero. That number, too, is more than what Black founders received this Q3, and it’s rare to see a company founded by a Black person worth more than $10 billion, let alone $32 billion. Meanwhile, Softbank revealed days ago that it held a nearly $100 million position in FTX, which it has written down to zero. Meanwhile, Sam right now is doing a letter-by-letter countdown, one tweet at a time, toward what is looking like another confession. So far he’s typed, “What h a p p e,” and was yet to reach “d” at the time of publication.
Ultimately, we’re dealing with this pervasive myth that investors are averse to risk. This isn’t true. They love taking 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 deems they must. Forget the cries and the calls; this is all about vibes, remember? A white guy could play video games during an investor call or come to a meeting dressed as SpongeBob’s pineapple house and still likely take a check home.
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