FTX fiasco symbolises venture capital cult out of control

Partner swapping at a luxury penthouse in the Bahamas. Meetings uncovered with presidential aides. Billions switched from account to account, and social activism on a lavish scale. It promises to be the trial of the century – at least so far.

When he appears in court this week, the 30-year-old former billionaire Sam Bankman-Fried is expected to plead not guilty to charges of fraud, setting up an epic legal battle over whether the one-time crypto whizz-kid was crooked, unlucky, or simply incompetent. It will be a riveting spectacle.

And yet, in truth, it will not just be Bankman-Fried who is in the dock. It will be the entire venture capital industry, and the money managers and bankers who surround it. The FTX founder could not have kept the show on the road for so long without an army of enablers, nor without a culture that was willing to invest billions in his brand of arrogance and carelessness.

As a courtroom drama, with its mixture of big money, high-powered politics, and personal vanity, it will probably outstrip even the trial of Ghislaine Maxwell in 2021. Less than a year ago, Bankman-Fried was celebrated as one of the world’s smartest young entrepreneurs. His cryptocurrency trading empire, FTX, was valued at $US32 billion ($47.1b), and its founder at $US26 billion ($38.2 billion). It was growing at lightning speed, investing in related tech start-ups, and with its championing of “effective altruism” leading a very millennial version of social active capitalism.

The fall, however, was spectacular. In a few short weeks last year, FTX ran out of money and collapsed with debts that are estimated at more than $US3 billion ($4.4 billion), but which could easily turn out to be a lot higher once the mess is finally cleared up.

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Bankman-Fried, of course, remains innocent until proven otherwise. It is perfectly possible for a company to go bust without any form of fraud taking place. Simple incompetence, naive over-confidence, or just a run of bad luck will do the job just as effectively as deliberate dishonesty.

His lawyers will no doubt make a case of some sort that nothing criminal happened. And yet, even if that turns out to be technically correct, there is nothing “innocent” about Bankman-Fried or about the industry that elevated him to cult hero.

He was emblematic of a venture capital cult that grew wildly out of control during a decade of easy money, and which created vastly overvalued companies based on little more than some fast-talking chutzpah.