Looking back, 2022 has been quite a year for some investors, and not in a good way. Mistakes made in the boom years of recent years led to many write-offs, but the most egregious example of abysmal investment practices this year was FTX, the bankrupt and disgraced crypto exchange.
In fact, as we wrote this, Sam Bankman-Fried, the co-founder of the company, was extradited from the Bahamas to the US, where he faces eight criminal charges. In recent months, his investors simply watched as the company’s value evaporated from $32 billion to zero in no time. Like it the rock band Talking Headsthey might have wondered, “Well, how did I get here?”
A major reason was that FOMO often replaced due diligence. And for a while, the V in VC seemed to stand for “vibes” — the founders’ vibes seemingly became more important than their products.
Unfortunately, FTX is just the latest in this series of failures. We can revisit companies like WeWork and Theranos, or even look at the list of billionaires and wannabes lined up to become part of the $44 billion disaster in the making that appears to be Elon Musk’s Twitter investment. Even Musk himself tried desperately to get out of the deal before finally closing it in October.
According to Axios editor Dan Primack’s Pro rata newsletter last week, while some investors seem to think Musk has done a reasonable job of cutting costs, others are concerned about how they will explain their involvement to their investment committees. Maybe they should have thought about that before did they throw their money into the deal?
This all points to a broader problem with investing today. We don’t want to tar the entire industry with the same brush, but it’s fair to say that some investors have lost their caution because they felt it was a better idea to get in line for the latest shiny thing.
Obviously investing should be about getting to know the team, checking the books (as far as possible) and making sure you push the idea. You should never sign checks because all the cool kids are doing it – that’s never a good approach to investing millions of dollars.
We spoke to a few investors to get a look at how due diligence and investment practices have failed in the recent past, and whether investors who may have fallen prey to chasing the next big thing would learn from the mega-mistakes from this year.
Have we learned anything?
There are several issues at play here, and the venture capitalists we spoke to emphasized that some investment firms (and investors) need to be more disciplined, especially when they’re handing out someone else’s money.
