FTX collapse shows need for venture capital ‘correction’, says investment chief

The collapse of FTX has underscored a “distortion” in the venture capital market and the need for a correction across the industry, the boss of a global investment body has said.

Chief of the Global Private Capital Association Cate Ambrose said the implosion of FTX, which had garnered a $32bn valuation as a result of splashy bets by investors like Sequoia Capital and Softbank, had highlighted a lack of discipline among VC firms.

“When you look at what happened with FTX it is really breathtaking,” she told City A.M. in an interview.

“But I think that’s where I see the scale of the money available does create distortion, and when there’s zero per cent interest rates or opportunity to resell, of course that distorts markets.”

She added that there was now a “necessary correction” in the industry as cheap cash dries up and “accountability” returns.

“When there’s so much money out there and so much speculation […] irresponsible things get done,” she said.

A host of big name investors were forced to publicly writedown their stakes in Sam Bankman-Fried’s firm just before it collapsed into bankruptcy on 11th November.  

Storied VC investor Sequoia Capital wrote to its investors on 10th November saying it would write down its roughly $210m investment into the firm down to zero. Softbank and the Ontario Teachers Pension Plan were forced to make similar announcements to their investors.

John Ray III, the new boss brought in to oversee the bankruptcy proceedings of FTX, has described the firm as suffering from an “unprecedented and complete failure of corporate controls”.

Questions have since been swirling in the industry over how FTX was able to part prolific investors from their cash with such a lack of internal controls in place.

The former COO of Softbank admitted that he had succumbed to “fear of missing out” and had a lack of understanding of FTX’s business when the Japanese investor poured cash into the firm.

“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 per cent understand what we are investing in,” he wrote on Twitter. “I totally failed here on both.”

The VC industry globally is suffering a downturn as interest rates rise and cheap capital dries up this year.

The number of global VC deals plummeted to 7,817 in the third quarter of the year – the lowest level since the fourth quarter of 2017, according to KPMG’s Venture Pulse report.