How to raise $2 billion with sloppy Excel spreadsheets

Good morning,

As soon as you think about the story of The collapse of the crypto exchange FTX It couldn’t get any worse, there were still more jarring details, and it involved every CFO’s worst nightmare: messy Excel spreadsheets.

Sam Bankman-Fried, CEO of FTX (split from Alameda Research in 2019), who stepped down last week when the exchange filed for bankruptcy, in his own words has “branded the internals” poor set for bank related accounts,” as he tweeted. But he also has a pretty amateur throw. That’s alarming because the Bahamas-based company has raised about $1.8 billion through multiple funding rounds. It reached a valuation of $32 billion in January. FTX is backed by some of the largest venture firms including Sequoia Capital, SoftBank and Tiger Global Management.

My colleague, Luisa Beltran, received materials that showcase the SBF’s style. “With each round of FTX raises, Bankman-Fried sent out a spreadsheet to potential investors showing items like revenue, profit and loss, daily users and expenses for FTX, according to an executive. documents have been received,” Beltran wrote. “Luck was sent two sets of spreadsheets on condition we could review but not publish the original document, dated December 2021 and June 2022.”

Taken together, the documents show an early picture of an extremely rapidly growing business run by a founder who moved away from traditional management structures, she continued. , supervision by the board of directors, a team of accountants and attorneys, and other standard practices of businesses that grow to this size. . Spreadsheets are far from audited financial statements; instead, they appear to be homemade Excel files, which are sometimes confusing and incorrectly labeled.”

“They are sales documents and do not provide clear documentation of how FTX values ​​its various tokens or debt when calculating metrics such as ‘net profit’,” writes Beltran. “However, Bankman-Fried was able to translate such documents into nearly $2 billion from some of the wisest investors around.” For more details on spreadsheet metrics and analysis, Read Beltran’s full story here.

So, in general, what do fundraising documents sent to investors typically look like? Andrew Murphy, managing partner at Loup, a technology investment firm based in Minneapolis, told me that for private companies, it can be very different, especially for companies. private companies at the early stage compared to private companies at the late stage.

“Typically, an early-stage private company will share the floor with potential investors,” explains Murphy. Many times these companies don’t have much to share about financial performance or audits, he said. “If an investor expresses an interest, the company will sometimes send documents to support the investor’s due diligence, including the terms sheet, the limit sheet, corporate documents such as articles of incorporation and charter, previous financial documents, contracts, finances, tax returns, etc,” he said. Later stage private companies often provide an investor Potential investment a link to the data room covers all of these aspects, Murphy said.

However, “For a company at the stage and value of FTX, fundraising documents are often detailed legal agreements that include important provisions to protect investors from fraud and conflict. conflicts of interest (now and in the future),” said David Spreng, president. Founder and CEO at Runway Development Capital LLC. Spreng adds: “It is unusual for a company to raise hundreds of millions of dollars (or at such a high valuation) without having audited financial statements. “Most late-stage investors and lenders require an audit.”

Qian (Cecilia) Gu, an associate professor at Georgia State University’s J. Mack Robinson College of Business, told me: Another factor to consider when it comes to fundraising materials are country requirements. where the company is located. Gu specializes in venture capital investment. “Regulations are very important,” she said. “If you’re headquartered in the Bahamas, it’s a very different business than when it was founded in the United States. The extent to which you disclose your information and financial presentation depends on the stage, industry you are in, environment and government regulations…That’s why we see many companies posting registered abroad for information disclosure reasons.”

Perhaps FTX investors were satisfied with an attractively messy spreadsheet. Or maybe they just don’t seem to really care because the numbers in the spreadsheet are almost too good to be true.

See you tomorrow.

Sheryl Estrada
[email protected]

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