The FTX freakout
SBF is ngmi, but crypto probably will
This is a (lightly) edited version of an internal Slack post at Spindl that I’m sharing here in the spirit of ‘building (and thinking) in public.’ If you’d like to see the internal version, we’re hiring.
I’ve been getting calls and emails in various stages of panic from Spindl’s venture capitalists this week. One took the form of an emailed PDF letter full of grim forebodings about the coming fund-raising environment. Another was a call where you could hear the fear, along with sputtering encouragement to go raise money if possible (I jokingly offered him a job at Spindl if this VC thing didn’t work out). Out of a total of five conversations, all were somewhere between “don’t panic but panic” and Spartan calls for resilience, along with disclaimers around taking care of mental health.
First, let’s do the numbers. Looks like something on the order of 10-ish billion dollars were incinerated in SBF’s adderall-fueled grift. While that might be large by crypto standards, it’s small in the bigger scheme of things. When I was a junior quant on the Goldman Sachs credit-trading desk during the 2008 credit crisis, we had hundreds of billions of credit risk on the books (and that was just the investment-grade desk).
The US government authorized $700B to backstop the financial system (about $450 billion of which was used). Banks were exploding one after another, and people were losing their houses all across the US. In a very not-funny version of Rahul Ligma, we watched as Lehman Brothers and Bear Stearns bankers were calling us for trades on one day, and standing on the street with a cardboard box in their hands the next (it was particularly jarring watching this unfold from inside another trading floor).
Which is a long way of saying, in the macro picture, FTX is not an apocalyptic financial event. The loss to those affected is of course enormous, and this isn’t meant to diminish the personal impact, but this is nothing like the economy-wrecking crashes of the past. If there’s any lesson from this is that the biggest crypto meltdown in history will barely affect the larger economy: crypto is still relatively small and isolated.
From the entrepreneurial perspective, one can also find far larger parallels in history. The dot-com bust of 2000 wiped out almost 80% of the NASDAQ and trillions (with a ‘t’) in market value evaporated in months. Whatever amount of hate crypto is about to get from the commentariat, it will be nothing compared to the non-stop haterade about tech during the first real tech downturn. The eventual Internet boom(s) followed all the same, of course.
As Carlota Perez discusses in her Technological Revolutions and Financial Capital, this is the sort of irrational exuberance necessary to propel a new order into being. You don’t get revolutions without it, but before the ancien régime is overturned, you have stalled revolts that hint at what the new regime will look like:
With the collapse comes recession—sometimes depression—bringing financial capital back to reality. This, together with mounting social pressure, creates the conditions for institutional restructuring. In this atmosphere of urgency many of the social innovations, which gradually emerged during the period of installation, are likely to be brought together with new regulation in the financial and other spheres, to create a favorable context for recoupling and full unfolding of the growth potential. This crucial recomposition happens at the turning point which leaves behind the turbulent times of installation and paradigm transition to enter the ‘golden age’ that can follow, depending on the institutional and social choices made.
Technological progress has always been driven by bubbles led by lunatics. The cover photo above is of the mayhem surrounding the South Sea Bubble which wrecked none other than Isaac Newton; the end result was royal regulation of joint-stock companies….what we’d now call corporations. Innovation starts in mad genius and grift and bubbles, and ends in establishment institutions that go on to reject the next round of mayhem1.
Every Web titan you see about you—Square, Stripe, Twitter, Facebook, Airbnb, Uber—all launched or massively scaled after another such VC panic, the one that followed the 2008 crash. Some of you (I imagine) were in diapers at the time, but the viral Sequoia post of that moment was a deck warning that ‘RIP Good Times’, that sounded just like the panic messages I just received.
And then what followed was the biggest tech boom of a generation. You build when there’s blood on the streets, and rake it in when those same streets are paved with gold. Everything you see now has happened before, and it’ll happen again. The script is the same, just the casting and props change.
Where FTX will matter is in the perception of risk in crypto, and there, VCs panicking about their LP’s panicking is more important. The short version of the letters and emails VCs sent is this: companies in the middle-stage of the startup trajectory, who are still burning money and who possibly raised at sky-high levels pre-crash, will not be able to raise more in the near future.
In the very short-term, that means cutting costs and layoffs (there go the ridiculous parties). In the longer-term, it means agonizing over user retention and monetization with what few tools exist in Web 3. Selfishly, there will be even more interest in Spindl now than before.
From a coldly calculating point of view, this is a vindication of the company’s thesis. I raised the company’s first capital in the wake of the crypto crash earlier this year, because every VC realized that the economics of Web 3 would now radically change. ‘Token go up’ is not in fact a law of nature; scalable user growth, retention, and monetization are. This business of crypto projects inventing a fake currency, stoking viral interest in it to pump the price via speculators, and then turning around and using it to pay users to use the product (most of which just gets stolen by sibyls) is obviously unsustainable2.
You need to build experiences and services users actually want, with some monetization model that pays for the servers, headcount, and (importantly) user acquisition costs. For as radical and inventive as crypto and Web 3 are, we’re not living in some fully-automated luxury crypto-communism of ever-increasing tokens that pay for everything. It would seem that era is well and truly over. The time for real Web 3 businesses is here, and Spindl will build its cash register.
For a taste of the lunacy, read this bio of Jay Gould, the much-hated railroad SBF of the time (19th century railroads being the then cutthroat battlefield of capitalist sociopathy). Or read about the assorted insanities around the development of the telegraph. <trigger warning: auto-erotic self-citation> Or go read Chaos Monkeys to see what it was like running around SF’s SoMa with a startup’s burn-rate roasting your ass. History sure does rhyme.
This is not some damning indictment of Web 3. Web 2 was exactly the same, inventing a fake asset (startup equity) in order to ensnare speculative capital in ever-mounting valuation spirals, then turning around and using that fake money to pay for employees and the venture capital to pay for user growth via marketing. The difference is that the capital raised was (generally) professional rather than retail (as it often is in crypto).
You might claim that’s morally superior, but where’s that professional venture capital ultimately come from? VCs aren’t masters of the universe: they’re just an asset-allocation layer between entrepreneurs and the LPs (limited partners) who are the real masters of the universe. And who are they? The California Public Employees’ Retirement System (CalPERS) for one, which was still reeling from the losses in the first dot-com crash decades later. The guy who works at the DMV, and who put money into a pension plan then or bought NFTs now, got burned in both Webs. To someone who’s experienced both Webs 2 and 3, there are more parallels here than Web 2 cares to admit or remember, or that Web 3 even realizes.