As seen in RealClearMarkets.
Business columnist Gene Marks is angry. He feels that venture capital firm Sequoia Capital did the other 99.99999% of us harm by investing in FTX. In his words, “super-smart people led millions of unsuspecting people into financial loss or ruin.” Actually, that’s not true.
If Marks doubts the above, he should contact investor relations at Sequoia about investing in one of their funds. He would have better odds of getting struck by lightning than being allowed in. If we ignore superfluous regulations that might exist as a barrier to Marks gaining exposure to Sequoia’s undeniably “super-market people,” we can’t ignore that the line to invest alongside Sequoia is a long one that yes – 99.99999% of us – would never get to the front of.
Marks perhaps knows the above but is seemingly saying that by investing heavily in FTX, Sequoia helped give life to an entity that all-too-many lost a lot of money on. Yet even there, Marks’s attempt to create victims falls short. As was the case with automobiles, radios, televisions, computers, and internet, any innovative new industry logically attracts a great deal of courageous investment that flows into companies that fail well over 90% of the time. Sequoia is evidence of this truth.
The rare “seen” with regard to this top VC is the very few investments that bear abundant fruit. The much more common “unseen” is the myriad investments that fail spectacularly, and usually very quickly. Put another way, and without insulting Sequoia one bit, the fact that it was heavily invested in FTX was in a very real sense a signal to small investors that they would be wise to not heavily expose themselves to it as customers. That was the case not because Sequoia aims to lose money, but because Sequoia has money to lose. There’s a difference between the two.
Sequoia and other Silicon Valley VCs, much like the Rockefellers, Vanderbilts and Phipps who were the pioneer Valley investors long ago, have the means to invest in ideas that are frequently outlandish, and for being outlandish, fail the vast majority of the time. But when their investments succeed, the gains are huge. Incredibly high risk, stupendously high reward on rare occasions that more than pays for all of the failed investments. Marks laments Sequoia’s $200 million+ loss in FTX, but that’s the VC’s business model. Thank goodness it is. More on this in a bit.
For now, it’s useful to address Marks’s other main point that Sequoia and others “ignored basic principles and common sense” with their investment in FTX. This narrative has been a popular one since FTX’s implosion, including among the free-market leaning. The argument has been that FTX founder Sam Bankman-Fried was the embodiment of “red flag” with his cargo shorts, his video gaming while on Zoom calls, his “effective altruism,” and all sorts of other “obvious” warning signs. Such a view implies that Sequoia got to the point where it has $85 billion under management absent the investing principles and common sense that those of us who allegedly saw through SBF abide. Such a view is much less then serious, as is the notion that Sequoia’s partners don’t have “red flags” they look for. In other words, critiquing Sequoia for having invested heavily in FTX reveals a major misunderstanding of the business Sequoia is in.
Put simply, investors at Sequoia are looking at businesses full of raging “red flags” every day. That’s the business they’re in. While once again 99.99999% of us have the luxury of searching for “blue chips” staffed by world-class managers, venture capitalists are in search of the oddballs foolish enough to believe they can rush an all-new future into the present. Translated for those who need it, they’re searching for near crazy and sometimes truly crazy individuals who believe they can accomplish the impossible by knocking today’s blue chips that we small investors buy and hold off of their perches. Individuals like this personify “red flag,” and VCs back them in some ways because.
Marks asserts that “we’re disappointed by their behavior,” and he’s of course writing about venture capitalists like those who roam the halls of Sequoia. The columnist gets it backwards. Sequoia is the hero in this story precisely because it’s putting money to work in pursuit of businesses that will vastly improve on the abundant present. We need more Sequoia-quality VCs willing to lose money in pursuit of a different tomorrow. That Marks doesn’t see this truth indicts him, not those he critiques.