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Unbelievable: The Power of a Messy Excel Spreadsheet

When you thought the story of the downfall of crypto exchange FTX couldn't get any worse, there are even more shocking details, including something that every CFO dreads: messy Excel spreadsheets.

Last month, FTX, one of the largest cryptocurrency exchanges in the world, with a previous valuation of $32 billion, filed for bankruptcy, and its CEO, 30-year-old Sam Bankman-Fried, resigned. Bankman-Fried was a prominent figure in the crypto industry, advocating for it on Capitol Hill and forming high-profile partnerships. For instance, in October, Visa announced a partnership with FTX to expand the use of its account-linked Visa debit cards in 40 new countries. As of now, Visa has terminated its global agreements with FTX and is closing down its US debit card program with its issuer.

Bankman-Fried admitted through a tweet that there was "poor internal labeling of bank-related account.” He also reportedly had an amateurish pitch, which is concerning given that the company, based in the Bahamas, raised over $1.8 billion from several rounds of funding and had a valuation of $32 billion in January. FTX was backed by some of the biggest venture capital firms, including Sequoia Capital, SoftBank, and Tiger Global Management.

FTX leadership structure

When taking a look at the leadership team it is unclear if FTX has a CFO. According to Dan Ashmore, a crypto analyst at Invezz, a London-based fintech firm, "FTX's collapse was unique in that it resulted from the complex relationship between the exchange (FTX) and the trading firm, Alameda Research, both of which were founded by Sam Bankman-Fried." Ashmore goes on to say that the reason there is no CFO at FTX is “because the leadership structure was highly unusual, given Bankman-Fried essentially made all the decisions for both companies.”

FTX was notoriously small, with only 75 employees, even as it experienced rapid growth and reached a valuation of $32 billion. This is in contrast to rival exchange Coinbase, which had more than 6,000 employees before laying off 1,100 earlier this year.

According to Ashmore, the former co-CEO of Alameda, Sam Trabucco, resigned earlier this year due to the heavy workload. "This left only Caroline Ellison, co-CEO at Alameda, and Bankman-Fried as the senior leaders, although the latter was very much the number one," Ashmore said.

Ashmore attributes the FTX "debacle" in part to its "bespoke management structure and lean headcount," with most of the legal and compliance team reportedly quitting. "There is no doubt that the aggressive leadership concentrated power structure and tangled relationship between FTX and Alameda could have been reined in with a more conservative and prudent leadership structure,” says Ashmore.

“Poor internal labeling”

Bankman-Fried wrote in a tweet, “The full story here is one I’m still fleshing out every detail of, but at a very high level, I f***ed up twice.” He continues, “The first time, a poor internal labeling of bank-related accounts meant that I was substantially off on my sense of users’ margin. I thought it was way lower.”

A finance team, for example, could have provided the financial clarity needed for the proper labeling of bank-related accounts.

Tristan Bove of Fortune provides this analysis: “He claims that because of this poor labeling, his sense of leverage was 0x when it was actually 1.7x and his sense was that he had 24 times the average amount of daily withdrawals in liquidity when he actually had just 0.8x. In other words, he was more leveraged than he thought and had less cash to cover it than he thought—a lot less. Then, when roughly $5 billion of withdrawals were made on Sunday, he found himself here.”

Sloppy spreadsheets

Fortune’s Luisa Beltran obtained documents that showed Sam Bankman-Fried’s style. “With each round FTX raised, Bankman-Fried sent a spreadsheet to potential investors displaying items like revenue, profit and losses, daily users, and expenses for FTX, according to an executive who received the documents,” Beltran writes. “Fortune was sent two sets of spreadsheets on the condition that we could review but not publish the original documents, which were dated December 2021 and June 2022.”

In her review, Beltran claims that “Taken together, the documents show an early picture of an outrageously fast-growing enterprise run by a founder who eschewed traditional management structures, board oversight, teams of accountants and lawyers, and other standard practices of businesses that grow to this size. The spreadsheets are a far cry from audited financials; rather, they appear to be homespun Excel files, which are at times confusing and have inaccurate labels.”

“They are sales documents and do not provide a clear accounting of how FTX was valuing its various tokens or liabilities when calculating figures such as ‘net profits,'” Beltran writes. “And yet Bankman-Fried was able to translate such documents into nearly $2 billion from some of the savviest investors around.”

In general, fundraising documents submitted to investors for private companies can vary in appearance depending on whether the company is an early-stage private company or a more established, late-stage private company.

Andrew Murphy, managing partner at Loup, a tech investment firm based in Minneapolis, says that “Typically, an early-stage private company will share a deck with prospective investors.” Often, these companies do not have much information to share about their financial activity or audits, but “if an investor expresses interest, the company will sometimes send documents to support the investor’s diligence, including a term sheet, cap table, corporate documents like articles of incorporation and corporate bylaws, prior financing docs, contracts, financials, tax returns, etc.,” says Murphy. In later-stage private companies, Murphy claims that investors are typically offered a link to a data room that contains all of these aspects.

However, “For a company at the stage and value of FTX, fundraising documents are normally detailed legal agreements that include significant provisions to protect the investor from fraud and conflicts of interest (now and in the future),” says David Spreng, chairman, founder, and CEO at Runway Growth Capital LLC. “It is very unusual for a company raising hundreds of millions of dollars (or at such lofty valuations) to not have audited financial statements,” Spreng adds. “Most late-stage equity investors and lenders require audits.”

Qian (Cecilia) Gu, an associate professor at Georgia State University’s J. Mack Robinson College of Business claims that the country where the company is located is an important factor to consider when it comes to fundraising. “The regulations matter a lot,” she says. “If you’re headquartered in the Bahamas, then it’s a very different business than if it were set up in the United States. The extent to which you disclose information and present your financials depends on the stage, the industry you’re in, the environment, and governmental regulations…That’s why we see a lot of the companies register overseas for disclosure reasons.”

It is unclear why FTX investors were satisfied with such a poorly organized spreadsheet, but it is possible that the numbers it contained were so impressive that it didn't matter. What is certain is that CFOs who were already hesitant about investing in cryptocurrency are likely to be even warier now.

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