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FTX: The worse it gets for SBF, the better it gets for crypto, strategist says

Tusk Ventures Co-Founder & Managing Director Bradley Tusk joins Yahoo Finance Live to discuss the demise of FTX, Sam Bankman-Fried’s criminal charges, how investors are reacting to Wednesday’s Fed meeting, and the outlook for cryptocurrency.

Video Transcript


- Everyone keeping in the same frame here broadly, regulators and policymakers are now looking to build legislation from the destruction left behind after FTX filed for bankruptcy. Joining us now to lay out tech's most anticipated regulatory battles for 2023 is Tusk Venture Partners cofounder and managing partner Bradley Tusk. Bradley, always a pleasure to speak with you and good to see you.

BRADLEY TUSK: Yeah, good to see you, Brad.

- Absolutely. So first and foremost, if we can, from a VC perspective, where did venture capitalists go wrong in evaluating FTX and really doing any due diligence? Because there was clearly a lack thereof.

BRADLEY TUSK: Right. I think you always asked and answered the question in the same sentence, which is people got so caught up in the moment, they felt such a need to show that they were in crypto, too, that they were just throwing money at SBF without really doing the kind of diligence that they should, and not only that, throwing money at him and then taking a lot of credit for it publicly. We saw Sequoia do that especially in their own internal magazine. And it's a big black eye for Sequoia specifically, but for venture generally. But I do think also there is a real distinction between FTX and the rest of crypto.

And one final thing-- because the venture market was so crazy over the last couple of years, it wasn't just crypto. People were writing checks without doing diligence in every sector, in fintech broadly, in health tech, transportation, climate, whatever it is. I would be on a call with a founder and then be told if I was interested I had to submit term sheet 20 minutes later. And my answer was usually no, I'm not going to do that. But I think a lot of other VCs did.

- Bradley, this is something I've been asking as well because we've heard from other folks, there's a baby bathwater situation here, where people are sort of throwing out everything crypto. Not everything crypto is bad. But at a certain point, does it matter? If crypto is all about perception, the value of an asset is what people ascribe to that asset, if people are not ascribing value to that asset, does it matter if there's actually sort of intrinsic value there?

BRADLEY TUSK: Yeah, a few things. One is in a weird way, the FTX thing has gotten so bad that it's actually helpful for crypto because when it was just like, here is a company not complying with regulations, not taking things seriously, and causing all of this damage, that really cast aspersions on the industry overall. Now that it's here's a Bernie Madoff-like figure who committed a deliberately a massive fraudulent scheme, it actually kind of separates it out from the rest of the sector in a way. So weirdly, the worse it gets for Sam Bankman-Fried, the better it gets for the rest of the sector.

But overall, look, I think that one thing that we could and should do, and I've calling for this for a while, would be one, let's have a ratings agency that can actually rate different tokens and say these are more secure investments, these are less secure investments, and base some of that on intrinsic value. So, for example, Bitcoin, because there is a limited supply, has some intrinsic value. Ethereum, because applications can be built on top of the blockchain for it, has intrinsic value. But most tokens do not.

And the second would be I would love to see a world, and the feds would have to waive antitrust provisions to do this, but the top 10 exchanges get together and say, these are the 20 or 30 tokens that we're going to trade. And everything else are effectively junk bonds and we're not going to touch them.

- You have a close pulse on DC and broadly within the overlap of policy, as well as some of the more innovative kind of business ventures that are out there as well, and specifically within blockchain. And you and I have discussed that in the past. So specifically in terms of understanding blockchain technology, do you believe that there is enough of an understanding in Capitol Hill for there to be regulation--


- --at least starting there and then making its way into crypto?

BRADLEY TUSK: Well, right, so no. I mean, I think that if we actually asked every member of Congress to define Bitcoin and blockchain as two separate things, how many-- what percentage gets that right? 10%, 5%, something like that? So no, they're not particularly well informed.

And I think it is really important to understand that, look, some cryptocurrencies may have intrinsic value and may really still be worthwhile. Others may not. But blockchain as a whole, it's plumbing, right? It's a better way to transmit data from point A to point B. And there are certain functions that make more sense on the blockchain.

So, for example, in the wake of the Taylor Swift Ticketmaster fiasco, ticketing on the blockchain that is much more transparent and audible-- auditable, it's something that could be pretty appealing, right? Anything where you're tracking record, whether it's a DMV or property liens or anything like that, makes sense for the blockchain.

But as a VC, one thing that I have found is I get pitched every day with every conceivable idea for the blockchain. Right, Uber for the blockchain, Airbnb for the blockchain. And one of the questions I have to ask myself is does the blockchain actually makes the product better in this case? Sometimes it does.

So in the case of like the tickets, I think it really could. In other cases, it's just hype. It doesn't really make a difference.

- Bradley, we've talked to you in the past about Tesla and what has been going over there. But there's been this view that has emerged, at least on Wall Street, that Elon Musk shouldn't be running Twitter and running Tesla because he's now doing harm to Tesla. I mean, do you share that view? And what do you think he should be doing here from a leadership standpoint?

BRADLEY TUSK: Well, look, I think the first thing is you shouldn't make decisions based on trying to get attention for yourself. He bought Twitter for all the wrong reasons. I really think he just woke up one day, was feeling badly about himself, needed a dopamine hit. And in the same way that we might buy a latte or even a car to make ourselves feel better, he bought Twitter. And then clearly he tried to get out of it for months.

But it's a problem for two reasons. The problem one because it's probably a pretty terrible investment. But number two, Tesla in some ways isn't unlike crypto, right? Is Tesla a really great company that produces a really good car? Absolutely.

Is Tesla worth 5 or 10x what General Motors or Ford should be or 3x or Toyota should be? Of course not. Right, so much of Tesla's share price is based on hype and is based on just the pixie dust that Musk is so good at putting out there that in a way, whenever he risks puncturing that image, it doesn't just reflect on Twitter. It reflects on Tesla or on SpaceX and everything else that he's doing. And so I think he's taking a risk for his entire portfolio.

- It's so interesting, the common thread between all of this stuff, which is easy money that is now going away, right, that fueled a lot of this, both on the venture side and in the public market side. There are so many things that were hyped, that were invested in, that we're now seeing they're going to be happening later than expected or not happening at all. What should we be watching for next? Is there a next shoe to drop that hasn't been exposed yet in this process?

BRADLEY TUSK: Yeah, that's an excellent question. I think the good news is the stuff that probably was at the margins has now started to be flushed out to a certain extent. But it's really valuations more broadly, right?

So I think what happened is a lot of venture capitalists said, I really just want to live off the management fees that my fund generates. And so if 2% of my total fund size equals x and that's what I need to pay my bills every year, that's all I really have to do. And as a result, the funds got way too big, right?

So you have a $600, $700 million series A fund. You can't write $2 or $3 million checks in that case. You got to write $10 million checks, $20 million checks, which means the valuation has to be inflated. And then all across the chain, through every successive round, all the way through growth equity, everything remains inflated.

It finally hits the public market. And then the markets usually correctly slash the value by 60%, 70% because what they got wasn't reflecting reality at all. And so I think now the next shoe to drop will just be valuations that are way too high. And they're way too high in part because VCs were benefiting themselves on the inside, often at the expense of their own LPs.

- Tusk Venture Partners cofounder and managing partner Bradley Tusk, always good to see you. Happy holidays. We'll talk to you soon.

BRADLEY TUSK: Yeah, thanks so much for having me. Have a great holiday.