The Founder's Myth
FTX
Listen, it has been a week Online. Elon Musk is doing his best to run Twitter off a cliff - more on that later! - some guy in Florida gave a speech, and the crypto world is in the throes of another reckoning. It is grappling with the implosion of FTX - one of the largest crypto exchanges and offshore betting markets and hedge funds (?) all rolled into one. The guy in charge of FTX is named Sam Bankman-Fried - known as SBF - and he appears to have taken customer funds and invested them in highly risky and illiquid assets and/or straight up stolen the funds outright, it is unclear at the moment.
One reason people - including Matt Levine - are suffering from whiplash is that SBF was respected in the finance community. He appeared on podcasts, and at serious-seeming finance summits, and in front of Congress, and came across intelligent and savvy.
Then, in a matter of days, the veneer shattered. The founder of Binance - nicknamed CZ - tweeted his exchange was going to liquidate half a billion dollars’ worth of FTT tokens, citing a lack of confidence in FTX. The FTT token, it turned out, was the ‘magic bean’ (Levine’s term) FTX created to give itself balance sheet liquidity - meaning it borrowed or lent customer funds (cash, Bitcoins, whatever) against the value of its own token FTT, and if anything happened to the value of that token its collateral (loans to itself!) would plummet in value and it would not be able to make its depositors whole.
Within days, customers withdrew billions and FTX teetered on the brink of failure. CZ and SBF announced Binance was going to ride to the rescue and provide funding to ensure FTX customers didn’t get screwed. Within 24 hours, however, Binance pulled out of the deal, citing concerns about FTX’s balance sheet. Later in the week, FTX filed for bankruptcy protection, and now there are investigations probing just what happened at FTX.
I will spare you the details of the alleged crypto polycule in SBF’s Bahamas mansion and his cynical foray into ‘effective altruism’, and instead talk about SBF as a persona, and why the obsession with quirky founders simply won’t die.
Last year, FTX made a splash when it raised $900 million dollars from top VC funds and investment firms. It gave the company and SBF an air of credibility and fueled the meteoric rise of a relative unknown outside the crypto world. SBF started popping up everywhere, at conferences and on covers of magazines.
Generally, when your company raises nearly a billion dollars, the investors want something in return. Equity in the company, sure sure, but even the most audacious founders raise money with a few strings attached. They may ask for audited financials, or at least a look at the books. They typically want a board seat or two, so they have someone in the room when big decisions are being made with their nine hundred million dollars.
Would it shock you to learn FTX did not have a board of directors?
[Chamath] Palihapitiya said that FTX then told his firm to "go fuck yourself" for suggesting changes.
Typically a board of directors, at the very least, provides a diverse set of opinions about how to manage what at the time was a $30 billlion dollar juggernaut. As for the financials, when it came time to rescue FTX, SBF sent around a hastily constructed Excel sheet that was…something:
Sam Bankman-Fried’s main international FTX exchange held just $900mn in easily sellable assets against $9bn of liabilities the day before it collapsed into bankruptcy, according to investment materials seen by the Financial Times.
The largest portion of those liquid assets listed on a FTX international balance sheet dated Thursday was $470mn of Robinhood shares owned by a Bankman-Fried vehicle not listed in Friday’s bankruptcy filing, which included 134 corporate entities.
FTX was valued at around $32 billion dollars at the time, and allegedly had $16 billion in customer assets before the $6 billion in withdrawals. Of the remaining $9 billion or so, the company had less than a billion in sellable assets - the rest was magic beans.
I do not know whether CZ and Binance knew the extent of FTX’s situation when they triggered the panic, but if they harbored suspicions they must have been delighted to receive a document from SBF himself with a row labeled ‘Hidden, poorly internally labeled “fiat@” account’ showing negative eight billion dollars. What does that mean? Well, SBF helpfully added a note explaining that the Excel sheet he was staking his multibillion dollar company and personal fortune on was ‘rough values’ and might include typos. You might think it means FTX is admitting to a hidden (from whom?) fiat currency account 8 billion in the hole but maybe it’s a typo? Sorry! The folks at Binance must have really enjoyed that.
We talk a lot around here about charismatic founders and the ways a cult of personality can obscure incompetence or malicious intent. SBF spun one flavor of entrepreneurial hero story - a disheveled, nerdy underdog who spoke the language of finance and came across as bluntly affable - and he fooled the top players in VC and finance for years. They wanted so badly to believe that SBF had discovered a way to run a crypto hedge fund, to manage investment risk on perhaps the riskiest of all asset classes, and do it all in a pair of basketball shorts while playing video games on his second monitor.
What happened to the money? There are theories SBF and his pals siphoned off billions to their own accounts, or that they simply made lots of bad bets and tried to paper over losses with balance sheet chicanery, and it may take years to unravel. It’s mostly irrelevant where the money went - forgive me if I do not mourn for crypto yield farmers and dumb celebrities. The lesson we should be learning from FTX and SBF, a failure we seem doomed to repeat, is that when a visionary startup founder sounds too good to be true, and they become fabulously rich or famous as a result, there’s a pretty good chance they’re selling you a box of beans.
While some people are paying attention to the high-speed FTX car crash, others are watching the slow motion container ship accident that is Elon Musk’s stewardship of Twitter dot com.
There have been mass firings, attempted un-firings, a mass exodus of the brand advertisers that make up most of Twitter’s revenue, and a hundred different stop-and-start initiatives dreamed up in the fever swamp of Musk’s right-wing ‘war room’ designed to…make Twitter money? It is all very confusing, messy, and unclear.
What we are seeing, like FTX, is the unmasking of a Business Genius. We’ve been told relentlessly for years that Elon is a visionary who can build rockets, design cars, dig tunnels, and succeed at anything he puts his mind to. By the standards set for him - or, really, his persona - by the media, it should be no problem for him to turn around a struggling social media website, right? Right?
Running websites and dealing with advertisers are two areas I happen to have some experience in - certainly more than Musk, who hasn’t run anything resembling a website since his PayPal days. When he charged into Twitter’s offices like a stung bull, Elon probably imagined he could use the same combative tactics he favors at Tesla to whip Twitter into shape.
Musk’s management playbook is full of what I imagine were seen as virtues in the 1990s - demanding unpaid overtime, firing anyone who dissents, etc - but wildly inappropriate in the modern day. Because he is surrounded by Yes Men who agree employees are fruit to be squeezed and discarded, no one has pointed out that coming in and upending the culture at a company of thousands, many of whom are (were!) responsible for critical systems and infrastructure might cause problems.
Another possibility Musk did not consider is that, unlike Tesla or SpaceX where employees sign NDAs and know what they are getting into working for their habitually abusive boss, Twitter is both the digital public square for journalists and a website many of those journalists have a vested interest in. Of course Twitter employees were going to share emails, screenshots, and internal documentation with the press. Of course journalists would be climbing over one another for scoops about the drama going on behind the scenes. It was no secret that Elon’s persona as a Free Speech Absolutist excluded any perceived insult to himself, which would be met with immediate and harsh retribution. In the world of software, having dissenting voices in the room can be important, if not vital, to writing code and designing features that are robust and useful.
The problem with treating a large, established company with a sprawling codebase like a gritty startup you can simply Overtime into Success is that the people you are indiscriminately firing might be the only ones who understand how bits of your software work, and those bits could be important. Or, you could be laying off entire moderation teams responsible for keeping hate-and-or-war crimes off your platform. Or, you could be turning off ‘bloated’ software services that might, say, control whether people can log in to your site.
Is it good that Twitter concentrated key features in the hands of a few, heavily-tenured and well-compensated employees? Probably not, but if you have a better idea how to run a multibillion dollar software company, Harvard Business Review would love to talk to you. The problem with software companies that Elon cannot seem to grasp is they are primarily reliant on people, the messy, not-easily-controlled sacks of meat who can easily get jobs at companies where their boss doesn’t expect them to bring a sleeping bag to work.
Then there are the advertisers, who are not at all amused by Musk or, more recently, his first major verification system change which saw a flood of impersonators trolling major brands in hilarious fashion. If Elon had simply let the dust settle after his initial missteps, many brands would have come back to Twitter, either resuming or reducing their budgets, but spending nonetheless. But when his first big idea exposed some of the largest companies in the world to humiliation and abuse? Oh boy. That is going to leave a bad taste. I am certain that many lawyers are discussing whether or not to file for damages against Twitter, and when you’ve gone from skeptical to adversarial with the brands that you rely on to pay your company’s bills, it is not a good place to be.
Other than perhaps the federal government’s SpaceX contracts, Musk has spent years largely unaccountable to his customers. He regularly changes the prices of his cars, locks software features, or doubles the price of his solar panels, and there isn’t much any one customer can do. But when Twitter gets ninety percent of its revenue from brand advertisers and Musk is now expected to flatter some VP-level suit at Procter & Gamble? It isn’t going to end well.
Thus far, Musk’s major initiatives at Twitter have been to indiscriminately fire critical staff, gut the teams that help keep the platform (relatively) safe, and roll and un-roll out a series of haphazard features that never should have made it off the whiteboard, opening his company up to a potential brand exodus and legal liability. I have said before that he may be one of our generation’s most savvy business opportunists, knowing when best to swoop in and claim the ideas of others, but it is clear from his breakneck series of unforced errors at the helm of Twitter that he is not the capable, visionary CEO he’s been made out to be. Like SBF and other charlatans who become so powerful they decide they are beyond consequence, when we get a look behind the scenes what we find is far from impressive.
Medical Debt
We have talked about medical debt, a uniquely American burden with the potential to ruin or even end lives. It is so commonplace that it has become nearly worthless to the hospitals and medical systems who hold it. So worthless in fact that a city in Ohio decided to wipe a bunch of it out for pennies on the dollar:
After months of discussions and public meetings, council passed the medical relief debt proposal by a vote of 7-5.
The action is thought to alleviate hundreds of thousands of dollars in medical debt for thousands of city residents with the proposal, which calls for allocating $800,000 in American Rescue Plan Act funds to RIP Medical Debt, a New York-based nonprofit group.
Eight hundred grand is good amount of money, but you’d imagine it won’t go that far given the size of even routine medical bills, right? Wrong!
Lucas County Commissioners recently announced it would spend an additional $800,000, which would eliminate $160-$200 million in medical debt for Toledo residents and Lucas County residents.
Estimates for the amount of debt eliminated go as high as $240 million dollars according to the nonprofit in charge of buying it up. At even a conservative estimate of $160 million, that means each dollar of medical debt is really worth half a penny to the collections agencies. Why is anyone paying full price for their medical care when the market consensus seems to be that it’s actually worth a fraction of a penny? I will stress that you should pay your medical bills (not financial advice!) but it’s important to know that if you can’t for some reason, you should not worry too much, because a certain amount of loss is built into the system.
Private Equity
Despite those loss levels, private equity firms are turning healthy profits buying up hospital and medical systems. How are they doing it? The same way many companies are booking record profits these days - price gouging:
As private equity extends its reach into health care, evidence is mounting that the penetration has led to higher prices and diminished quality of care, a KHN investigation has found.
Despite dozens of lawsuits and half a billion dollars in settlements for overbilling and abuse, health profiteering has been good business. Some firms have targeted specific types of medical practice, so they can hit patients with outsized bills for necessary or emergency procedures:
New research by the University of California-Berkeley has identified “hot spots” where private equity firms have quietly moved from having a small foothold to controlling more than two-thirds of the market for physician services such as anesthesiology and gastroenterology in 2021.
Though this may appear an obvious violation of anti-competition laws, firms typically stay below the regulatory radar by doing a series of smaller takeovers to stay below the $101 million dollar threshold that triggers FTC or DoJ reviews. The number of those transactions and the money involved is truly alarming:
Private equity has poured nearly $1 trillion into nearly 8,000 health care transactions during the past decade, according to PitchBook.
Once they have control over a market, PE firms will encourage doctors to inflate billing any way they can - unnecessary procedures, or padding bills for services like anesthesia or hospital stays. PE firms pitch themselves to doctors and medical practices as a way to improve efficiency or take annoying administrative work off their hands - another reality of America’s dysfunctional medical system is doctors must employ teams of people to battle insurers to cover patient claims. You could forgive some doctors for wanting to focus on the thing they spent a decade in school to do - treat patients, help people, etc. They may not realize they’re handing control over to rapacious vultures concerned only with creating maximized financial returns for their shareholders. Maybe they didn’t google ‘private equity’ before accepting the check?
Private equity is rapidly invading the many cracks in our badly broken health care system to wring additional profits from patients. The problem is, patients are real people who may be injured or even killed by unnecessary treatments, or lack of proper treatment. The millions in settlements paid out, and the growing number of complaints and whistleblowers indicate there’s a very large iceberg under the water, and unless the government steps in to assess and regulate private equity’s increasing foothold in health care, we will continue towards it, full steam ahead.
Short Cons
Daily Beast - “When employees at leading COVID pseudoscience group America’s Frontline Doctors tried to log in to work last week, they found themselves locked out of their email accounts. The nonprofit quickly fell into factions, with employees holding rival Zoom meetings to plot who would take over the group.”
NYT - ““When I looked into HyperFund, to me it just seemed black and white,” Mr. de Hek said during one of several interviews from his home in Christchurch. “Then I thought, I need to warn people about this.””
Gizmodo - “The Department of Homeland Security launched a failed operation that ensnared hundreds, if not thousands, of U.S. protesters in what new documents show was as a sweeping, power-hungry effort before the 2020 election to bolster President Donald Trump’s spurious claims about a “terrorist organization” he accused his Democratic rivals of supporting.”
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