Don’t be like SBF

The FTX and Sam Bankman-Fried (SBF) ordeal is wild beyond words.

John J. Ray III, who cleaned up the mess after the collapse of Enron and now must sort out FTX’s demise, called the situation “unprecedented.”

Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. -John J. Ray III (my emphasis)

(By the way, we’re finding that “FTX” was actually a conglomerate of dozens of entities registered worldwide under various names. “Alameda Research” is one—but only one—of these entities entangled in the “intentionally convoluted” web of entities, as crypto researcher Nick Mancini called it. But for simplicity, I’m using “FTX” to refer to the entire organization under SBF’s direction.)

FTX’s failure went far beyond the scale of most small businesses. But ultimately, the same mental and procedural factors that led SBF astray can wreak havoc on any business owner. So there are some lessons all of us can take away:

Don’t rely on non-experts. It’s clear no one inside the operation had a corporate finance background, and there was no independent board of directors. FTX handled billions of dollars in customer assets, made significant intercompany transfers (most remarkably between FTX and Alameda Research), and went on a spending spree with corporate endorsements, such as renaming the Miami Heat’s arena. It’s no wonder FTX ran into cash flow problems with no oversight or financial analysis. Hire and listen to qualified advisors.
Don’t overcomplicate things. If you can’t explain added complexity in terms that make sense to someone outside your organization, it probably isn’t necessary, or is trying to hide something. SBF’s organization grew to around 100 separate entities spread across dozens of countries, with about 300 employees. The prevailing view is SBF intentionally set up the structure to keep employees, and eventually customers and regulators, in the dark about the actual operations of the organization. Follow the KISS principle: Keep It Simple and Straightforward.
Don’t ignore internal processes and controls. No matter how small, every business needs standard operating procedures (SOPs), the proper structures to implement them, and documentation of who carried out those procedures. FTX had woefully inadequate SOPs, illustrated by its invoicing and spending approvals that relied on QuickBooks and emojis in Slack. Slack and QuickBooks are great tools for specific purposes and within a certain range of businesses, but the biggest concern is that important decisions involving significant amounts of money were made through these platforms with little, if any, oversight or documentation. Document everything in a system that makes sense for your business.
Don’t get greedy. FTX’s rise and fall have brought effective altruism—a movement that advocates widespread social good—to the forefront. But even SBF, who supposedly championed the concept and used FTX to fund EA-aligned efforts, went astray, something that EA advocates are still trying to reconcile. Regardless of the motivation, it’s clear that FTX became a slush fund for SBF’s personal life and pursuits, along with those of Caroline Ellison and a handful of others. With no internal controls or fiscal oversight, human nature took over. Running a business of any size requires stewardship, or managing with the utmost care, as if tending to it for others, even if it’s entirely yours. Be a steward of your business.

We still don’t know if the collapse was due to negligence, intent to defraud, or some combination of the two (I think it’s a combination).

As the dust settles, we’ll learn more and perhaps draw other, or even different, lessons.