Sam Bankman-Fried’s Many ‘Shocked’ Critics Forget That He Was Supposed to Fail

A recent opinion piece by the Wall Street Journal’s Allysia Finley led with the question/title “Where Was Biden’s SEC Sheriff on Sam Bankman-Fried?” At risk of speaking for Finley, isn’t it safe to say she knows exactly Gary Gensler was?

Gensler was sitting in his office utterly clueless about something amiss at Bankman-Fried’s FTX much as any Republican head of the SEC would have been. Which is kind of the point, or should be. Stating what should be obvious, if regulators could see around the proverbial corner, they wouldn’t be regulators. This is a simple truth that’s not getting enough attention now as Bankman-Fried is vilified, and predictably politicized.

Not said amid all the ink being spilled by the always up in arms is that Bankman-Fried was supposed to fail. As Peter Thiel put it in Zero to One, “most venture-backed companies don’t IPO or get acquired; most fail, usually soon after they start.” Thiel knows of what he speaks not just as an investor, but also through one of his own startups, PayPalPYPL
. As The Founders author Jimmy Soni makes plain, PayPal nearly died countless times. Which is a crucial truth, though one not acknowledged at the moment about FTX.

Businesses backed by venture capital investors are in pursuit of the impossible. This needs to be stressed over and over again. That’s why failure and bankruptcy don’t ruin one’s resume in Palo Alto in the way that they do most anywhere else: precisely because bankruptcy is the 90%+ rule, those with bankruptcy in their past aren’t run out of town. In other words, if you’re not failing then you’re not really pursuing the impossible, and it’s the achievement of the impossible that defines success in Silicon Valley.

Much more important, achievement of the impossible is essential to venture capital success. Since most technology businesses fail per Thiel, and with little for investors to recover upon failure, the very few successes pay for all of the investment misfires. It’s the 80/20 principle we’re all familiar with, only it’s more like 98/2. The microscopically few stabs at the impossible that succeed more than pay for everything else. Without this extreme form of investing, the Silicon Valley business model makes no sense.

The above is seemingly what has been lost in all the ranting about and ridiculing of Bankman-Fried: without endless bankruptcies of the fiery variety, Silicon Valley wouldn’t be Silicon Valley. Bankman-Fried did as he was expected to do. Sort of…

As Thiel makes plain, most venture-backed start-ups fail quickly. Bankman-Fried’s lasted quite a while, and at one point achieved a $32 billion valuation. Please stop and think about the previous number for a second, and in particular think about it in terms of all the Enron-style descriptions being attached to FTX now.

The valuation arrived at by investors with rather impressive investing backgrounds signals that Bankman-Fried and FTX succeeded against incredibly high odds of failure. How we know this has to do with a basic understanding of markets. Even if readers think “efficient markets” a load of nonsense, no critic of the latter would say that multi-billion dollar opportunities will ever be passed on by established businesses. Which means that when FTX’s valuation reached what smart investors thought was $32 billion, Bankman-Fried and FTX had done something that established businesses clearly felt wasn’t worth doing simply because it made no sense.

To which some will say that the valuation was all a fraud, that Bankman-Fried is a sanctimonious thief, and that discoveries of endless disarray inside FTX supports such a view. Sure, but not so fast. It once again rates stress that smart, seasoned investors valued FTX where they did.

After that, it’s useful to tack back to Thiel and the investment model of his Founders Fund (a look at the Founders Fund website does not indicate that it had a position in FTX) which contends that it makes no sense for investors to suppress the odd qualities that abound within entrepreneurs trying to rush a very different future into the present. Thiel’s approach has long been to find the “borderline crazy,” and upon finding these rather opposite thinkers, he gives them wide latitude. Really, how does one guide or mentor an individual in pursuit of what’s outlandish, and as FTX’s former valuation yet again confirms, it was most certainly in pursuit of the outlandish. Bankman-Fried didn’t choose laundromats; instead he chose an all-new sector. His choice of industry hopefully explains the lack of controls that have so many so very much up in arms.

All of which brings us back to Gary Gensler and the SEC. To blame the regulatory body for not seeing what some of the world’s greatest investors didn’t is quite something. The view ascribes genius to regulation that doesn’t remotely exist within actual investors. Call the SEC wholly superfluous, with FTX as the latest real-world example explaining why it’s superfluous.

As for Bankman-Fried, assuming he and his oddball colleagues actually stole from customers, throw the book at them. Beyond that, it’s time that the shocked all around us relax. Inventing the future is a challenging pursuit defined by endless mistakes. What’s important is that failure isn’t or at least shouldn’t be a jail-able offense. Neither should insufferable haughtiness indict one.

In other words, I’ll take Sam Bankman-Fried’s odious “effective altruism” over and over again so long as he’s in the proverbial arena. Indeed, much more perilous than error wrapped in faddish notions of giving is the locking up of those who dare to be different.