Seven critical lessons for startups from the FTX collapse
Image courtesy of Mariia Shalabaieva on Unsplash
In just eight momentous days, cryptocurrency exchange giant FTX went from a valuation of $32bn to bankruptcy. The brand, which was readily endorsed by celebrities, whose name adorned a sporting venue and whose donations were eagerly received by politicians, is now a source of deep embarrassment. By any standard, this has been an ignominious ‘crash and burn’. Choose your metaphor for sudden and catastrophic collapse: ‘house of straw’, ‘house of cards’ or something else. They all apply. Perhaps the only thing more shocking than its implosion is that few saw it coming.
In fact, the scope, scale and severity of the FTX disintegration is so extensive, that there may yet be contagion that could spread to other parts of the crypto-currency financial system.
As the layers of complexity that contributed to the sudden demise of FTX are removed, the dangers of businesses that grow exponentially without proper accountability have become all too clear. Specifically, it has revealed how, without some method of assurance, bad practice can easily transition into sharp practice.
The fact that FTX operated as a billion-dollar firm with a global reach and influence, suggests that there might not be much for small or micro enterprises to learn from its rise and fall, but that is far from the case. In terms of applicability of learning, there are many valuable insights to unpick and unpack. So, let’s dive straight in. Set out below, are seven critical lessons for start-ups, from the FTX collapse.
1. As you grow at scale, understand the potency of power
As businesses grow, everything that they do grows along with them. Successes are amplified as are failures. It is important to recognise that in business, growth is not just a process it is also a responsibility. Perhaps the most important aspect of the way in which increased responsibility affects business, is how they wield the power and influence that is derived from it. Whilst power can be difficult to acquire, it is easily taken for granted and all too often abused. The lesson from the FTX debacle appears to be one that shows how power can be used as a vehicle for coercive control and malevolent manipulation. The learning point for start-ups is the need to develop a mature relationship with power.
2. The measure of sustainability is roots not branches
In the end, FTX’s demise was entirely of its own making. This is not a business that fell on hard times due to changing and unfavourable economic conditions or loss of market share due to the inability to keep pace with competitors. Rather, the seeds of its own destruction appear to have been sown at the beginning to the extent that ethical business practice appears to have been jettisoned or at the very least, defined in the most ambiguous of terms. Organisations of every size will cut corners, but when the value system of ethics are viewed as surplus to requirements, irregularity and even illegality can be found in its wake.
3. The risks of inhalation, exhalation and intoxication
Organisations ‘inhale’ when they absorb and draw inferences from experiences, observations and other knowledge available to them. They ‘exhale’ when they make decisions in response to the information considered. In well-functioning organisations, this process leads to rational and measured conclusions. By contrast, ‘intoxication’ occurs when an organisation’s judgement is impaired to the extent that it is no longer capable of right thinking or sound decision-making. For an organisation of any size, the peril of becoming untethered from reality is always a clear and present danger. The threat here is not only of deluding oneself, but the greater threat that one may delude others.
4. The collective madness of the ‘yes men’
In so many ways FTX is a case study on the consequences of who you surround yourself with. It is hard to know whether from the beginning, the business was simply a front to defraud or whether fraudulent practice evolved from bad practice. Irrespective, the lesson here is not just whether anyone knows the difference between right and wrong. By itself, the ability to identify wrongdoing is valueless without the courage to put a stop to it. The unravelling of FTX teaches that no matter how many people are involved in a deception, it can only ever last as long as it takes for one person to uncover and disclose it.
5. Sometimes your greatest fantasies can be your worst nightmares
The freedom to indulge your fantasies may seem like a great idea on paper, but it may be the worst thing in practice. Unlike most businesses, especially in the financial sector, FTX seemed to support some regulation of the crypto-currency ecosystem. Whether or not this was genuine, is an open question. But the point is this: love them or hate them, there is a reason why laws are in place to curtail certain business practices. It is because, left alone, commercial enterprises are not inclined to regulate themselves. When a business creates an environment that makes it easier to ‘jump’ the proverbial ‘fence’, it only increases the likelihood that they will do so.
6. Halos are for saints not startups
In the regulatory space there is a principle known as the ‘halo effect’. It is demonstrated when levels of confidence reach such a level that normal processes of due diligence and common sense are suspended or set aside. This seems to be exactly what happened with FTX. In the belief that FTX’s business practices were beyond reproach reason and logic went out of the window along with billions of investor dollars. Doubtless that few if any start-ups will enjoy the largesse of goodwill enjoyed by FTX, but that is not the point. The specific point here is the problem that arises when an organisation of any size, becomes too smart and too dangerous for its own good.
7. The dangers of desperation
What do people do when they get desperate? They take risks. What do people who run businesses (large or small) do when they get desperate? They also take risks. By itself and on its own, there is nothing wrong with risk taking. In fact, every commercial transaction is predicated on the assumption of risk. Therefore, risk is not the problem. The problem is when desperation leads to levels of risk taking that are unacceptable or worse. This appears to have been the case with FTX, leaving an estimated one million investors, with little if any prospect of recouping their investments. Desperation is seldom a casual response to stimuli, but it is always consequential one.
Organisations are predictable entities. Irrespective of their size, the factors that contribute to their success or failure are the same. The things that matter such as values, quality of decision-making and leadership efficacy apply to small and large alike. The only point of distinction between them is that everything is to scale. For larger organisations the scale of risk taking, or recklessness is bigger, whilst the implications of getting it wrong (as in the case of FTX) are magnified. For start-ups the lesson of the FTX collapse is clear: failure does not always result from the inability to deal with complex problems, but it is more likely to arise from the unwillingness to do simple things.
