If Sequoia, Paradigm and Thoma Bravo settle a new lawsuit, it could upend VC; here’s why

It was only a matter of clip earlier disappointment customers of nan fallen crypto speech FTX went aft its deep-pocketed task backers. Indeed, nan astir astonishing point astir a class-action suit flagged earlier by Bloomberg — 1 that accuses Sequoia Capital, Paradigm, and Thoma Bravo of promoting FTX to nan detriment of its users — is that it was revenge yesterday and not sooner.

Still, VCs astatine each patient had amended dream that thing comes of it aliases nan full task manufacture is successful large trouble. A proceedings — moreover a colony — could person wide ramifications.

Here’s nan imaginable problem: nan caller title specifically accuses nan 3 firms of bestowing FTX pinch nan “air of legitimacy” done their various actions, including a glowing portion astir FTX laminitis Sam Bankman-Fried that Sequoia Capital commissioned (and later took down from its website), a Startup Grind event past year wherever Sequoia partner Michelle Bailhe interviewed Bankman-Fried for a convention titled “The Unstoppable Rise of FTX,” and boosterish tweets by Paradigm cofounder Matt Huang and Thoma Bravo laminitis Orlando Bravo. (In consequence to a 2021 tweet by MicroStrategy Michael Saylor, informing group to “Only waste and acquisition #bitcoin connected a morganatic speech you trust,” Bravo past tweeted to his Twitter followers: “Only waste and acquisition #bitcoin pinch @FTX_Official.”)

The ineligible title besides refers to respective media outlets successful which these investors sang Bankman-Fried’s praises, including a MarketWatch portion wherever Bravo was quoted arsenic saying that Bankman-Fried “combines being visionary pinch being a phenomenal usability . . . That is rare.”

None of what is cited successful nan title is caller information. All of it makes nan investors look foolish successful retrospect. None of it suggests nan investors did thing retired of nan mean successful position of their nationalist comments. They actively promoted an investment, and is location a azygous investor who doesn’t do nan same? Take a look astatine Twitter aliases TechCrunch aliases Bloomberg TV astatine astir immoderate clip of time and you’ll spot aliases publication investors blathering connected astir really awesome their portfolio companies are.

Is specified promotion crime? If it is, nan full manufacture is blameworthy of it. VCs spot portion of their “value add” arsenic helping to widen nan marque of nan startups they fund. They’ve been “talking their book” since nan manufacture sewage disconnected nan crushed galore decades ago. With nan advent of societal media, it only became overmuch much annoying.

Does it beryllium that these circumstantial investors were trying to dupe anyone — that they were trying to pull attraction to an speech that they secretly believed was a location of cards? I really uncertainty it. More important, while I’m not a lawyer, I don’t spot that lawsuit being made successful nan filing (see below).

There is nary mobility that nan organization investors successful FTX royally screwed up. The 3 firms named successful this caller suit unsocial mislaid a stunning $550 cardinal connected FTX, which has since been accused of orchestrating “old-fashioned embezzlement” by nan lawyer-CEO now steering nan institution done bankruptcy.

But VCs don’t thin to screw up connected purpose; nationalist humiliation isn’t bully for business. You could reason that for each nan in installments it gets for its investing savvy, Sequoia Capital successful peculiar should person known better. FTX is now believed to person been freely commingling costs pinch different outfit that was founded by Bankman-Fried, Alameda Research, correct nether nan firm’s nose.

At nan aforesaid time, Alfred Lin, nan Sequoia partner who led nan firm’s finance successful FTX, has said explicitly that nan patient believes it was “misled” by Bankman-Fried, and that he feels personally deceived by Bankman-Fried, not because of nan finance itself but because he thought he knew Bankman-Fried. “It’s nan twelvemonth and a half moving narration afterwards, that I still didn’t spot it. And that is difficult,” Lin said astatine an arena I hosted past month.

Relatedly, erstwhile asked astir Sequoia’s owed diligence astatine this aforesaid event, Lin defended it, saying that VC is simply a “trust business” and suggesting location is small a task patient tin do erstwhile it isn’t being presented pinch nan full image by a founder.

“We looked astatine equilibrium sheets, we looked astatine organizational charts of nan subsidiaries, we looked astatine really [big a percentage] Alameda was of FTX’s volume. We looked astatine a assortment of things,” said Lin. “The institution Alameda we knew was a hedge fund. We knew that they were trading connected FTX. But it was not connected immoderate of FTX’s organizational charts. [And] erstwhile we asked, ‘Are these 2 companies independent?’ We were told that they were.”

The caller suit against nan 3 firms is being spearheaded by nan rule patient Robbins Geller Rudman & Dowd of San Diego.

In 2014, nan aforesaid rule patient helped wring a $590 cardinal colony retired of 3 backstage equity firms —  Kohlberg Kravis Roberts, The Blackstone Group, and TPG Capital —  aft they were accused of colluding pinch 1 different to thrust down nan prices of firm takeover targets.

We reached retired to nan Robbins Geller Rudman & Dowd past nighttime for remark astir nan title and person yet to perceive back. In nan meantime, it has revenge another people action lawsuit against Avaya Holdings, a business communications institution that revenge bankruptcy yesterday, 5 years aft emerging from its erstwhile bankruptcy.

Pictured above: Alfred Lin of Sequoia Capital astatine a 2016 TechCrunch Disrupt event

Class-action suit revenge connected behalf of FTX investors by TechCrunch connected Scribd