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Sam Bankman Fried, SBF, founder of now-bankrupt cryptocurrency exchange FTX and the former golden boy of the crypto industry, was found guilty of seven counts of fraud and conspiracy.
Why am I talking about him?
As investors, companies' leadership quality is one of the most critical qualitative factors we must research. For a few years, SBF painted a picture of a visionary, convincing more than a $1B investment in his company.
He did it because he knew how to get people and investors to trust him.
He is not alone in this.
Many companies we research have leaders applying SBF's framework. They are not all guilty of fraud, but as investors, we must be aware of such tactics and not fall for those stories.
In today's post, I reveal SBF's playbook, so we learn to invest based on facts and less on stories.
I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
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Whether you agree with author Michael Lewis, who seemingly believes SBF is a genius with good intentions, or among millions of FTX customers wanting him to go to jail for the rest of his life, you must accept SBF had a superpower – the unique power to get people to trust and believe in him.
In 2017, he convinced several smart, young, and talented people to join him in starting Alameda Research – a trading firm focusing on bitcoin price arbitrage opportunities, known as Kimchi Premium. In 2018, he reportedly convinced high-profile, successful investors, such as the founder of Skype, to give him up to $100 million in assets to manage and trade. And that's not all! He was just getting started. He raised over a billion dollars in investment capital and convinced over 600 people to join his crypto exchange firm, FTX.
How did a math nerd, in his lawyer's words, with unkempt hair, wearing T-shirts and shorts without any business or startup experience, achieve all that early success?
This is the story of a playbook that Sam Bankman-Fried followed masterfully to establish trust and make people believe in him and the future he promised.
Why This Matters
This post is not to justify SBF's actions. Instead, this episode is an intellectual investigation into a three-part playbook anyone can master to succeed ethically and for proper causes.
There is another use for knowing this playbook. If you are an investor in startups or publicly traded companies, one of the fundamental factors you must assess is the quality of the company's leadership. Knowing how a trust framework works can help you better assess the leadership quality of the companies you invest in.
People invest in and work with other PEOPLE. Trust is the magic ingredient that makes your life easier and accelerates your path to success. You will be much ahead if you know how to establish TRUST or make people believe in you.
The Trust Triangle
According to research published in Harvard Business Review, trust has three components:
Empathy: Show You Care
Sam had a unique and consistent way of showing that he cared about other people and the world. He started his adult life at MIT and graduated in 2014 with a bachelor's degree in physics and a minor in mathematics. In his 3rd year at MIT, he was introduced to the Effective Altruism movement. Effective Altruism, or EA for short, is an ongoing project to find the best ways to do good in the world. SBF was drawn to the idea of Earning to Give. Which is pursuing a lucrative career to donate a significant portion of the earnings to cost-effective organizations. Even before joining the EA movement, SBF was a member of multiple organizations supporting animal welfare. When he became wealthier and focused on political donations, he always talked about donating to both parties and pandemic prevention lobbying.
Undoubtedly, he also lobbied for crypto regulations that would benefit his company, and we have no way of knowing whether he believed in those altruistic causes in his heart. However, his words and actions painted a picture of a man who cares about improving humankind and society.
Being more than just about the money and showing you care about the advancement of society and humankind is a story that resonates with all of us. SBF isn't the only person who follows such a formula. Elon Musk talks about becoming a multiplanetary race, living on Earth and Mars. Mark Zuckerberg talks about connecting people. Alex Karp, Palantir's CEO, speaks of supporting America and its allies in defeating their adversaries. The examples are endless. Those who get people to trust them and support their efforts with their money and resources show their intentions to be above and beyond making money.
I don't say you can't be successful if you just want to make money. People want to know you care about them and what affects their lives.
Logic: Show You Can
The second aspect of the trust triangle is the people believing you can do what you say you'll do. This means you have the skills and the means to achieve it.
The logical way to assess this skill is to look at someone's background and achievements. In the tech startup world, it is common for a second-time founder to be able to raise money fast. Investors believe if he or she has managed to succeed at making one company, chances are they will make it again. In the case of young SBF in 2017, he had limited business experience. He had a substitute for making people believe he could do what he said he could. Before starting Alameda, Sam worked as a trader at Jane Street Capital, a trading firm that provides liquidity to the capital market, not so very known to everyday investors. However, it is one of the largest market makers in the world, with 2000+ employees and $17 trillion trading volume.
Interestingly, some of Alameda's early investors, including Skype's founder, knew people at Jane Street who spoke of Sam's trading skills during his 2.5-year tenure there. There you have it! Early investors believed SBF could do what he said he would: take advantage of the so-called Kimchi Premium, the Bitcoin price difference between the U.S. and Asia.
Later on, as Alameda became FTX, the company had a chance to benefit from the explosion of interest in cryptocurrency trading. So, when he said he could scale an exchange, he had the evidence to prove it. Despite his lack of experience, he fits the profile of someone who can make it work and has the evidence to back it up.
Authentic: Show You Are
According to Harvard Business Review's framework, the last pillar of SBF's success was authenticity. People believed SBF was being himself and not pretending to be a visionary. He showed up in t-shirts and shorts and never combed his hair. He was never too prepared if you watch his media and conference appearances. On the surface, he was authentic without trying. In behind-the-scenes, however, the story was different. From my research, he was quite intentional about how he looked. In the early days of Alameda, Andy Croghan, the company's COO, asked Sam to cut his hair, to which SBF responded that his hair is part of his image and makes people believe he is crazy.
Indeed, being a crazy, daring person who wanted to change the financial system was a part of his image. This is not unique to SBF.
Elon Musk has called himself the Ironman. Palantir's CEO wears his hair like Einstein to paint a certain image. Being crazy makes people believe what you say and attribute it to larger-than-life personalities that can change the world.
He also used the overall market's direction and sentiment in his favor. He had what a very smart fintech founder I spoke with calls "winner's aura." The term winner's aura is when the world sees compelling evidence of someone's ability to make a change. Every day, more clients, investors, Twitter followers, and reporters root for that founder's success. Even better, they think that the founder is the best thing that happened to that specific market. SBF had that aura and projected an image of the one that can be the change-maker. You see it in his political activities, appearances in Congress, and presenting the image of a good-doer who is trailblazing forward.
Just before we finalized this post, SBF was found guilty, even though he tried to apply his playbook by making a testimony in court. So, the playbook has its own limits.
Being aware of the playbook teaches us that whenever you invest in a company, be aware of similar masterful skills and make investment decisions based on facts, not stories and the image the leadership paints. There is a post on our blog on researching a stock based on facts using a 6-part process that can help you. I'll leave a link to it below for you to watch next.
I'll see you next time!