November 16, 2022

Lessons From FTX: What would Peter F. Drucker Say?

By Elizabeth Haas

When we read the news on FTX’s filing for bankruptcy last week, we flashed back to a conversation with Peter F. Drucker from December 2003.  At the time, Drucker was sitting on his coach reflecting, for purposes of the interview, on his biggest leadership worries.  After a few moments of silence and what seemed to be deep thought, he said, “You know, as of last month, there is no longer a CEO with a living memory of the Great Depression. Not a single CEO.” Drucker’s point seems so relevant now: FTX’s CEO, Sam Blankman-Fried, does not have a living memory of Long Term Capital Management.

Did Blankman-Fried push the boundaries of trust too far and ignore the power of history, experience, and oversight? Absolutely. Do we want genius entrepreneurs to continue pushing boundaries and occasionally falling off the balance beam? Again, absolutely, but with a degree of retrospection and wisdom that comes from deep and broad experience.

As Drucker often said, he emigrated to the U.S. in 1937 because he saw it as an open society where entrepreneurship and innovation were encouraged and celebrated.  As he often commented, in the  US, customers and investors are open to trusting the untested – the young, brainy, and innovative -- who have delivered fundamental change. Over the years, these innovators have changed the way we live -- from electricity in every home to data storage in the cloud to a smartphone in every hand, just to name a few.

In Sam Blankman-Fried’s case, investors failed to put in place even the most basic of guardrails -- a board of directors with hard-fought experience and a simple financial system to provide critical oversight. To paraphrase Charlie Munger, much is different about crypto when viewed through the lens of traditional finance. Still, we cannot forget that much about life is always the same and human behavior very rarely moves a degree left or right. The adage, “if it sounds too good to be true, it probably is,” doesn’t always apply to hyped innovations, but in this case, it does. FTX was a success story that was too good to be true. It went from a valuation of $0 to $32 billion in less than three years.   

To make matters worse, in the midst of the crypto winter, when crypto values plummeted, FTX pumped money into the system in an attempt to bail out all the other exchanges.

Blankman-Fried was a link to this new world of cryptocurrency that seemed both innocent and brilliant (and he is) but also naïve. There is a reason Sergey Brin and Larry Page added gravitas to their early business judgment with grey-hair-fueled advice when co-founding Google.  A lack of grey hair advice got Steve Jobs booted from Apple and Edison booted from GE, with both being brought back after they gained business experience and “greyed.” At FTX, no guardrails were in place, with even the most experienced and reputable investors, like Sequoia Partners, Blackrock, and Softbank, all acting as if Blankman-Fried didn’t need them. But he did.

One thing is for sure: cryptocurrency is new and here to stay. In its wake, it has taught us that we need to learn new lessons and relearn old ones. 

It may be that cryptocurrency is simply a vehicle for consumer payments without the associated credit card fees or a banking service now available to the unbankable. It may always remain just a vehicle, not a value in and of itself. The governance of web3 may not be like that of web2 – but it will be important to recognize that expertise and basic safety come with bigger players managing the ecosystem.  And, as much as we see good change coming from newer, dynamic players who understand the importance of decentralization and the value of a creator economy, we need to strike a balance.

As this new ecosystem evolves, we need to be open to learning as we go and balancing “innovation on steroids” with a common-sense approach informed by management fundamentals, deep business experience, and hard-fought lessons learned from the past.

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