Electric Capital executives told its limited partners Thursday that the crypto-focused venture capital firm is relatively unscathed from the FTX debacle — thanks to “yellow flags” Electric spotted when it comes to due diligence.
The contents of the investors-only call was obtained by Blockworks, and a source with knowledge of the matter provided additional details.
The “yellow flags” in question, Electric partners told investors, came to light as they probed the financing and token economics of a potential early-stage investment in the serum (SRM) token — heavily backed and marketed by former FTX CEO Sam Bankman-Fried.
Serum is a decentralized exchange software built on Solana. Bankman-Fried is a co-founder of Project Serum, which, according to its white paper published in July 2020, was designed to have cross-chain support, stablecoins, wrapped coins, order books and the ability to create custom financial products. It was built to be interoperable with Ethereum.
Warning signs from interactions with now-bankrupt FTX and Alameda Research — both founded by Bankman-Fried — kept the firm “outside of the blast radius” of FTX’s fall, Electric Capital co-founder Avichal Garg said on the call.
The financing round for serum, Garg said, followed a fast-and-loose playbook, a formula relying on a “spreadsheet” tracking incoming SRM allocations. The atypical setup meant the earlier an investor committed to write a check, the less they paid for tokens.
“So, it was a little bit of a yellow flag and kind of rubbed us the wrong way that this didn’t feel like a group of people that actually wanted to have true partners and true long-term relationships with the people giving them capital,” Garg said.
Electric questioned, too, SRM’s token economics, which called for a lack of liquidity for many of the tokens over a number of years.
Serum’s whitepaper said its circulating supply at launch would amount to roughly 10% of the digital asset’s total float. All presale, team and contributor tokens were set to unlock between one and seven years thereafter.
“When we probed about this, the team said the reason they were doing this was to be long-term aligned with the users of the protocol, which is the generous interpretation,” Garg said. “The less generous interpretation of this might be that what you’re going to do is have a very low float on the tokens…where the low float sort of constrains the supply such that it bids up the price.”
Spokespeople for Serum and FTX did not immediately return a request for comment.
SRM traded around $0.25 at 3 pm ET on Thursday, down 15% in the last 24 hours — contributing to a staggering 65% one-month drop.
Limited exposure to FTX’s collapse
Electric Capital thus passed on investing in SRM, and later on, decided not to invest in FTT.
“As a result of us sort of repeatedly passing on these investment opportunities, we never got really close to that ecosystem,” Garg said. “We were never very close to Sam. We were never sharing investment opportunities back and forth.”
The asset manager had no FTX equity stakes, nor exposure to the exchange’s underwater native token, FTT, SRM or Solana’s SOL token, the proof-of-stake blockchain which likewise has been hammered by its association with Bankman-Fried. And Electric never did business with Bankman-Fried’s Alameda Research.
The company had eight bitcoins — currently worth roughly $130,000 — custodied by FTX, he added. Two unnamed startups Electric Capital had invested in — exposure amounting to about $700,000 in one of its venture funds — had assets sitting on FTX. The company is looking to work with the founders to recover the frozen assets.
Garg declined to detail specific portfolio companies impacted.
Electric Capital’s focus moving forward
Electric Capital raised a notable — even toward the height of the bull market — $1 billion in March it said it would use to deploy capital to Web3, NFT and DeFi projects.
The injection of capital was set to fund a $400 million venture fund and a $600 million token fund, bringing the firm’s total funds to four.
“Our [assets under management] is somewhere between 0 and $2 billion, depending on what you think crypto is worth,” Garg told Blockworks in a statement.
Executives said on the call that the firm is focused on early-stage projects that can replace “building blocks” potentially destroyed by FTX’s collapse, adding it has already made two unspecified investments in Solana-focused startups.
Otherwise, the firm is being patient when it comes to deploying cash, anticipating additional selling and choppy trading waters ahead.
“We think it’s very likely that, especially some of these liquid token networks, become forced liquidation events as creditors have to sell these assets off,” Garg told Electric investors. “[Assets] will likely overcorrect, and they start to present very interesting risk-reward opportunities.”
Michael Bodley contributed reporting.
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