FTX Cryptocurrency Exchange Bankruptcy Filing: MSP Software Investors Among Losers?

FTX Cryptocurrency Exchange Bankruptcy Filing: MSP Software Investors Among Losers?

FTX’s bankruptcy filing has ripple effects that extend far beyond the cryptocurrency market. Indeed, FTX’s business failure has implications for MSP software investors, cybersecurity experts and regulators worldwide.

The background: Several investors and owners of MSP software companies (such as Thoma Bravo, Softbank and Insight Partners) also invested in FTX Trading as part of a funding round in July 2021. That round could raise a Series B of $900 million to a value of $18 billion – now be worthless amid FTX’s bankruptcy filing in November 2022.

Fast forward to January 2022, and FTX raised $400 million in Series C funding at a valuation of $18 billion. Participants included Temasek, Paradigm, Ontario Teachers’ Pension Plan Board, NEA, IVP, SoftBank Vision Fund 2, Lightspeed Venture Partners, Steadview Capital, Tiger Global and Insight Partners, among others.

We do not know each securities company’s exact original or current ownership stake in FTX in the middle of the bankruptcy. But the funding frenzy shows how some VCs and venture capital firms – known for savvy enterprise and MSP software investments – got swept up in the highly speculative cryptocurrency investment craze. Alas, some teacher pension funds and education-focused organizations may also suffer financial blows.

VCs, PE firms expanded from MSP software to cryptocurrency investments

Thoma Bravo, for example, apparently invested $130 million in FTX as part of its July 2021 funding round, The Wall Street Journal reported, although ChannelE2E has not independently confirmed this figure.

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To be clear: the vast majority of Thoma Bravo investments are focused on less speculative, more reliable enterprise and MSP-focused software companies – including names like ConnectWise, N-able and Sophos.

Meanwhile, peer FTX investors also have stakes in the MSP software market. Examples include FTX investor Softbank (which also backs the Pax8 cloud marketplace for MSPs) and Insight Partners (owner of Kaseya and Datto, and Veeam).

Softbank in particular has been hit hard by investments going bad starting in August 2022 or so. Fast forward to Nov. 14, and Softbank’s shares fell further after the company reported a big loss at its Vision Fund investment arm for the third straight quarter, Reuters reported.

No one is suggesting wrongdoing in the venture capital or private equity firms. But we will look at whether or how FTX’s collapse affects the performance of each investment firm and their overall investment thesis strategies. We’ve reached out to Thoma Bravo, Insight and Softbank for comment, and will update this article if they share perspectives on the FTX situation.

And on a brighter note, Wall Street and MSPs are signaling continued momentum in the MSP software market despite recession fears.

FTX Business: Growth, collapse and cyber attack?

For those unfamiliar with FTX’s rapid rise and fall, here’s some background.

Former FTX CEO Sam Bankman-Fried. Credit: Getty Images

FTX, founded in 2019 by Sam Bankman-Fried, operated a cryptocurrency exchange that supported derivatives, options, volatility products and leveraged tokens. The platform was designed to be “robust enough for professional trading firms and intuitive enough for first-time users,” the company said.

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FTX revenue rose to $1.02 billion in 2021, and net income reached $388 million that year, Business of Apps reported in September 2022 — though we don’t know if those financials were audited. FTX founder Sam Bankman-Fried emerged as a hero within the cryptocurrency market. But behind the scenes, FTX used billions of dollars of client money to fund risky trades by Alameda Research, a digital currency firm that Bankman-Fried also funded, The Wall Street Journal reported.

Both FTX and Alameda filed for Chapter 11 bankruptcy protection in November 2022. Bankman-Fried withdrew during the collapse. A day after the bankruptcy filing, FTX said on November 12 that it was investigating the matter “unauthorized transactions” flowing from the accounts, as crypto researchers documented suspicious transfers of $515 million that may have been the result of a hack or theft, The New York Times reported.

FTX Business and Bankruptcy Timeline

Here’s a timeline tracking the FTX bankruptcy filing, and the potential implications for MSP software investors, and crypto cybersecurity regulations. Keep checking back for updates.

May 2019: Sam Bankman-Fried and Gary Wang founded FTX.

July 2021: FTX raised $900 million at a valuation of $18 billion from such venture capital firms as Softbank and Sequoia Capital.

January 2022: FTX raised $400 million in Series C funding at a $32 billion valuation. Source: PR newswire.

17 October 2022: The state of Texas begins investigating FTX for allegedly selling unregistered securities. Source: Texas Tribune.

November 2, 2022: CoinDesk reports that a large portion of Alameda Research’s assets were held in FTT, and Bloomberg previously reported that the FTT-Alameda relationship would have been prohibited in traditional stock markets. Sources: Several.

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November 7, 2022: Binance decided to sell its FTT holdings, triggering an FTX liquidity crisis – which triggered an 80% drop in FTX’s shares. Source: CNBC.

November 9, 2022: Binance considered buying all of FTX, but abandoned the idea because FTX allegedly mishandled customer funds. Source: CNBC.

10.–12. November 2022: Multiple reports highlight the deep relationship between FTX and Alameda Research – which included FTX client deposits allegedly being transferred to Alameda Research without the clients’ knowledge or approval.

November 11, 2022: FTX filed for Chapter 11 bankruptcy protection.

November 11, 2022: FTX’s collapse could be a catalyst for regulation, according to Hester M. Peirce, a commissioner at the Securities and Exchange Commission (SEC). Source: Codesk.

November 12, 2022: Approximately $1 billion to $2 billion in FTX customer funds could not be accounted for. The new CEO of FTX, John Ray, also said that the company was hacked last night in an attack that “drained hundreds of millions of dollars in crypto from the exchange’s wallets.” Source: Codesk.

Note: Keep checking this article for additional timeline updates as they happen.

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