http://buttonwooddd.com/ Buttonwood Due Diligence - Blog RSS Feed 2.0 en-us Fri, 17 Apr 2026 04:35:19 GMT Fri, 17 Apr 2026 04:35:19 GMT http://buttonwooddd.com/blog/13032/The-Dangers-of-Piggyback-Riding blog When we're young, it's common for friends to jump on each other's backs or shoulders and get a piggyback ride. These are heaps of fun until the first time we crack our head on the monkey bars or a tree branch. After that, we give the environment in which we try piggyback riding much more thought. As many strong voices in finance, investment, and due diligence try to dissect the implosion of the cryptocurrency exchange FTX, we keep nodding our heads at a common question: How did reputable FTX backers miss the warning signs? This query leads to a simple and distinct conclusion for due diligence professionals and their stakeholders: beware 'piggybacking' due diligence, or one may end up hitting proverbial monkey bars like the fraught crypto exchange. What is Piggybacking? In the alternative investment field, prospective investor firms may look over a myriad of standard items: financial statement trends, auditor quality and opinion, capacity of employees to cover necessary duties, asset modeling, underwriting, and many others. Among these items is quality peer reviews. Firms often look to see whether an asset or investment program has passed the investment committees of asset class leaders they believe to have significant weight and expertise. If so, a firm may have an increased comfort level if or when the same program reaches their investment committee. Executives may press certain issues with less fervor, essentially piggybacking off the due diligence of the asset class leaders, however intentionally or unintentionally. As the FTX case proved, this can incur significant risk.  The FTX Case Sequoia Capital has been a standout name among venture capital firms for nearly 50 years, having managed 34 funds, over 359 portfolio company exits[1], and an adviser entity overseeing over $80 billion as of early 2022[2]. The firm has had some of the highest profile successes in Silicon Valley: Apple, Cisco, Google, LinkedIn, WhatsApp, and Zoom, among several other sizable names[3]. By most measures, this can be viewed as one of most successful track records in venture capital and could reasonably denote a substantial expertise of underwriting and monitoring to investors. In July 2021, one of Sequoia's funds invested $150 million into FTX entities during a Series B funding round, and another Sequoia fund separately invested $63.5 million[4]. And they were not the only ones. About 80 firms participated in funding FTX with nearly $2 billion in a two-year period, including Softbank, Temasek, and Paradigm[5]. During the process, Sequoia decided to forgo some of its standard due diligence controls for investments of this size, including external board oversight[6].  The firms would go on to miss a myriad of flags. Flags FTX had a definitive conflict of interest with its leadership owning and running a hedge fund engaged in crypto trading (Alamaeda Research). In fact, FTX founder Sam Bankman-Fried indicated he had started FTX to help fix difficulties that Alamaeda was experiencing[7]. Additionally, FTX embraced significant leverage and loaned money to Alameda[8]. FTX featured a small staff and young executives[9], despite running something as complicated as an exchange in a growing, but fledgling asset type. FTX maintained an employee count of several hundred, while its competitor Coinbase hired thousands[10]. At the same time, FTX had no real human resources department[11] and exhibited a disparate and complex organizational structure[12]. After the failure of FTX, the replacement CEO brought in as part of the bankruptcy process stated that he hadn't observed "such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here." His immediate remedy actions began with the establishment of controls for "accounting, audit, cash management, cybersecurity, human resources, risk management, data protection, and other systems that did not exist, or did not exist to an appropriate degree prior to my appointment." The new CEO, John Ray III, oversaw the Enron bankruptcy and has about 4 decades' experience in the field.[13] Meanwhile, Sequoia had refrained from contacting the exchange's founder for updates, and he had been known to play video games on investor update calls. A partner quote from a self-published Sequoia article read: "Embarrassingly, we had never tried to reach out to Sam, because we figured he didn't need us. I thought they were just minting money and had absolutely no need for investors."[14]  Signals As a trained due diligence professional makes their way through the (inexhaustive) catalog of flags above, the professional can easily surmise that a number of the flags above would have come to the fore during basic steps of their own process. Yet, one of the top VC firms in the world missed nearly all, if not all of them. While the FTX position ultimately represented a small percentage of the funds in which it was held, Sequoia eventually wrote its entire $214 million exposure down to zero[15]--a complete loss on the position. Such a large process failure sends a signal. And there are few stronger signals that investors and investment firms should beware piggybacking. Rather, they might consider hiring strong due diligence professionals and keenly examining their independent analyses, even when preeminent asset class leaders back a popular investment. Monkey bars hurt. About Buttonwood Now in our 20th year, Buttonwood Due Diligence is a leading provider of research, education and due diligence support to the Broker Dealer, Registered Investment Advisor, and Family Office communities. Our knowledge and insight into the alternative investment industry is backed by decades of experience and credentialed analysts including MBAs, CPAs, CAIAs, and JDs. Buttonwood provides a wide range of fully customizable services including: Investment and Manager/Sponsor Due Diligence Reviews Manager/Sponsor Qualifications Buttonwood AIM - Customized On-Going Due Diligence for both private and public programs BW Centurion - Members Only RIA Alternative Investment Support Consultations - Managers/Sponsors and BD/RIA/Family Offices Investment Committee Reports and Due Diligence Support Education Product Training and Testing Source List/Endnotes   [1] https://www.crunchbase.com/organization/sequoia-capital [2] https://www.wsj.com/articles/sequoia-capital-changes-regulatory-status-to-broaden-investment-scope-11641816003 [3] https://www.cnbc.com/2020/09/18/sequoia-had-a-9-billion-week-from-three-ipos-and-helped-on-tiktok.html [4] https://www.reuters.com/business/finance/sequoia-capital-cuts-fees-new-funds-amid-vc-slowdown-2023-01-13/ [5] https://economictimes.indiatimes.com/tech/newsletters/ettech-unwrapped/how-did-ftx-fleece-the-worlds-shrewdest-investors/articleshow/95611498.cms?from=mdr [6] https://www.wsj.com/articles/sequoia-capital-apologizes-to-limited-partners-for-ftx-investment-11669144914 [7] https://www.forbes.com/sites/brandonkochkodin/2022/11/11/the-red-flags-on-ftx-we-all-seemed-to-miss/?sh=11cfbfcf11f6 [8] https://www.wsj.com/articles/sequoia-capital-changes-regulatory-status-to-broaden-investment-scope-11641816003 [9] https://fortune.com/2022/11/11/sam-bankman-fried-crypto-empire-ftx-alameda-run-gang-kids-bahamas-who-all-dated-each-other/ [10] https://fortune.com/2022/06/18/ftx-sam-bankman-fried-coinbase-brian-armstrong-crypto-layoffs/ [11] https://www.cnbc.com/2022/11/17/ftx-ceo-shreds-bankman-fried-never-seen-such-a-failure-of-controls-.html [12] https://www.forbes.com/sites/georgecalhoun/2022/11/21/ftx-and-esg-a-panorama-of-failed-governance-pt-1--the-internal-failures/?sh=2e7e143f2d9d [13] https://www.cnbc.com/2022/11/17/ftx-ceo-shreds-bankman-fried-never-seen-such-a-failure-of-controls-.html [14] https://www.forbes.com/sites/brandonkochkodin/2022/11/11/the-red-flags-on-ftx-we-all-seemed-to-miss/?sh=4a52018911f6 [15] https://www.cnbc.com/2022/11/10/sequoia-capital-marks-down-its-ftx-investment-to-0.html Wed, 27 Mar 2024 06:00:00 GMT http://buttonwooddd.com/blog/13032/The-Dangers-of-Piggyback-Riding http://buttonwooddd.com/blog/12840/Beyond-the-Black-Box-of-Alternatives blog RIAs, Is Your Continuous Oversight and Monitoring Process Even Remotely Adequate? Congratulations, you've just completed the process of recommending an alternative investment! You've scrubbed the data room, read through and absorbed the third-party due diligence report, interviewed the program sponsor and even possibly visited the asset, and after weeks, or even months, of checking off the various aspects of your process, the investment has been made. Gold star for you, but what now? Most RIAs will acknowledge that continuous oversight and monitoring of the investor account and the investments in that account are imperative as a fiduciary. A fastidious RIA will be paying close attention to changes in management personnel and the overall standing of management (i.e., background checks), equity raise and deployment, style drift, distribution and redemption activity, financial performance, status of insurance and tax payments, debt environment...and on and on and on. You get the point...there's a lot to be informed on.                                                                                             For those of you squirming a bit right now as you realize that your oversight and monitoring process is, at best, touching on a fraction of the topics listed above, fear not, you're not alone. The reality is that one of the more perplexing aspects of the alternative investment process, especially for private offerings, is that once the investment has been made the due diligence and oversight process metaphorically packs up and goes home. Despite many of these investments having a 3, 5, even 10-year hold, for most of the hold period the RIA is often left on their own, scrounging for scraps of information. These scraps may take the form of a smattering of pedestrian data points from a fintech platform or possibly a semi-annual one-pager released by the sponsor. I suppose if the RIA takes 147 steps in the opposite direction, squints hard enough and tilts their head to the left, the consumption of these scraps may constitute adequate continuous oversight and monitoring (*cough* *cough*...it doesn't). For public programs we have the opposite problem. The need to thoroughly read and understand every 10-K, 10-Q and 8-K filed - for each investment - presents such an overwhelming task for most RIAs that they either hire an analyst dedicated solely to the consumption of these amazing page-turners, or they simply shut down the advisory practice for the week so they can huddle in a dark corner of their basement reading filings and wondering where they went wrong in life. Neither option is very palatable for most and the net effect is that many end up with an oversight and monitoring process that is inadequate, or worse, they simply avoid alternative investments altogether.                                                                                                                                         So if the RIA is caught between eating scraps (private program) or drinking from a fire hose (public program), what are they to do? First off, for the avoidance of doubt, in many situations an inadequate oversight and monitoring program is not the fault of the RIA...it's a systemic problem! For decades the process of investing in alternatives has been to do a bang-up job evaluating and conducting due diligence pre-investment, but then post-investment the RIA often spends the next 5-10 years clutching the proverbial pearls and relying on the sponsor alone to tell them that everything was going to be ok. The process was simply not built for post investment oversight and monitoring. And when I say "not built" I am of course referring to a problem of dollars. The RIA often doesn't have the margins to hire a full-time alts analyst or the internal capacity to conduct thorough ongoing due diligence on all their alts investments, and the program sponsors traditionally have not faced RIA pressure to provide for ongoing support through a third party (like they do with pre-investment due diligence reports) on an ongoing basis. Prior to the 2023 launch of Buttonwood Due Diligence's Alternative Investment Monitoring (AIM) program, there simply weren't realistic options for the RIA to efficiently conduct oversight and monitoring of their investments. So how should the RIA address this problem without throwing a bunch of money at it, or resigning themselves to a life of conducting ongoing due diligence? One solution is to utilize third party support such as the aforementioned BW AIM program, while another option being utilized by some RIAs is to realize efficiencies through a collective due diligence review process. These collective due diligence efforts are designed to provide the RIA with thorough initial and ongoing due diligence on alternative investments - a must have for RIA oversight and monitoring - while spreading the effort across a consortium of RIAs. While each RIA needs to have their own due diligence process that meets the needs of their firm, there is no need for each element of that process to be unique, opening the door to collective consumption of centrally-prepared due diligence and monitoring. One such example of a collective effort is Buttonwood Due Diligence's Centurion, a consortium of RIAs currently being built for the purpose of providing education, due diligence and investment monitoring support to member RIAs that relies on the concept of centrally-prepared due diligence. The solution here will be an individual decision for RIAs; throw money at the problem, develop a vitamin D deficiency sitting in the basement conducting due diligence and monitoring, or utilize a third party effort like Buttonwood's AIM or Centurion program. What's most important is that you have a robust continuous oversight and monitoring process in place.                                                                                             If you'd like to learn more about Buttonwood or our services, including our full due diligence sponsor and program reviews, sponsor qualifications, representative testing, the BW AIM program or the Buttonwood Centurion, please reach out. We offer a full suite of customizable due diligence products. Wed, 31 Jan 2024 06:00:00 GMT http://buttonwooddd.com/blog/12840/Beyond-the-Black-Box-of-Alternatives