I started covering the crypto industry at Fortune in August 2022, just a couple of months before FTX collapsed. I’ve never experienced a story like it. Sure, tech companies have imploded in spectacular fashion before—just look at Theranos—but FTX was something else. You had the young, idiosyncratic founder who flew too close to the sun, and the investors who turned a blind eye to clear red flags. But FTX was a financial services platform, and its failure meant the evaporation of billions of dollars—real money, not only to VCs, but normal people who trusted the company with their savings. It was the 2008 financial crisis but speedrun by 20-year-olds.
For the past six months, Allie Garfinkle and I have been reporting a story about a startup collapse that eerily echoes FTX, except for the amount of public attention it’s received. Like FTX, Synapse was a red-hot fintech company run by a wunderkind named Sankaet Pathak who wanted to upend financial infrastructure. And like Sam Bankman-Fried, FTX’s founder, Pathak convinced blue-chip investors, including Andreessen Horowitz, to fund his idea with tens of millions of dollars.
It ended in calamity.
Synapse was a financial middleman born in the “banking as a service” wave, connecting fintech unicorns without banking charters such as Mercury and Dave with regional banks that were eager to take on new deposits. But as Synapse experienced astronomic growth during the last fintech boom, the startup suffered from poor internal controls and management, leading to the deterioration of relationships with its banking partners, and ultimately, its collapse.
When Synapse went bankrupt last April, it took down a number of fintech apps that relied on it to help store their customer deposits—apps like Yotta, which offered savings accounts to everyday users, enticing them with Powerball-style daily lottery drawings instead of boring interest dividends. Because of poor accounting, everyone involved in Synapse disputed the transaction history of the billions of dollars that Synapse was shuttling between fintechs like Yotta and regional banks, and $200 million of customer funds were frozen across the different apps.
Almost a year later, as much as $95 million is still missing. Customers are desperate, like Kayla Morris, who sold her house after members of her family had a series of health scares and decided to put $280,000 on Yotta, thinking that her account was FDIC-insured. She’s only gotten back $500.
There are a couple of takeaways from this story. One is the regulatory danger revealed by Synapse. Because it operated in a no man’s land in terms of supervision, no agency has stepped in—not the Federal Reserve, not the Consumer Financial Protection Bureau, and not the Federal Deposit Insurance Corporation. Instead, each party is blaming the other, from Synapse to the banks to the fintech clients to the end users, with no end in sight. It’s a nightmare version of the Spiderman meme, where identical versions of the web-slinger point at each other. And it’s only likely to happen again as the Trump administration pushes its deregulatory agenda.
The other takeaway is the myth of the founder. Unlike Bankman-Fried or Theranos’ Elizabeth Holmes, Pathak has not faced any legal consequences (and to be clear, there is no clear evidence of legal wrongdoing, though there is an active Justice Department criminal investigation into the collapse, as we report). Really, Pathak is more similar to WeWork founder Adam Neumann—especially because, just as Neumann has convinced VCs to continue to pour money into his projects after his company went bankrupt, Pathak has raised $11 million for another startup dedicated to building humanoid robotics, including from Tribe Capital. It begs the question: How badly does a founder have to fail for VCs to not fund their next venture?
When we interviewed Pathak, we asked if he had any regrets about how he ran Synapse. “There’s no shame in failing, unless it’s catastrophic,” he replied. “Those were my values when I started Synapse, instinctively, and those are my values now.”
We spent months speaking with former employees and Synapse partners and poring over hundreds of pages of court documents to unravel what went wrong.
You can read our full investigation here.
One more thing…Jessica Mathews reports on the strange case of a startup fighting a Trump-run agency with Trump’s own rhetoric. With the new administration rolling back regulations left and right—and encouraging supervisors to drop lawsuits—the telecom company Telnyx is fighting an enforcement action by the Federal Communications Commission by hiring lobbyists and political consultants, including the influence shop that Elon Musk hired for his own PAC. You can read the full article here.
Leo Schwartz
X: @leomschwartz
Email: leo.schwartz@fortune.com
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VENTURE DEALS
- Reflection, a New York City-based AI company building superintelligent autonomous systems, raised $130 million in funding across seed and Series A rounds. Lightspeed and CRV led the Series A round and Sequoia and CRV led the seed round.
- Bluebird Kids Health, a Palm Beach County, Fla.-based pediatric care provider, raised $31.5 million in funding. F Prime and .406 Ventures led the round and was joined by AIF and Juxtapose.
- Daupler, a Kansas City, Mo.-based response management system, raised $15 million in Series B funding. Aqualateral led the round and was joined by existing investors Burnt Island Ventures and KCRise Fund.
- Peer Global, a Newport Beach, Calif.-based metaverse game engine, raised $10.5 million in funding from the family office of Tommy Mai.
- Alceberg, a New York City-based developer of AI safety and compliance technology, raised $10 million in seed funding from SYN Ventures and Sprout & Oak.
- Faireez, a New York City-based AI-powered residential housekeeping platform, raised $7.5 million in funding from Aristagora VC, Longevity Venture Partners, Hetz Ventures, Secret Chord Ventures, and others.
PRIVATE EQUITY
- INNERGY, backed by Mainsail Partners, acquired Microvellum, a Central Point, Ore.-based developer of cabinet design software for manufacturers. Financial terms were not disclosed.
FUNDS + FUNDS OF FUNDS
- Sofinnova Partners, a Paris, France-based venture capital firm, raised €1.2 billion across funds focused on health care and sustainability companies.
PEOPLE
- Ironspring Ventures, an Austin, Texas-based venture capital firm, hired Sam Natbony and Natan Reddy as Principals. Previously, Sam was at LoneTree Capital and Natan was at 25madison.
