Sequoia Capital just reduced the value of its stake in cryptocurrency exchange FTX to zero — a stake that represented among the largest unrealized gains in the venture firm’s 50-year history as of last week.
He warned his limited partners in a letter sent to them this evening. (See below.)
No doubt these backers are still collectively processing the events of this week. They are used to initial failures; this is clearly a problem.
When Sequoia invested in FTX’s Series B in July 2021, the high-flying, Bahamas-based outfit was valued at $18 billion. Two months later, the company was valued at $25 billion by investors. In January of this year, FTX raised $400 million in a Series C round, bringing its total funding to $2 billion and a valuation of $32 billion.
Now, after a series of missteps – this is the best case scenario – FTX has not lost its rich value. According to the WSJ, FTX founder and CEO Sam Bankman-Fried told investors today that it needs emergency funding to cover a shortfall of up to $8 billion due to withdrawal requests received in recent days. It is reportedly looking for a mix of debt and equity.
Unsurprisingly, Sequoia decided to write off the investment instead. FTX’s other investors, including BlackRock, Tiger Global, Insight Partners and Paradigm, are expected to file their communications today regarding the adoption of the same decision as limited partners. (The Ontario Teachers’ Pension Plan Board, which invests directly in FTX, has a much broader shareholder base that may learn that pension dollars just disappear into thin air.)
Sequoia’s decision was more uncharacteristic tweet after sending the letter directly to its investors this evening. It’s hard to interpret the move as anything other than a clear signal that Sequoia wants to distance itself from the FTX as much as possible, as the details of the FTX’s sudden release emerge.
It’s already known: Binance, an early investor in FTX, has become a fierce competitor, announcing on Sunday that it was selling its holdings of FTX’s local token, FTT, at a then-$529 million valuation due to “recent disclosures.” illuminate.”
The revelations come courtesy of CoinDesk, which reported last week that Bankman-Fried-owned trading house Alameda Research holds a full third of its assets in FTX’s own FTT token, raising questions about possible market manipulation. it is clear that the two garments are dangerously intertwined and therefore vulnerable.
Binance immediately tweeted about these “revelations”, unloading their FTT holdings and creating enough uncertainty that other FTT holders raced to unload. their FTT tokens. Yesterday, a crippled FTX collapsed on Binance’s doorstep, and the internet had fun with the whole saga after Binance said it had signed a letter of intent to acquire the stuff (probably at a sale price).
Besides, as it turns out, the story is still ongoing. After some due diligence, Binance said it was pulling back from FTX. Specifically, the statement said: “Our initial hope was to support FTX’s customers to provide liquidity, but the challenges are beyond our control or ability to assist.” (Ouch.) Bankman-Fried has since looked elsewhere for funds.
It’s clear that it won’t charge more than Sequoia. The question is, what happens in the very likely scenario that none of FTX’s backers want to throw FTX a lifeline, and why? On top of all that, the SEC is now investigating whether FTX “mismanaged client funds,” and they’re looking into the firm’s ties to other parts of Bankman-Fried’s crypto empire, Bloomberg reported earlier today.
Of course, if FTX is not bailed out, they will lose billions of dollars to their clients, and will direct some of the money back to them. Sequoia, for its part, wants no part of it, stressing tonight that it does “extensive research and thorough due diligence on every investment” and suggesting that if FTX has problems, it comes after its checks are cashed.
We’ll see if that resolves the issue, or if the $2 billion lost by the firm and its investors isn’t the end of it.
Dear Limited Partner,
“We are trying to share an update on our investment in FTX. In recent days, the liquidity crisis created a solvency risk for FTX. The full nature and extent of this risk is currently unknown. Based on our current understanding, we mark our investment down to $0.
Sequoia Capital’s exposure to FTX is limited. We own FTX.com and FTX USA in one private fund, Global Development Fund III. FTX is not a top ten position in the fund, and our $150 million value base represents less than 3% of the fund’s invested capital. The $150 million loss is offset by ~$7.5 billion in realized and unrealized gains in the same fund, so the fund remains in good shape.
Separately, SCGE Fund, LP invested $63.5 million in FTX.com and FTX US, representing less than 1% of SCGE Fund’s portfolio (at fair value) as of 9/30/2022.
We are in the business of taking risks. Some investments will surprise on the positive side and some on the negative side. We do not take this responsibility lightly and apply extensive research and due diligence to every investment we make. When we invested in FTX, we went through a rigorous due diligence process. In 2021, the year of our investment, FTX generated approximately $1 billion in revenue and more than $250 million in operating income, as disclosed publicly in August 2022.
The current situation is developing rapidly. We will be in touch in due course as more information becomes available. If you have additional questions, please contact Andrew Reynolds, Marie Klemchuk and Kathleen Forte at firstname.lastname@example.org. For SCGE questions, contact Kimberly Summe at email@example.com.
The Sequoia team
Global Development Fund III (GGFIlI) data is as of September 30, 2022 and is based on US GAAP. The $7.5 billion consists of $5.8 billion in unrealized gains and $1.7 billion in realized gains. Includes General Partner distribution on May 27, 2021 pursuant to 2021 Amendment. Past performance is not indicative of future results
Global Growth Fund III (GGFIII) refers to Sequoia Capital Global Growth Fund III – Sustainable Partners, LP and does not include Sequoia Capital Global Growth Fund III – US/India Complementary Fund, LP, Sequoia Capital Global.
Growth Fund III – China Complementary Fund, LP and their parallel funds