Sequoia Capital just wrote down the value of its stake in cryptocurrency exchange FTX — a stake that was a minor percentage of Sequoia’s capital but last week likely represented one of the most unrealized gains. most important in the venture capital firm’s 50-year history.
She alerted her sponsors in a letter she sent them tonight. (See below.)
No doubt these backers are still collectively dealing with the events of this week. They are used to startup failures; it is a pure calamity.
When Sequoia invested in FTX’s Series B in July 2021, the Bahamas-based high-flying outfit was valued at $18 billion. Two months later, the company was valued by investors at $25 billion. In January this year, FTX raised $400 million in Series C, bringing its total funding to $2 billion and its valuation to $32 billion.
Now, following a series of missteps – this is the best case scenario – FTX hasn’t just lost its rich valuation. According to the WSJ, FTX founder and CEO Sam Bankman-Fried told investors today that he needed emergency funding to cover up to $8 billion in shortfall due to withdrawal requests received in recent days. He would have looked for a mix of debt and equity.
It’s no surprise that Sequoia decided to cancel its roughly $210 million investment instead. Presumably, other FTX investors – including BlackRock, Tiger Global, Insight Partners and Paradigm – are issuing their own limited partner communications to make the same decision. (The Ontario Teachers’ Pension Plan Board, which invested directly in FTX, has a much broader base of shareholders who may be questioning their retirement savings, even if their pensions are guaranteed.)
Sequoia’s decision to Tweeter the letter tonight after sending it directly to its investors. It’s hard to interpret the move as anything other than a clear signal that Sequoia wants to distance itself from FTX as much as possible, just as details of FTX’s abrupt unwind continue to surface.
What we already know: Binance, an early investor in FTX turned fierce rival, announced on Sunday that it was selling its FTT holdings, the native token of the FTX exchange, worth 529 million dollars at the time, due to “recent revelations that have come to light.”
These revelations came courtesy of CoinDesk, which reported last week that Alameda Research, a trading house also owned by Bankman-Fried, held a third of its assets in FTX’s own FTT token, raising concerns. questions about possible market manipulation and making it obvious that the two outfits were dangerously intertwined and therefore vulnerable.
Binance quickly went for the jugular, tweeting about these “revelations” and dumping its FTT holdings and creating enough uncertainty for other FTT holders to rush to offload their FTT tokens. Yesterday, a crippled FTX collapsed on Binance’s doorstep, and after Binance said it had signed a letter of intent to acquire the outfit (win at a bargain price), the internet had fun with the whole saga.
Except the story is still ongoing, as it turns out. After doing due diligence, Binance has declared that it is withdrawing from FTX. Specifically, he said in a statement, “At first our hope was to be able to help FTX clients provide liquidity, but issues are beyond our control or ability to help.” (Ouch.)
Bankman-Fried has since sought funds elsewhere.
He’s clearly not getting more money from Sequoia. The question is what happens in the very likely scenario where nothing FTX backers want to throw FTX a lifeline. On the one hand, the fall of FTX raises fears of crypto-contagion. On the other hand, the risks for FTX increase. Most notably, the SEC has begun investigating whether FTX mishandled client funds and examining its relationships with other parts of Bankman-Fried’s crypto empire, Bloomberg reported earlier today.
This leaves many FTX-related companies in a precarious position, including Sequoia. In just one potential scenario, FTX clients spending billions of dollars will be focused on recovering some of those funds, possibly with help from regulators.
Sequoia doesn’t want to be part of that. Perhaps that’s why he pointed out publicly tonight in his LP letter that he does “extensive research and thorough due diligence on every investment” he makes, and suggested that if FTX was wrong, it was after Sequoia’s checks were cashed.
We’ll see if that fixes things. It also seems likely that for the company and its co-investors, their $2 billion loss isn’t the end of this chapter.
Dear sponsor,
“We are contacting you to share an update on our investment in FTX. In recent days, a liquidity crisis has created a solvency risk for FTX. The full nature and extent of this risk is not known at the moment. Based on our current understanding, we reduce our investment to $0.
Sequoia Capital’s exposure to FTX is limited. We hold FTX.com and FTX US in a private fund, Global Growth Fund III. FTX is not in the top ten positions of the fund and our cost base of $150 million represents less than 3% of the fund’s committed capital. The $150 million loss is offset by about $7.5 billion of realized and unrealized gains in the same fund, so the fund remains in good shape.
In addition, SCGE Fund, LP has invested $63.5 million in FTX.com and FTX US, which represents less than 1% of the SCGE Fund’s portfolio as of 09/30/2022 (at fair value).
We are in the business of taking risks. Some investments will surprise on the upside, and some will surprise on the downside. We do not take this responsibility lightly and conduct extensive research and due diligence on every investment we make. At the time of our investment in FTX, we conducted a rigorous due diligence process. In 2021, the year of our investment, FTX generated approximately $1 billion in revenue and over $250 million in operating revenue, as publicly disclosed in August 2022.
The current situation is changing rapidly. We will communicate in due course when more information becomes available. If you have additional questions, please contact Andrew Reynolds, Marie Klemchuk and Kathleen Forte at: [email protected] For SCGE questions, please contact Kimberly Summe at [email protected]
Sincerely.
Sequoia Team
Footnotes :
Data for Global Growth Fund III (GGFIlI) is as of September 30, 2022 and is based on US GAAP. The $7.5 billion is made up of $5.8 billion of unrealized gain and $1.7 billion of realized gain. which includes the distribution to the General Partner on May 27, 2021 in accordance with the 2021 Amendment. Past performance does not represent future results
Global Growth Fund III (GGFIII) means Sequoia Capital Global Growth Fund III – Endurance Partners, LP and does not include Sequoia Capital Global Growth Fund III – US/India Annex Fund, LP, Sequoia Capital Global
Growth Fund III – China Annex Fund, LP and their parallel funds
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