Sequoia Capital marks its investment in FTX down to $0

Sequoia Capital just slashed its stake in cryptocurrency exchange FTX to zero — a stake that, as of last week, probably represented among the largest unrealized gains in the venture firm’s 50-year history.

He warned his limited partners in a letter he sent them this evening. (See below.)

No doubt these supporters are still collectively processing the events of this week. They are used to startup failures; this is pure trouble.

When Sequoia invested in FTX’s Series B round in July 2021, the high-end Bahamas-based outfit was valued at 18 billion dollars. Two months later, the company was valued by investors at 25 billion dollars. In January of this year, FTX raised $400 million in Series C, bringing its total funding to $2 billion and its valuation to a breathtaking 32 billion dollars.

Now, after a series of missteps—that’s 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 a shortfall of up to $8 billion due to withdrawal requests received in recent days. He is reportedly looking for a mix of debt and equity.

Not surprisingly, Sequoia instead decided to write off its roughly $210 million investment. Other FTX investors – including BlackRock, Tiger Global, Insight Partners and Paradigm – are understood to be firing off their own limited partner communications about making the same decision. (The Ontario Teachers’ Pension Board, which invests directly in FTX, has a much broader base of shareholders who may be wondering about their retirement savings even as their pensions guaranteed.)

More atypical was Sequoia’s decision to a tweet sent the letter tonight after sending it directly to its investors. It’s hard to interpret this move as anything other than a clear signal that Sequoia wants to distance itself as far from FTX as possible, just as details about FTX’s sudden release continue to surface.

What’s already known: Binance, an early investor in FTX turned fierce rival, announced on Sunday that it was selling off its holdings of FTT, the native token of the FTX exchange, valued at $529 million at the time, due to “recent revelations that have come to light up.”

These revelations came courtesy of CoinDesk, which reported last week that Alameda Research, a trading house also owned by Bankman-Fried, has a third of its holdings in FTX’s own FTT token, raising questions about possible market manipulation as well as making it clear that the two companies are dangerous intertwined and thus vulnerable.

Binance immediately went for the jugular by tweeting about these “revelations” and dumped their FTT holdings and created enough uncertainty that other FTT holders were racing to offload theirs FTT tokens. By yesterday, the crippled FTX had collapsed on Binance’s doorstep, and after Binance said it had signed a letter of intent to acquire the outfit (winning a fire sale price), the internet he was having fun with the whole saga.

Except the story is still unfolding, as it turns out. After conducting due diligence, Binance said it was withdrawing from FTX. Specifically, a statement said: “Initially, our hope was to be able to support FTX customers in providing liquidity, but the issues are beyond our control or ability to assist.” (Auch.)

Bankman-Fried has since looked elsewhere for funding.

Obviously, it won’t be getting any more money from Sequoia. The question is what happens in the very likely scenario that none of FTX supporters want to throw FTX a lifeline. On the one hand, the decline in FTX raises fears of a crypto contagion. On the other hand, the risks for FTX are growing. Most notably, the SEC has begun investigating whether FTX mismanaged client funds and is looking into its ties to other parts of Bankman-Fried’s crypto empire, Bloomberg reported earlier today.

This leaves many firms with ties to FTX in a precarious position, including Sequoia. In just one potential scenario, FTX’s billion-dollar customers will be focused on getting some of those funds back, possibly with the help of regulators.

Sequoia wants no part of it. Which is perhaps why he stressed publicly tonight in his letter to LP that he does “thorough research and due diligence on every investment” he makes, and suggested that if FTX screwed up, it was after cashing checks on Sequoia.

We’ll see if that fixes things. It seems so likely that for the firm and its co-investors, their $2 billion loss is not the end of this chapter.

Dear Limited Partner,

“We are reaching out to you to share an update on our investment in FTX. In recent days, the liquidity crisis has posed a risk to FTX’s solvency. The full nature and extent of this risk is currently unknown. Based on our current understanding, we are reducing our investment to $0.

Sequoia Capital’s exposure to FTX is limited. We own FTX.com and FTX US in one private fund, Global Growth Fund III. FTX is not in the fund’s top ten, and our $150 million base represents less than 3% of the fund’s committed 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 as of 09/30/2022 (at fair value).

We are in the business of taking risk. Some investments will surprise on the upside and others will surprise on the downside. We do not take this responsibility lightly and perform extensive research and due diligence on every investment we make. During 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 more than $250 million in operating income, as reported in August 2022.

The current situation is evolving rapidly. We will communicate in due course when more information is available. If you have additional questions, please contact Andrew Reynolds, Marie Klemchuk and Kathleen Forte at: [email protected] For questions about SCGE, please contact Kimberly Summe at [email protected]

At your disposal.

Team Sequoia

Footnotes:

Global Growth Fund III (GGFIlI) data is as of September 30, 2022 and is based on US GAAP. The $7.5 billion consisted of $5.8 billion in unrealized earnings and $1.7 billion in realized earnings. which includes the General Partner Distribution on May 27, 2021 pursuant to the 2021 Amendment. Past performance is not indicative of future performance

Global Growth Fund III (GGFIII) refers to 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

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *