Sequoia Capital marks its FTX investment down to zero dollars

Sequoia Capital just marked down to zero the value of its stake in the cryptocurrency exchange FTX — a stake that accounted for a minor percentage of Sequoia’s capital but as of last week likely represented among the most sizable unrealized gains in the venture firm’s 50-year history.

It alerted its limited partners in a letter that it sent out to them this evening. (See below.)

No doubt those backers are collectively still processing the events of this week. They’re accustomed to startup failures; this is outright calamity.

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

Now, following a series of missteps — that’s the best-case scenario — FTX didn’t just lose 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. Reportedly, he has been seeking a mixture of debt and equity.

It’s not surprising that Sequoia decided instead to write off its roughly $210 million investment. Presumably, others of FTX’s investors — including BlackRock, Tiger Global, Insight Partners, and Paradigm — are shooting out their own communications to limited partners about making the same decision. (The Ontario Teachers’ Pension Plan Board, which invested directly in FTX, has a much broader base of shareholders who may be wondering about their retirement savings, even while their pensions are guaranteed.)

More uncharacteristic was Sequoia’s decision to tweet out 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 as far from FTX as it can, just as details of FTX’s abrupt unspooling continue to surface.

What is known already: Binance, an early investor in FTX turned into a fierce rival, announced on Sunday it was selling off its FTT holdings, the native token of FTX exchange, worth $529 million at the time, due to “recent revelations that came to light.”

Those revelations came courtesy of CoinDesk, which reported last week that Alameda Research, a trading house also owned by Bankman-Fried, had fully one-third of its assets in FTX’s own FTT token, raising questions about possible market manipulation as well as making it apparent that the two outfits were dangerously intertwined and thus vulnerable.

Binance promptly went for the jugular, tweeting about those “revelations” and dumping its FTT holdings and creating enough uncertainty that other FTT holders raced to unload their FTT tokens. By yesterday, a crippled FTX had collapsed at the doorstep of Binance, and after Binance said it signed a letter of intent to acquire the outfit (victory at a fire-sale price), the internet had its fun with the whole saga.

Except that the story is still unfolding, as it turns out. After conducting some due diligence, Binance said it was backing away from FTX. Specifically, it said in a statement: “In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.” (Ouch.)

Bankman-Fried has since been searching for funds elsewhere.

He’s clearly not getting more money from Sequoia. The question is what happens in the very likely scenario that none of FTX’s backers want to throw FTX a lifeline. On the one hand, FTX’s fall is setting off fears of a crypto contagion. On the other, the risks to FTX are mounting. Very notably, the SEC has begun investigating whether FTX mishandled customer funds and looking into its relationships with other parts of Bankman-Fried’s crypto empire, Bloomberg reported earlier today.

It leaves a lot of firms with ties to FTX in a precarious position, including Sequoia. In just one potential scenario, FTX customers out billions of dollars will be focused on getting some portion of those funds back, possibly with the help of regulators.

Sequoia wants no part of that. Which may be why it stressed publicly tonight in its LP letter that it does “extensive research and thorough thorough diligence on every investment” it makes, and suggested that if FTX screwed up, it was after Sequoia’s checks were cashed.

We’ll see if that settles things. It seems as likely that for the firm and its co-investors, their $2 billion loss isn’t the end of this chapter.