As of last week, the venture firm marked down the value of its stake in the FTX exchange to zero, making it one of the most lucrative investments in the firm's 50-year history.
This evening, it sent out a letter to its limited partners. Below, you can see a picture.
When Sequoia invested in the Series B round of the Bahamas-based outfit in July 2021, FTX 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.
FTX isn't just worthless after a series of mistakes. According to the WSJ, FTX founder and CEO Sam Bankman-Fried told investors that he needed emergency funding to cover a shortfall of up to $8 billion. He has been looking for debt and equity.
It was no surprise that Sequoia decided to write off the investment and write a letter to its partners. Some of FTX's investors 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 wide range of shareholders who might be learning that their retirement dollars just vanished into thin air.
After sending the letter directly to its investors, the company decided to send it out via social media. As details of FTX's abrupt unspooling continue to surface, it's hard to see the move as anything other than a signal that Sequoia wants to distance itself as far from FTX as possible.
The native token of FTX exchange, which was worth $529 million at the time, was sold off by the early investor in FTX.
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.
Binance went for the jugular, dumping its holdings and creating a lot of uncertainty for other holders of the token. The internet had a lot of fun with the FTX collapse and the fact that the letter of intent to acquire the outfit had been signed.
The story is still being told. The company said it was pulling away from FTX. 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
He isn't getting any more money from the company. The question is what will happen if FTX's backers don't want to give it a chance. The SEC is investigating whether FTX mishandled customer funds, and they are also looking into the firm's relationships with other parts of Bankman- Fried's empire.
FTX investors will be left out of billions of dollars, money they will focus on getting back to them. It's clear that Sequoia wants nothing to do with that. The letter was sent a little earlier.
Dear Limited Partner,
We are reaching out to share an update on our investment in FTX. In recent days, a liquidity crunch has created solvency risk for FTX. The full nature and extent of this risk is not known at this time. Based on our current understanding, we are marking our investment down 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 a top ten position in the fund, and our $150 million cost basis accounts for less than 3% of the committed capital of the fund. The $150 million loss is offset by ~$7.5B in realized and unrealized gains in the same fund, so the fund remains in good shape.
Separately, SCGE Fund, L.P. invested $63.5M in FTX.com and FTX US, representing less than 1% of the SCGE Fund’s 9/30/2022 portfolio (at fair value).
We are in the business of taking risk. Some investments will surprise to the upside, and some will surprise to the downside. We do not take this responsibility lightly and do extensive research and thorough diligence on every investment we make. At the time of our investment in FTX, we ran a rigorous diligence process. In 2021, the year of our investment, FTX generated approximately $1B in revenue and more than $250M in operating income, as was made public in August 2022.
The current situation is developing quickly. We will communicate in a timely manner when more information is available. If you have any additional questions, please contact Andrew Reynolds, Marie Klemchuk and Kathleen Forte at: investorrelations@sequoiacap.com. For SCGE questions, please contact Kimberly Summe at summe@sequolacap.com.
Sincerely.
Team Sequoia
Footnotes:
Global Growth Fund III (GGFIlI) data is as of September 30, 2022 and is based on U.S. GAAP. The $7.5B is composed of $5.8B of unrealized gain and $1.7B of realized gain. which includes the General Partner distribution on May 27, 2021 pursuant to the 2021 Amendment. Past performance is not indicative of future results
Global Growth Fund III (GGFIII) refers to Sequoia Capital Global Growth Fund III – Endurance Partners, L.P. and does not include Sequoia Capital Global Growth Fund III – U.S./India Annex Fund, L.P., Sequoia Capital Global
Growth Fund III – China Annex Fund, L.P., and their parallel funds
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