Sequoia Capital took a $213 million bath on FTX after the crypto exchange imploded. That's not that bad, VCs say.
Brendan McDermid/Reuters
- FTX investor Sequoia Capital has marked down its position to $0 as the crypto exchange crumbles.
- The venture capital giant had invested around $213 million into the beleaguered startup.
- People also lampooned an article about FTX that shows how enchanted Sequoia partners were.
Sequoia Capital now views its $213.5 million investment in FTX as worthless as the crypto exchange teeters on the brink of collapse after an eleventh-hour deal to salvage the business fell apart.
The venture capital firm said that while the full extent of the risk posed to FTX was "not known," it had decided to mark its investment down to $0, in a letter to investors on Wednesday. Sequoia shared the memo on Twitter, eliciting responses both complimentary and scathing from counterparts at other funds.
Many investors said the damage was largely contained. The growth fund that backed FTX is still up $7.5 billion in gains, Sequoia said.
"Breathing a sign of relief for @sequoia," Sheel Mohnot, a prominent early-stage fintech investor and general partner at Better Tomorrow Ventures, said in a tweet citing the fund's astronomical gains.
"Somehow Sequoia capital turned a FTX write down to zero into a humblebrag. Respect," super angel Howard Lindzon tweeted.
Sequoia's investment in the crypto exchange was spread across two funds. It invested $150 million into FTX through its third growth fund, which Sequoia said totaled less than 3% of that fund's capital commitments. But the wash was offset by other investments bringing the fund's gains to $7.5 billion, composed of $5.8 billion of unrealized gains and $1.7 billion of realized gains, it said.
It had another $63.5 million invested in FTX and FTX.US through a crossover fund, representing less than 1% of the fund's portfolio.
—Sequoia Capital (@sequoia) November 10, 2022
Early bets on DoorDash have insulated the growth fund, investors said. Sequoia owned about 20% of DoorDash at the time the food-delivery company went public in 2020, an equity slug worth $5.3 billion at the opening price, regulatory filings show. The firm sold only a portion of its holdings and pocketed more than a billion dollars in returns, according to estimates by tech reporter Eric Newcomer, before the stock price tumbled from its all-time high.
Sequoia also has a position in Unity driving the fund's gains, Nihal Mehta, a partner at Eniac Ventures, tweeted. It was the largest single shareholder in the game-engine company before it went public in 2020, amassing a stake worth nearly $3 billion at the opening price. The firm still owned 70% of its original position in June, a regulatory filing showed.
Zoomed out further, Sequoia's position in FTX represents only 0.25% of its more than $85 billion in assets under management, Austen Allred, a cofounder of The Bloom Institute, a coding bootcamp formerly known as Lambda School, said in a tweet.
"On an individual investment basis: huge miss. From a portfolio standpoint: doesn't matter one bit," Allred said.
A Sequoia spokesperson did not immediately respond to a request for comment that was sent outside regular business hours.
A diligence miss
Elsewhere on Twitter, investors tore into the firm for its apparent lack of due diligence.
They pointed to a lofty, 14,000-word profile of Sam Bankman-Fried, the founder and CEO of FTX, detailing the young executive's meteoric rise, that Sequoia posted on its website in September.
It describes a Zoom video call in July of 2021 where Bankman-Fried, relaxed and well-spoken, first pitched the firm on his vision to create the super-app for buying and spending crypto. The partners fired off messages of exaltation in a separate chat window. "I am a 10 out of 10," one wrote.
Here's what they didn't see: Bankman-Fried was playing "League of Legends," an online battle arena video game, through the entire meeting, according to the report.
"What Sequoia was reacting to was the scale of SBF's vision," freelance reporter Adam Fisher wrote. "It wasn't a story about how we might use fintech in the future, or crypto, or a new kind of bank. It was a vision about the future of money itself—with a total addressable market of every person on the entire planet."
The firm promptly wrote a check into the funding round.
—tae kim 🐀 (@firstadopter) November 9, 2022
Online, some investors cringed.
"This will make for an incredible scene in a HBO TV show in like 12 months," Delian Asparouhov, a principal at Founders Fund, said.
Zach Ware, a longtime Zappos executive-turned-venture capitalist, likened the startup to WeWork, whose guiding mission — "elevate the world's consciousness" — got it routinely mocked for using aspirational language to brand a money-losing business. The profile of Bankman-Fried had those "vibes," Ware said in a tweet.
The article is still on Sequoia's website, but it has an update at the top. "Since this article was published, a liquidity crunch has created solvency risk for FTX and its future is uncertain," it reads.
In its letter to investors, Sequoia said it does "extensive research and thorough diligence" on every investment it makes. The reality of the business, it said, is that some investments fail while others succeed.
Sequoia isn't the only venture firm with egg on its face amid uncertainty over the crypto exchange's liquidity crunch. The startup raised close to $2 billion in a span of six months over 2021 and 2022, from blue-chip investors like New Enterprise Associates, IVP, SoftBank Vision Fund, Lightspeed Venture Partners, Insight Partners, and Tiger Global, among others, it said in a press release.
Bank-Friedman is now calling on investors to provide emergency funding to cover a shortfall of up to $8 billion, according to reports in Bloomberg and the Wall Street Journal on Thursday.
FTX did not immediately respond to Insider's request for comment.
Contributer : Business Insider https://ift.tt/igh8Sd0
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