Sequoia Capital marks its FTX funding all the way down to zero {dollars}

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2022-11-10 02:13:47

Sequoia Capital simply marked all the way down to zero the worth of its stake within the cryptocurrency alternate FTX — a stake that, as of final week, seemingly represented among the many most sizable unrealized positive factors within the enterprise agency’s 50-year historical past.

It alerted its restricted companions in a letter that it despatched out to them this night. (See beneath.)

Little doubt these backers are collectively nonetheless processing the occasions of this week. They’re accustomed to startup failures; that is outright calamity.

When Sequoia invested within the Sequence B spherical of FTX in July 2021, the high-flying, Bahamas-based outfit was valued at $18 billion. Two months later, the corporate was valued by traders at $25 billion. In January of this 12 months, FTX raised a $400 million in Sequence C spherical that introduced its whole funding to $2 billion and its valuation to a panoramic $32 billion.

Now, following a sequence of missteps — that’s the best-case situation — FTX didn’t simply lose its wealthy valuation. In keeping with the WSJ, FTX founder and CEO Sam Bankman-Fried advised traders as we speak that he wanted emergency funding to cowl a shortfall of as much as $8 billion because of withdrawal requests acquired in current days. Reportedly, he has been looking for a combination of debt and fairness.

It’s not stunning that Sequoia determined as a substitute to put in writing off the funding. Presumably, others of FTX’s traders — together with BlackRock, Tiger International, Perception Companions, and Paradigm amongst them — are capturing out their very own communications to restricted companions as we speak about making the identical resolution. (The Ontario Lecturers’ Pension Plan Board, which invested straight in FTX, has a wider base of shareholders who could also be studying that their retirement {dollars} simply vanished into skinny air.)

Extra uncharacteristic was Sequoia’s resolution to tweet out the letter tonight after sending it on to its traders. It’s onerous to interpret the transfer as something aside from a transparent sign that Sequoia needs to distance itself as removed from FTX as it will possibly, simply as particulars of FTX’s abrupt unspooling proceed to floor.

What is thought already: Binance, an early investor in FTX become a fierce rival, introduced on Sunday it was promoting off its FTT holdings, the native token of FTX alternate, price $529 million on the time, because of “current revelations that got here to gentle.”

These revelations got here courtesy of CoinDesk, which reported final week that Alameda Analysis, a buying and selling home additionally owned by Bankman-Fried, had totally one-third of its belongings in FTX’s personal FTT token, elevating questions on attainable market manipulation in addition to making it obvious that the 2 outfits had been dangerously intertwined and thus susceptible.

Binance promptly went for the jugular, tweeting about these “revelations” and dumping its FTT holdings and creating sufficient uncertainty that different FTT holders raced to unload their FTT tokens. By yesterday, a crippled FTX had collapsed on the doorstep of Binance and after Binance mentioned it signed a letter of intent to accumulate the outfit (presumably for a fire-sale value), the web had its enjoyable with the entire saga.

Besides that the story remains to be unfolding, because it seems. After conducting some due diligence, Binance mentioned it was backing away from FTX. Particularly, it mentioned in an announcement: “At first, our hope was to have the ability to help FTX’s clients to offer liquidity, however the points are past our management or capacity to assist.” (Ouch.) Bankman-Fried has since been trying to find funds elsewhere.

He’s clearly not getting any extra money from Sequoia. The query is what occurs within the very seemingly situation that none of FTX’s backers wish to throw FTX a lifeline, and why would they? On prime of all the pieces else, the SEC is now investigating whether or not FTX “mishandled buyer funds, they usually’re wanting into the agency’s relationships with different elements” of Bankman-Fried’s crypto empire, Bloomberg reported earlier as we speak.

After all, if FTX isn’t rescued, its clients will probably be out billions of {dollars}, cash they are going to be targeted on getting some portion of which returned to them, probably with the assistance of regulators.

Sequoia, for its half, needs no a part of that, stressing publicly tonight in its LP letter that it does “intensive analysis and thorough thorough diligence on each funding” it makes, and suggesting that if FTX developed challenges, it got here after its checks had been cashed.

We’ll see if that settles issues, or whether or not the agency and its co-investors discover their misplaced $2 billion isn’t the top of this chapter.

Expensive Restricted Associate,

“We’re reaching out to share an replace on our funding in FTX. In current days, a liquidity crunch has created solvency threat for FTX. The total nature and extent of this threat isn’t identified presently. Primarily based on our present understanding, we’re marking our funding all the way down to $0.

Sequoia Capital’s publicity to FTX is restricted. We personal FTX.com and FTX US in a single personal fund, International Progress Fund III. FTX isn’t a prime ten place within the fund, and our $150 million price foundation accounts for lower than 3% of the dedicated capital of the fund. The $150 million loss is offset by ~$7.5B in realized and unrealized positive factors in the identical fund, so the fund stays in fine condition.

Individually, SCGE Fund, L.P. invested $63.5M in FTX.com and FTX US, representing lower than 1% of the SCGE Fund’s 9/30/2022 portfolio (at honest worth).

We’re within the enterprise of taking threat. Some investments will shock to the upside, and a few will shock to the draw back. We don’t take this accountability frivolously and do intensive analysis and thorough diligence on each funding we make. On the time of our funding in FTX, we ran a rigorous diligence course of. In 2021, the 12 months of our funding, FTX generated roughly $1B in income and greater than $250M in working earnings, as was made public in August 2022.

The present scenario is creating shortly. We are going to talk in a well timed method when extra info is accessible. When you have any extra questions, please contact Andrew Reynolds, Marie Klemchuk and Kathleen Forte at: [email protected] For SCGE questions, please contact Kimberly Summe at [email protected]

Sincerely.

Group Sequoia

Footnotes:

International Progress Fund III (GGFIlI) knowledge is as of September 30, 2022 and relies on U.S. GAAP. The $7.5B consists of $5.8B of unrealized achieve and $1.7B of realized achieve. which incorporates the Common Associate distribution on Could 27, 2021 pursuant to the 2021 Modification. Previous efficiency isn’t indicative of future outcomes

International Progress Fund III (GGFIII) refers to Sequoia Capital International Progress Fund III – Endurance Companions, L.P. and doesn’t embody Sequoia Capital International Progress Fund III – U.S./India Annex Fund, L.P., Sequoia Capital International

Progress Fund III – China Annex Fund, L.P., and their parallel funds

 





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