VC Firm Sequoia Capital Writes Off Investment In Crypto Exchange FTX
Sequoia Capital, a prominent venture capital firm, has eaten a considerable loss from its investment in the embattled crypto exchange FTX. The firm confirmed in an email sent to its limited partners that it has marked down the value of its stake in FTX to $0, a stake it acquired for a total of $214mn.
- Sequoia Capital invested both in FTX and FTX US, the American arm of FTX that’s run as a separate firm. The VC firm invested $150mn from one of its funds and $63.5mn from another. It now values the shares it acquired at $0 following FTX’s insolvency.
- However, don’t cry for Sequoia– the firm says its FTX-related investments made up a minute percentage of its portfolio. The $150mn it deployed from the first fund was less than 3% of the capital committed to that fund and the $63.5mn from the second fund was less than 1% of the committed capital to the fund.
Sequoia Capital has over $80bn of assets under management, so its FTX loss truly won’t break the bank. Ironically, a report from The Information says that FTX founder and CEO Sam Bankman-Fried was an investor in Sequoia’s funds.
The FTX Saga Explained
To cut the story short, FTX is insolvent and unable to fulfill withdrawals from its exchange. The saga began last week following a news report that Alameda Research, a crypto trading firm with close ties to FTX, had considerable debt on its balance sheet and most of its equity held in FTT, the native token issued by the FTX exchange. Shortly after the report, Binance, a major FTX rival, announced that it was selling all its FTT tokens– Binance was an early investor in FTX and received FTT tokens when FTX bought back the company’s stake for $2.1bn last year.
Binance’s sell-off sunk the price of FTT, a relatively illiquid token to start. Hence, Alameda’s balance sheet tanked, and FTX was unable to fulfill customer withdrawals.
- But, FTX and Alameda are two separate firms (although chaired by the same individual). How does Alameda’s bankruptcy affect FTX?
That’s where it gets interesting. It appears that FTX was lending customer deposits to Alameda at the behest of Sam Bankman-Fried. In other words, Bankman-Fried traded with FTX’s customer deposits through Alameda and lost most of it amid this year’s crypto market crash. According to a Wall Street Journal report, Alameda owes FTX about $10bn, which it’s unable to pay back at this point. If it can’t pay back, then FTX has no money to fulfill customer withdrawals.
FTX halted all customer withdrawals on Tuesday, the 8th of November, after customers rushed to pull $6bn from the platform in under 72 hours. It partially resumed withdrawals on Thursday, but still, most customers can’t access their funds.
A proper exchange should know better than using customer funds for risky trading but here we are. Where there are no clear laws, it looks like greed tends to take over.
What’s next for FTX?
We didn’t mention that Binance signed a letter of intent to acquire FTX on Tuesday but backed out of the deal barely a day later. Binance pointed to news reports of FTX misappropriating customer funds and alleged investigations from U.S. government agencies as what compelled it to back out of the deal. In Binance’s own words, “the issues are beyond our control or ability to help”.
FTX is reportedly hoping to raise about $9 billion from investors and rivals to rescue itself from the hole it dug. It’s unclear if the exchange will be successful, especially considering the large amount it wants to raise during a crypto bear market. If it doesn’t get a rescue package, FTX is likely headed for bankruptcy followed by a tedious process of sifting through the company’s books to trace assets that can be used to compensate customers.
- FTX raised a total of $1.8bn from VCs, most recently at a $32bn valuation. The exchange’s predicament means that all investors are likely to lose their money just like Sequoia Capital. Other notable investors in FTX include private equity firm Blackstone, hedge fund Tiger Global, and Japanese tech conglomerate SoftBank, which tends to be present whenever it’s time to lose money on a flashy company.
Update: FTX and FTX US have commenced proceedings for Chapter 11 bankruptcy in a U.S. court. CEO Sam Bankman-Fried has stepped down and been replaced by John J. Ray III, a bankruptcy veteran who helped pick up the pieces of the infamous Enron accounting fraud scandal.