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, as of last week, likely represented among the most sizable unrealized gains in the venture firm’s 50-year history.

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

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.

Now, following a series of missteps — that’s the best-case scenario — FTX isn’t just worthless. 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.

It’s not surprising that Sequoia decided instead to write off the investment and to write a letter to its limited partners toward that end (see below). Presumably, others of FTX’s investors — including SoftBank, BlackRock, Insight Partners, and Paradigm among them — are shooting out their own communications to limited partners today about making the same decision. (As an LP itself, the Ontario Teachers’ Pension Plan Board, which invested directly in FTX, has a much broader range of shareholders who may be learning that their retirement dollars just vanished into thin air.)

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.

This story is developing . . .

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