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VC giant Sequoia writes down $214 million investment in FTX to zero: ‘We are in the business of taking risk’

November 10, 2022, 5:33 PM UTC
Sam Bankman-Fried
Sam Bankman-Fried.
Ting Shen/Bloomberg via Getty Images

Sequoia Capital said it will mark down its investment of $214 million in cryptocurrency exchange FTX to zero.

“In recent days, a liquidity crunch has created solvency risk for FTX,” the venture capital firm said in a note to investors it shared Wednesday on Twitter. “Based on our current understanding, we are marking our investment down to $0.”

It was not the kind of note typically sent by Sequoia, one of the most successful venture capital firms of all time.

Sequoia made its investment in FTX in July 2021, when the firm was valued at $18 billion.

FTX was valued even higher earlier this year, at $32 billion, but questions about its health have been swirling this week, to say the least. On Tuesday, rival crypto exchange Binance signed a nonbinding letter of intent to acquire FTX, then backed out just a day later, stating that the company’s issues “are beyond our control or ability to help.”

FTX had approached Binance for help after a barrage of customer withdrawal requests started over the weekend, many of them prompted by a tweet from Binance’s CEO that he was dumping FTX-linked coins. Cryptocurrency prices fell amid concerns about its solvency and fears of a possible contagion. 

Binance wrote on Twitter on Wednesday: “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com.”

The Wall Street Journal reported that FTX lent billions of dollars to affiliated trading arm Alameda Research, money that was used to fund risky bets. 

One question will be how a VC firm of Sequoia’s stature found itself so exposed to the risk.

It wrote to investors Wednesday: 

“We are in the business of taking risk. Some investments will surprise to the upside, and some will surprise to the downside… At the time of our investment in FTX, we ran a rigorous due 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 firm rushed to reassure limited partners that its exposure was limited, writing:

“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 10 position in the fund, and our $150M cost basis accounts for less than 3% of the committed capital of the fund…. Separately, SCGE Fund, L.P. invested $63.5M in FTX.com and FTX US, representing less than 1% of the SCGE Fund’s 9/30/22 portfolio (at fair value).”

Fortune reached out to Sequoia Capital, but it did not immediately respond to questions.

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