Sequoia Capital Writes Off its Entire Investment in FTX
Several companies were exposed to the massive crypto crash and don't expect to recoup the millions of dollars they invested in FTX, a popular cryptocurrency exchange that was once valued at $32 billion and is now on the brink of bankruptcy.
Galaxy Digital, Sequoia and Robinhood unveiled their exposure to both FTX and trading platform Alameda Research, which are both are owned by Sam Bankman-Fried, the institutional face of the crypto sphere.
Binance, which is run by Bankman-Fried rival Changpeng Zhao, reversed course on November 10, backing out of a plan to salvage FTX from its liquidity crisis by acquiring it.
Bankman-Fried, who only days before was a multi-billionaire, has acknowledged that FTX is almost out of cash.
The situation was caused by massive withdrawals from customers on November 6 after Binance announced its decision to sell $500 million worth of FTT, the cryptocurrency issued by FTX following press reports on the financial health of the group.
"We saw roughly $5b[illion] of withdrawals on Sunday--the largest by a huge margin," Bankman-Fried said.
Venture capital firms made large investments into FTX in 2021 with Sequoia Capital providing capital in a $420 million in a round that that boosted the exchange's valuation to $25 billion in October 2021. A consortium with Paradigm invested $400 million in January 2022, bringing the valuation to a massive $32 billion.
Galaxy Digital Reveals FTX Exposure
Galaxy Digital (BRPHF) , a crypto financial services firm, said its exposure to FTX is $76.8 million. The company reported its $68.1 million third quarter loss on November 9.
The exposure includes $47.5 million in the withdrawal process and “the Company is evaluating the recoverability of these assets,” Galaxy Digital said in its earnings statement.
"This is a very young and new industry and part of the growing pains is weeding out the bad actors, the excesses, and pivoting towards something that's more trusted," Galaxy Digital CEO Mike Novogratz said on the company's earnings call. "We've had two, three, four episodes in the last 12 months that have really dented the momentum of this base ... Galaxy has a role to play and [a] very good role to play as a strong, transparent, more risk-managed focused institution."
Galaxy is facing its own challenges and has not laid off any employees, but told Bloomberg in November it had strongly considered laying off 15% to 20% of its workforce totaling 375 employees.
A Galaxy spokesperson told Yahoo Finance the company is "always considering optimal team structure and strategy and will share future plans when finalized.”
Shares of Galaxy Digital Holdings, which trade on the Tornoto Stock Exchange, fell by 32.47% during the past five days, but rebounded by 7% on November 10. Shares have sunk by 82.86% year-to-date.
Sequoia Capital Values Investment at $0
In 2021, several venture capital firms made significant investments into FTX with Sequoia Capital participating in a $420 million in a round that increased the exchange's valuation to $25 billion in October 2021. Other investors included Ontario Teachers' Pension Plan Board, Sea Capital, IVP, ICONIQ Growth, Tiger Global, Ribbit Capital, Lightspeed Venture Partners and funds and accounts managed by BlackRock.
Sequoia sent a letter to its limited partners on November 9, stating that it now values the $210 million investment into FTX as $0 and was a total loss.
"Based on our current understanding, we are marking our investment down to $0,” the Silicon Valley-based firm said. “The fund remains in good shape,” it said in a statement posted on its Twitter account
Sequoia said its exposure was limited to investing $150 million in FTX.com and FTX.us through the Global Growth Fund III.
“FTX is not a top ten position in the fund,” the company said, adding that it accounts for less than 3% of the total capital of the fund.
“The fund remains in good shape,” Sequoia said, noting that its exposure to the crypto exchange was offset by a larger capital flow of “realized and unrealized gains in the same fund.”
“We are in the business of taking risk,” the VC wrote in its note. “Some investments will surprise to the upside, and some will surprise to the downside.”
Robinhood Bounces Back
Brokerage Robinhood CEO Vlad Tenev told its investors that the company has minimal exposure to the downfall of FTX, a crytocurrency exchange.
"It’s business as usual at @RobinhoodApp," he tweeted on November 10.
Shareholders appeared to agree with Tenev's sentiment as shares jumped by nearly 9%.
Shares of the brokerage were trading at $11.72 on November 8 when FTX first disclosed it would be acquired by Binance due to its liquidity issues, but closed at $9.80. The stock had fallen by as much as 15%.
Investors began selling off their holdings on November 10 as Binance reversed course and said they would no longer acquire FTX due to initial discoveries made as the company conducted due diligence. Robinhood shares closed at $8.40.
Bankman-Fried bought a 7.6% stake in May in Robinhood, a brokerage meant to attract Millennial investors who sought to invest in cryptocurrencies.
"Despite SBF having an equity stake in Robinhood, we have no direct exposure to Alameda, FTX, or any of its entities, and we've confirmed with our partners that they don't have material exposure either," Tenev tweeted.
Tenev said the unregulated aspects of trading cryptocurrencies are problematic. FTX is headquartered in the Bahamas.
"Over the past few years, as cryptocurrency has entered the mainstream, we've seen an explosion of new companies and new technologies, many of them offshore and unregulated," he said.
"In fact, one of the things that has made crypto special is the fact that anyone with a laptop can contribute and create a meaningful new product. However, this makes it doubly important for customers to do their due diligence into the platforms and products they use. As a regulated US entity, we'll continue to do our part, working closely with regulators, to deliver the safest and most trusted crypto experience possible."
