Crypto VCs Reckon With Failing FTX Investments

Venture capital (VC) firms Sequoia and Multicoin Capital have issued letters to limited partners advising them of their exposure risk to collapsed crypto exchange FTX.

Multicoin Capital, a crypto-focused VC unit, has reportedly told partners of its Master fund that it was unable to pull all of its crypto held on FTX before withdrawals were halted on Tuesday, saving just 24% of the funds held there.

FTX had witnessed an influx of $6 billion in withdrawals, triggering a bank run that followed revelations the firm was engaged in talks with Binance over a buyout deal. That deal has since soured.

Roughly 10% of Multicoin’s total assets under management are still locked up on the exchange pending withdrawal approvals, the firm said. Those include bitcoin, ether and USD.

The process could take months to see through should FTX take the bankruptcy route, similar to what occurred at Celsius Network earlier this year. The bankrupt lender is yet to make its customers whole.

While its fund dodged the worst of Celsius, Voyager and Terra’s blowups, Multicoin said it couldn’t avoid being caught up in FTX’s insolvency due to its position in the exchange’s token FTT and other assets locked up on the platform.

The firm also advised partners that the fund’s largest digital asset position is Solana’s native token (SOL). Previously championed by FTX CEO Sam Bankman-Fried, SOL has dipped more than 50% since Tuesday, from $29 to around $15, now worth less than dog-themed memecoin shiba inu.

As Binance CEO Changpeng Zhao began unwinding his exchange’s position in FTT, FTX’s sister company Alameda Research likely sold SOL to support FTT’s price, Multicoin said. 

Multicoin said it was attempting to reduce unnecessary exposure by recalling all outstanding collateral, as well as eliminating contagion to another counterparty — crypto financial services firm Genesis. Further details on why Multicoin wanted to reduce its Genesis exposure were not provided. 

Genesis meanwhile tweeted Thursday it had sold collateral resulting in a loss of roughly $7 million across all counterparties, including Alameda.

Sequoia Capital writes off crypto exchange FTX

Around the same time, Sequoia Capital issued a statement of its own to its limited partners advising it would mark down its FTX investment to $0.

“In recent days, a liquidity crunch has created a solvency risk for FTX,” the Menlo Park firm said. “The full extent and risk is not known at this time.” Founded in 1972, Sequoia is one of Silicon Valley’s longest-running and most successful VC firms, having backed tech giants such as Apple and PayPal.

Sequoia, which has a stake in FTX and FTX.US via its Global Growth Fund III (GGFIII), said its exposure to the exchange was limited and that its $150 million stake accounted for less than 3% of the fund’s committed capital.

The distancing from FTX is part of a major shakeout in the industry which has rocked investors, spurred by public speculation over whether FTX rehypothecated client crypto to bail out Alameda in the second quarter of this year.

“At the time of our investment in FTX, we ran a rigorous diligence process,” said Sequoia in its letter. “In 2021, the year of our investment, FTX generated approximately $1 billion in revenue and more than $250 million in operating income, as made public in August 2022.”

GGFIII, which targets software and tech companies, consists of $7.5 billion in realized and unrealized gains with a $1.7 billion and $5.8 billion split respectively, Sequoia said.

Sequoia’s total assets under management was around $85 billion earlier this year.

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