FTX Collapse Tarnishes Sequoia’s Reputation, Prompts Apology

The blast radius from the FTX debacle is likely to affect many players, but for Sequoia it is an especially painful belly flop. Nearly overnight, FTX joined the pantheon of epic startup failures—like Webvan, Pets.com and Theranos—that serve as venture capital’s boogeymen, warnings of what may happen when too much capital and too few safeguards collide. Pete Flint, a San Francisco-based general partner at the early-stage venture firm NFX, said the FTX’s situation seemed like a unique failure for Silicon Valley venture firms.

“I can’t point to other brand-name institutional firms that have delivered this amount of money to one company with this lack of governance and level of this disaster, but it’s possible there are others,” said Flint. “It does feel like this is a black eye for Sand Hill Road. But I hope it’s an isolated incident.”

The Securities and Exchange Commission and the Justice Department are currently investigating Bankman-Fried after he used customer funds on FTX to prop up his affiliated hedge fund, Alameda Research.

Lin declined to comment for this article. The Wall Street Journal earlier reported on details of Sequoia’s call to its limited partners.

But past interviews with Sequoia partners, people familiar with the firm and public statements point to a potentially flammable combination that could be characterized as an acute form of crypto FOMO—fear of missing out. The firm was playing catch-up as rival firms like Andreessen Horowitz made more money on crypto investments.

Some of the obvious red flags have been well documented. FTX was a firm with too close a relationship with its sibling firm, Alameda Research, no outside board members and no chief financial officer. The firm’s loosey-goosey management was so extraordinary that it prompted this stunned quote from John J. Ray III, who is leading the company through chapter 11 bankruptcy proceedings: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

In some cases, people within the crypto industry say they tried to warn Sequoia of their concerns about FTX. One person who had closely followed FTX told the venture firm that FTX’s supposedly stellar software development was overhyped, a person familiar with the matter said

The paths of Sequoia and Bankman-Fried intersected at a moment of insecurity for the venture firm, which was founded in the early 1970s by Don Valentine, who made early bets on videogame maker Atari and on Apple. Sequoia had just been ramping up investments in cryptocurrency startups after having mostly avoided the sector for years.

For a time, it seemed as though venerable Sand Hill Road institutions like Sequoia might get left behind by a younger generation of aggressive cryptophiles. Andreessen Horowitz had begun raising increasingly large , multibillion-dollar crypto funds, while a former Sequoia partner, Matt Huang, had left to form his own crypto-focused venture firm, Paradigm, in 2018.

Both Andreessen Horowitz and Paradigm funded Coinbase, a crypto exchange that became a $100 billion company shortly after its April 2021 direct listing. Sequoia partners, meanwhile, had passed on investing in Coinbase twice, according to Coinbase co-founder Fred Ehrsam.

Getting Burned

As Sequoia eventually warmed to crypto investing it publicly cultivated an image of sobriety, pledging to take a discriminating approach to the category.

“Our goal is not to invest in every crypto company; our goal is to invest in the crypto companies led by the best founders of tomorrow,” Michelle Bailhe, a junior Sequoia partner who led the FTX deal with Lin, told The Information in an interview last year.

When they met Bankman-Fried, though, Sequoia’s partners soon seemed to fall under the spell of the fast-talking, brainy Massachusetts Institute of Technology grad. Before the firm’s first official meeting with Bankman-Fried last year, Bailhe gushed about the company to colleagues who were going to join. “Guys, don’t ask silly questions in the meeting. This is an amazing company,” Bailhe told them, she recalled last year in a podcast produced by FTX. “Please bring your A game.”

Sequoia wrote a $125 million check to FTX in July 2021, and a few months later participated in another round valuing the company at $25 billion, a rich 25 times next year’s revenue. The deals made the firm the largest outside shareholder in the company. By comparison, investors valued Coinbase at eight times the coming year’s revenue when that crypto exchange went public the same month. (In total, Sequoia invested $150 million in FTX from its global growth fund while its affiliate, Sequoia Capital Global Equities, invested $64 million.)

That funding round also paid tribute to Bankman-Fried’s sophomoric sense of humor: FTX raised $420.69 million from 69 different investors, earning the fundraising the nickname of the “meme round” because of its allusions to marijuana and sex. Bankman-Fried was hardly a chilled-out layabout though. His apparent round-the-clock availability endeared him to Sequoia.

“Sam is not the most low-key founder. He’s very available,” Bailhe said in a podcast interview.

Lin and his fellow Sequoia partners told others that they thought they had found a once-in-a-generation founder running a company with explosive growth. Lin, at least for a time, personally advised Bankman-Fried on business strategy, an FTX investor said. Lin wrote in a press release last year that Bankman-Fried was a “special founder who is ambitious and daring.”

And in early 2022, Sequoia had cast off its reservations about the broader crypto sector. It launched a $600 million crypto fund, its first-ever sector-focused investment fund, in what was viewed as a sign of its long-term commitment to the exploding crypto sector. The firm has deployed roughly 10% of that fund, according to a person with direct knowledge of the matter (the newsletter Newcomer was first to report this figure).

Sequoia, of course, wasn’t the only big firm Bankman-Fried took in. Private equity firm Thoma Bravo, VC firm Lightspeed Venture Partners and mega-investor SoftBank also wrote FTX big checks. Two firms with ties to Sequoia also put money in: Newlands, a venture firm recently formed by former Sequoia partner Michael Abramson, and Paradigm.

But Bankman-Fried set off alarm bells with other investors. Partners at Andreessen Horowitz turned down a pitch from Bankman-Fried because they didn’t trust the FTX founder, Semafor reported. Other skeptics have taken victory laps. Alex Pack, managing partner of Hack VC, told CNBC his previous firm passed on investing in Bankman-Fried’s Alameda Research because of red flags about the hedge fund’s level of risk-taking.

On the call with its limited partners on Tuesday, Lin, who spoke for the majority of the call, said that he internalized and took full personal responsibility for the loss. He assured the investors that he had asked questions about Bankman-Fried’s relationship with Alameda and was told that FTX was not loaning money to Alameda and that the two entities were totally separate. He also told limited partners that he asked FTX several times to hire a CFO.

Lin explained Sequoia’s diligence process on the FTX deal, stating that Sequoia had met the company several times, studied the exchange business, received financial metrics including unaudited financial statements and reviewed the company’s organizational structure. At the time the firm made its initial investment, FTX had 600 institutional clients, 300,000 retail clients and an average daily trading volume of $16 billion, Lin told limited partners.

Sequoia had already downplayed the financial damage from the FTX debacle. The firm earlier this month told its limited partners that it had a “rigorous diligence process” when it came to backing FTX in 2021, and it could not have foreseen the exchange’s collapse.

Some close to the firm say there are rational reasons for the mistake. “People forget in venture, 50% to 60% of what we invest in [goes] to zero,” said Mark Kvamme, a Sequoia partner from 1999 to 2012, a period when the firm invested in Google, YouTube and LinkedIn.

“My recollection was the Google investment was made in days with no due diligence,” Kwamme said, referring to Sequoia’s bet on the search startup. “That worked out well for Google. Less so for FTX.”

But the spectacular failure of Sequoia’s FTX investment may have dinged the venture firm’s reputation. At the very least, it seems to be making Sequoia more cautious. Doug Leone, a partner at the firm, suggested at a conference last week that the implosion could dampen its investment activity, saying that “for the next three to six months, we’re going to dream a little less.”

Kyle Russell, a former deals partner at Andreessen Horowitz, told The Information that big Silicon Valley venture firms will have to work through the mistake internally.

“I think of prior waves of speculative bubbles. You get burned, and you have the equivalent of Depression babies who are more conservative investors for their entire lives,” Russell said. “You’ll have a cohort of [venture capitalists] who know how embarrassing this thing can be. They’ll be more mindful than they’ve been in recent years.”