A marquee list of investors from Silicon Valley and Wall Street teemed with FTX. They invested almost $2 billion with few strings attached and no oversight from the cryptocurrency exchange board, promoting it as a safe bet.
Now backers are nursing a high-profile black eye as the three-year-old company — which was valued at $32 billion at its peak — falters. This was announced by the venture capital company Sequoia Capital on Wednesday writes an investment of 150 million dollars One of his funds had gone to zero in FTX because of solvency risk.
FTX CEO Sam Bankman-Fried told several investors on a call Wednesday that he needed emergency funding to cover a shortfall of up to $8 billion, the Wall Street Journal reported. Mr. Bankman-Fried said he hopes FTX can raise $3 billion to $4 billion in equity.
Under normal circumstances, that would be a huge challenge for a financial company the size of FTX. The largest funding round to date was $1 billion in mid-2021, as crypto was booming and investors were clamoring to get into what many consider to be one of the hottest startups in the world.
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In addition to Sequoia, dozens of others supported FTX’s rise, including Ontario Teachers’ Pension Plan, SoftBank Group Corp. 9984 1.32%, a venture capital arm of Samsung Electronics Co.
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Dan Loeb’s Third Point LLC, Tiger Global and soccer star Tom Brady.
Sequoia said in a letter to fund investors that it had conducted a “rigorous due diligence process” on FTX and its loss was small in the context of a fund making billions in profits. “We’re in the business of taking risks,” the company said.
An FTX spokesman declined to comment.
The rapid dissolution of FTX shows the pitfalls of investing in a rush. Attracted by a founder they saw as visionary, investors quickly jumped at the stakes while forgoing some usual oversight precautions, according to people familiar with the company.
Mr. Bankman-Fried founded FTX in 2019. Two years prior, he founded a crypto trading firm called Alameda Research, and his dissatisfaction with the quality of existing crypto exchanges inspired him to try to build a better one.
FTX’s big funding push began in the summer of 2021, when it raised the first of three consecutive rounds of funding at progressively higher valuations. It raised $1.9 billion from more than 70 investors in seven months, according to data provider PitchBook.
The holdings are characterized by their structure. Several investment rounds have been widely split among dozens of backers, in contrast to typical venture capital rounds where a lead investor negotiates key terms with the company, several investors said.
The lack of a key investor strengthened FTX’s negotiating position and made it more difficult for venture investors to campaign for a seat on the board, these investors said.
At WSJ Tech Live, FTX’s Sam Bankman-Fried and Lightspeed Venture Partners’ Ravi Mhatre discuss how the crypto industry is planning a comeback.
What reassured many investors who heard the pitch was FTX’s perceived simplicity. While the crypto sector is full of companies with difficult-to-understand business models that rely on speculative tokens for their growth, venture investors in FTX boasted that it was just an exchange that made real money by reducing crypto transactions.
“We don’t really speculate on whether crypto asset prices, bitcoin or otherwise, will go up or down,” Ontario Teachers chief investment officer Ziad Hindo said, according to a transcript at the fund’s annual meeting in April. The bet, he added, was that “there will be a lot more transactions and exchanges will clearly benefit from it.”
Ontario Teachers said in a statement posted to its website on Thursday that financial losses on its FTX investment would have limited impact as they represent less than 0.05% of total net assets. “Of course, not all early-stage investments in this asset class perform as expected,” the fund added.
Venture capital-backed startups typically have a board of directors that includes at least one or two early investors. Those who raise large sums of money often negotiate a seat to oversee the company. But by the summer of 2021, Mr. Bankman-Fried was the sole director, according to securities filings and people familiar with the matter.
In a summer 2021 funding round that saw FTX raise around $1 billion, the company wrote to investors telling investors it would add two “highly qualified, independent” directors to its board.
In the next round of funding, these directors were in place. FTX appointed Jonathan Cheesman, then FTX manager, and Arthur Thomas, an Antigua attorney whose website lists gaming as his area of expertise. Mr. Cheesman was replaced by another FTX employee earlier this year.
For US-listed public companies, independent directors may not be officers or have any other financial relationship with the companies. FTX is tightly held and based in the Bahamas.
Mr Bankman-Fried told the Financial Times in March, which reported on the composition of the three-member board, that a board “should reflect what is important to the operation and oversight of the company, rather than financial contributions”.
One reason venture investors like to sit on boards is that directors are typically required to approve related-party transactions where the company does business with its top executives or major shareholders.
Related party transactions are at the heart of FTX’s troubles, particularly billions of dollar flows between FTX and Alameda Research, a crypto trading firm also controlled by Mr. Bankman-Fried, The Wall Street Journal reported. A CoinDesk article about these links helped spark a wave of withdrawals at FTX that led to its current crisis.
In its most recent audited financial statements for 2021, FTX announced that related parties accounted for around 6% of total transaction volume, according to several people familiar with the matter. No significant credit exposure to Alameda Research was specifically mentioned.
After cryptocurrency prices plummeted earlier this year, FTX was seen as a rare bright spot among venture capitalists, who viewed Mr. Bankman-Fried as a prudent risk manager who quickly became a leading voice in the industry.
Until earlier this week, FTX held a prominent place on Sequoia’s website, being listed as the fourth startup at the top of the page. An article provided a glimpse of the firm’s partners’ reactions to meeting Mr. Bankman-Fried, including an internal message from an unnamed Sequoia partner who wrote, “LOVE THIS FOUNDER.”
Some investors viewed Mr. Bankman-Fried’s Alameda experience as an asset as he had built a large, profitable business with little outside investment.
Following its investment in FTX last year, Samsung Next, the South Korean conglomerate’s venture arm, has mentioned its role in building Alameda ahead of FTX’s launch in a blog post about its investment. The post described Mr. Bankman-Fried as a “crypto prodigy” and called the company “one of the hottest startups in the world.”
Write to Eliot Brown at [email protected], Peter Rudegeair at [email protected], and Berber Jin at [email protected]
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