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Is Sequoia Capital's Apology for FTX a Sign that it backed the wrong start-ups?

A public apology and an assurance that it would conscientiously get financial statements, even for early-stage start-ups, seems to imply that the VC is now reading closely between the lines

Is Sequoia Capital's Apology for FTX a Sign that it backed the wrong start-ups?
Outlook India
POSTED ON November 23, 2022 11:13 PM

Top partners of California-based firm Sequoia Capital apologised to fund investors for backing FTX, a crypto exchange platform founded by Sam Bankman Fried (SBF). The venture capital (VC) also assured investors that it would improve its due diligence process for future investments, a Wall Street Journal report stated. 

This is reminiscent of a similar claim the company made earlier this year in India. But let'slet's get to that later.

Sequoia Capital's surprising apology comes after the VC firm wrote off its entire investment in FTX earlier this month. It had invested around $2 billion into the Sam Bankman Fried-led crypto company in a Series B funding round last year and has lost over $150 million to date. 

How The FTX Saga Came Undone

Sequoia Capital, which has won big on betting on the likes of Apple Inc, Google and Airbnb Inc, had invested in FTX in a Series B round in July 2021, valuing the start-up at $18 billion. Two months later, investors increased the start-up's valuation to $25 billion. 
In January 2022, FTX raised $400 million in a Series C round, which brought its total funding to $2 billion and its valuation to an astounding $32 billion. 

However, after the rapid ascent came an equally fast descent when the crypto platform faced a liquidity crunch of $8 billion. SBF also had a war of words with Binance chief executive officer Changpeng Zha. 

When FTX could not raise capital to meet the withdrawal demands of its investors, it was hoped that Binance would rescue it. Except that the latter axed the takeover deal, claiming that FTX had mismanaged client funds and was under investigation by US regulators. This cast a gloom on the once-shining sunshine crypto company. 

Samuel Bankman-Fried, founder of FTX
Samuel Bankman-Fried, founder of FTX who has now fallen from grace

On November 22, in a letter to his staffers, Bankman-Fried outlined a $51 billion crash in the company collateral, which has dropped to $9 billion from $60 billion. Bloomberg reported that the letter touched upon a combination of sell-offs in cryptocurrencies, a credit squeeze and a "run on the bank" that left the collateral at only $9 billion ahead of the company's filing for Chapter 11 bankruptcy.

In a conference call, Roelof Botha, Sequoia's global leader, said that he and his colleagues repented backing the crypto wunderkind. Sequoia Capital had invested $214 million in FTX.com and FTX.us across two funds. 

Roelof claimed that while the VC had conducted a due diligence process, Bankman Fried misled them. He added that the company would now be conscientious about getting the financial statements, even for early-stage start-ups. 

Feet Of Clay Start Showing Through

Sequoia Capital was considered the gold standard in the VC world for a long time. According to a report by ASK Private Wealth Hurun India Future Unicorn Index 2022, it has invested in 39 Indian start-ups to date.

However, some of the unicorns it has backed now seem to be in trouble in recent months. This includes food aggregator Zomato, which has seen a spate of high-level exits as well as edtech Byju's, which has been in the news for laying off people to rationalise costs. 

Meesho, another start-up backed by Sequoia, recently laid off around 300 employees to combat the economic downturn.

And much before that, the VC had seen other issues crop up among the companies it was nurturing. 

It harks back to the suspension of Zilingo's founder and CEO, Ankiti Bose, in April 2022, after alleged discrepancies were discovered in the fashion start-up's accounting during a due-diligence process for a new funding round. This scrutiny took a severe toll on the VC company as its India'sIndia's managing director Shailendra Singh stepped down.

Next up under the microscope was BharatPe co-founder and former chief executive Ashneer Grover, who was investigated for siphoned money, a charge that Grover has vehemently refuted. 

Sequoia Capital, which held 19.6 per cent of BharatPe, claimed in a blog that it had zero tolerance toward proven wrongdoing "and would continue to respond strongly to wilful misconduct or fraud so that a few errant founders do not create big setbacks for start-up ecosystem".

While the VC promised then that it would "take tough calls where needed in the interest of doing what is right," without directly mentioning BharatPe back then, its recent missteps and public apology raise the question—will it really be able to put its money where its words are?

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