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Sequoia Capital makes apology over FTX loss

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Sequoia Capital has apologised to its fund investors for the $150m it lost on crypto exchange FTX, said people familiar with the matter, a rare moment of contrition for the storied venture capital firm.

On the call, Sequoia’s partners told the fund investors that the firm would improve its due-diligence process on future investments and that it believed it was misled by FTX based on its recent bankruptcy filing, the people said.

Sequoia Capital, an early backer of Apple, Alphabet’s Google, and Airbnb, has long been seen as the gold standard in the venture industry for its high investment bar. The firm earlier this month wrote off its entire investment in FTX — one of the largest written by a venture firm in the company — after the crypto exchange struggled to meet a wave of withdrawals. FTX filed for bankruptcy protection on November 11.

In the call, a Sequoia partner said that the firm in the future will be in a position to have even early-stage startups’ financial statements audited by one of the Big Four accounting firms, the people said.

Sequoia was one of scores of venture investors who piled roughly $2bn into FTX amid last year’s boom in crypto investment. Eager to get into the hot startup, they shirked traditional corporate controls such as external board oversight that are typical for such large investments.

In the call, Sequoia partners said the firm conducted due diligence on FTX but believed it was misled by the company’s founder, Sam Bankman-Fried, on the exchange’s connections with Alameda Research based on recent bankruptcy filings, the people said.

FTX, based in the Bahamas, and its US arm used a pair of smaller auditing firms to sign off on their 2021 financial statements earlier this year, according to documents viewed by The Wall Street Journal, and the executive hired to shepherd FTX through bankruptcy has expressed “substantial concerns” about the quality of FTX’s audited statements.

The ties between FTX and Alameda were central to FTX’s implosion. Bankman-Fried has told investors and employees that FTX loaned customer funds to Alameda, which lost billions of dollars after crypto prices fell earlier this year. He told investors FTX faced a funding gap of up to $8 billion.

Sequoia invested the bulk of its cash in a Series B funding round for FTX in July 2021, when investor fervour for cryptocurrency startups hit an all-time high, people familiar with the matter said.

Attracted to a founder they saw as visionary, investors put aside customary oversight safeguards when backing FTX, which earlier this year was valued at $32 billion, making it one of the most valuable startups in the world.

When Sequoia and other shareholders asked for a seat on the company’s board of directors, Bankman-Fried repeatedly pushed back, telling them their ownership in the company was too small to warrant it, people familiar with the matter said. Boards typically have to approve transactions with so-called related parties like Alameda.

John J Ray, the restructuring specialist who replaced Bankman-Fried as CEO of FTX and helped oversee some of the biggest bankruptcies ever, including Enron’s, said in a filing that he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information” as FTX.

Sequoia’s conference call Tuesday was an extraordinary event for the 50-year-old firm, according to the people familiar with the matter. Sequoia rarely addresses its broader group of investors outside of routine update calls and in-person conferences, the people said.

The swift decline of FTX has amplified a rare moment of discontent from Sequoia’s fund investors over some of its recent decisions, the people familiar said.

Eliot Brown and Alexander Osipovich contributed to this article.

From DJN.

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