$214 million on one lie: how FTX's founder fooled Silicon Valley's smartest venture funds

We're closing our series on Silicon Valley's biggest scandals with a story still considered the most devastating collapse in crypto industry history — and simultaneously one of the most painful lessons for venture capital: the collapse of crypto exchange FTX and Sequoia Capital's public admission that its own portfolio founder had fooled it completely.

How Big Was the Investment

Sequoia Capital, one of Silicon Valley's most prestigious venture funds, with a track record of investing in Apple, Google, and Airbnb, invested $214 million in FTX.com and FTX.us across two of its funds. This wasn't a one-off rookie bet — Sequoia was, at the time, considered one of the most experienced and meticulous investors in the industry.

What Sam Bankman-Fried Was Hiding

The key element of the fraud was that both FTX and trading firm Alameda Research were founded by the same person — Sam Bankman-Fried — but their close relationship, which included Alameda's ability to borrow FTX customer funds, was never disclosed to investors or exchange users. According to the SEC, between 2019 and 2022 Bankman-Fried systematically funneled company money into another venture of his own — and, according to lawsuits, used some of that money to buy real estate in the Bahamas, invest in other companies, and fund political campaigns.

Sequoia's Admission After the Verdict

On November 2, Bankman-Fried's guilty verdict was handed down, and Sequoia partner Alfred Lin issued a public statement:

Today's swift and unanimous verdict confirms what we already knew: that SBF misled and deceived so many, from customers and employees to business partners and investors, including myself and Sequoia. — Alfred Lin, Sequoia Capital partner

Beyond the public statement, Sequoia's top partners apologized to their own fund investors for the decision to back FTX and pledged to tighten their due diligence process — specifically, to require financial statements even from early-stage startups, something the venture capital industry hadn't typically demanded before.

Why This Became the Industry's Biggest Scandal

The FTX case stands out from other crypto collapses precisely because of the scale of trust that was betrayed: this wasn't retail investors falling for hype, but Silicon Valley's most experienced institutional players, who had run due diligence on hundreds of deals. Lawsuits filed later even tried to cast Sequoia and other investors as co-conspirators — though Sequoia itself maintains it was just as much a victim of the deception as the exchange's customers.

The Lesson for the Industry

FTX's collapse became a turning point for venture funding of crypto startups: after 2022, virtually every major fund publicly announced tightened financial vetting of portfolio companies, and regulators worldwide accelerated work on transparency rules for exchanges and stablecoins. Three years on, the FTX-Sequoia story remains the industry's prime reminder that even the world's most experienced venture firm can place complete trust in a charismatic founder — and get it wrong by hundreds of millions of dollars.

This material is for informational purposes only and is not investment advice.