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"it’s hard to understand why it felt compelled to give away $21 million — money that institutions like Stanford and hospitals give to Sequoia to invest on their
by eightysixfour 7y ago
"it’s hard to understand why it felt compelled to give away $21 million — money that institutions like Stanford and hospitals give to Sequoia to invest on their behalf."
Does not seem that hard to understand to me. They led the round, that means other investors are in on the deal as a result of Sequoia. If they had taken the money back, they would have lost the trust of other investors in future fundraising rounds that they lead and left the other investors in Finix in a bad spot with a lot of capital in a company that is now, presumably, $21m short of their needs.
$21m is nothing compared to the loss of trust in Sequoia that pulling the funding would have caused.
- wmichelin 7y agoSure, but wouldn't it have made more financial sense for them to maintain some kind of position? Even if they gave up their board seat for the conflict of interest reasons, I would imagine that Sequoia has some kind of obligation to their investors to get some kind of return on that $21m.
- eightysixfour 7y agoNo, because the conflict of interest wasn't the board position, it was that there is perceived to be a single pie that Finix and Stripe are trying to eat from. They have an obligation to help Finix get a bigger piece of that pie and an obligation to Stripe to do the same. For their investors, their more important obligation is to protect their existing gains in Stripe instead of the $21m they put into a newcomer "by mistake."
- nradov 7y agoMany other investment holding companies such as mutual funds own stock in competitors that are both trying to eat a single pie. It's not necessarily a problem as long as the investor maintains a "Chinese Wall" between their holdings and manages each one independently.
- eightysixfour 7y agoI don’t have all of the answers but my guess is they have something in their deal with one or both parties that doesn’t allow this. My guess is it is with Stripe and, after learning of the investment, Stripe immediately reached out with a “hey guys, WTF” email and this is Sequoia’s way of exiting the mistake quickly.
- filmgirlcw 7y agoThat’s my guess too. I’m guessing there was a provision attached to the Stripe investment precluding any investment in competitors. Sequoia may not have seen Finix at a competitor but Stripe did. And if that’s the situation, the startup shouldn’t have to suffer because the lead investor messed up. Pulling out but letting the startup keep the money and get the board seats back is really the only correct move.
- paulgb 7y agoI understand it's rarer in VC, but at least one case comes to mind: SoftBank's investment in both Uber and Didi (and maybe another I'm not recalling?)
- matchagaucho 7y agoStripe is presumably close to dropping an S1 and wants to prevent another WeWork due-diligence finding that "our primary investor is building a competitor".
- intuitionist 7y agoIt’s not even clear that that’s necessary, at least for stakes in public companies, and at least under existing regulations. Berkshire Hathaway owns big chunks of all of the four largest US airlines, and smaller chunks of the big four US banks, and there’s no Chinese wall between Warren Buffett and himself.
- yanowitz 7y agoThey could give back $21m of their carry.
- caseysoftware 7y agoInvestors have access to and get privileged (material non-public) information constantly. Non-board members would have less overall and less complete information but there would still be some. Having any position introduces unnecessary risk for everyone involved. Sequoia backing out and letting the company keep the money keeps everyone's hands clean and mitigates lawsuits or bad blood from everyone too. Not ideal but probably "cheaper" in many, many ways.
- raleighm 7y agoThey could waive information rights.
- deleted 7y ago[deleted]
- petters 7y agoCouldn't they have tried to sell their stake instead? Perhaps the same reason?
- eightysixfour 7y agoProbably but that would have come with a new lead investor who would have wanted a board seat and all of the other things that come with a $21m B round. They probably thought this would be the fastest way to escape the mistake without dragging it out. $21m is a costly mistake, but not as expensive as the reputation hit if this had been a protracted issue for Finix or the other investors.
- jessriedel 7y agoThey could have sold the stake without the board seat (and anything else) for less than $21M but a lot more than $0. Seems like there has to be another VC firm that would have paid $10M overnight.
- duxup 7y agoYeah this seems to be the case. Nobody is going to want to invest with them if they're known to round everyone up and ... walk. Presumably the value of being able to call up other investors and get their money, guidance, thoughts in the game too is highly valuable. In business very often the network type stuff is the most valuable. Give me $1B and someone with a good network $1B and we go out investing in startups or such ... dude with the network probabbly does pretty well compared to me.
- wolco 7y ago1b vs no money but big network? 1b wins. You have no capital. I think it gets interesting around: 1 billion vs 500 million. Still put m money on a 1 billion and buying access to a network for less than 100 million.
- duxup 7y agoCould be. I do wonder what the professional relationships type situation is with the network. I suspect someone at Sequoia can call some buddy at another place if he has a question and get some good information "No man that dude is bonkers / reckless." that might save them a lot of time. Same goes the other way. Not sure how much good info I get calling up Sequoia "Hey man I got a $1b ... what do you know about...."
- omarchowdhury 7y agoWell, you'd put $10M of the $1 billion into Sequoia and then ask "what do you know about"...
- duxup 7y agoI think they might be a bit more picky about my 10 mil to start and less than forthcoming.
- deleted 7y ago[deleted]
- richardlblair 7y agoThis very much feels like "Do a bad, do a good"
- paulddraper 7y agoOf course don't take the money back, but at least sell your shares.
- technotony 7y agoThere's probably some hidden clause that's costing them something with their Stripe investment. Any tiny effect there is going to cost them way more than $21MM.
- gajus 7y agoEveryone is suggesting all the ways they could have parted that would have been less expensive, but everyone seems to ignore that this was by the quickest and therefore the least painful way to part ways without drama.
- oldgradstudent 7y agoThat makes sense for Sequoia, but not necessarily for the limited partners. Shouldn't this come out of Seqoia's, rather than the investor's pockets?