[HN Gopher] Sequoia gives away $21M investment in Finix as it wa...
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Sequoia gives away $21M investment in Finix as it walks away from
deal
Author : ykm
Score : 138 points
Date : 2020-03-09 18:12 UTC (4 hours ago)
(HTM) web link (techcrunch.com)
(TXT) w3m dump (techcrunch.com)
| kolbe wrote:
| Abandoning equity is relatively common, but not like this.
| Usually its because a VC cannot realize a capital loss until it
| abandons (or sells) the equity of a worthless company. Finix
| raised $35m about a month ago. There's no way Sequoia thinks
| they're worthless already.
| jariel wrote:
| There's something more going on here I think.
| m0zg wrote:
| Likely good lawyering on the part of Finix. If Sequoia could
| recover the investment, it would. $21M is not a joke even to
| them.
| aresant wrote:
| VC's "skin in the game" is interesting.
|
| EG the $21,000,000 they just "gave away" will need to be paid
| back to investors before Sequoia partners see any of their carry
| / performance fee.
|
| On a $100,000,000 fund the VCs have a performance fee of
| something like 20% of the profits on every $1.00 over
| $100,000,000 they send back to investors.
|
| Yes this is house money, but it's still real skin in the game for
| the partners who just evaporated at least $4 - 5m in potential
| fees on other investments to maintain the integrity of their
| brand.
| skinnymuch wrote:
| Is there any partner at Sequoia that isn't worth millions?
| cosmodisk wrote:
| Having looked at the some of the guys who work there and their
| net worth, I think they'll survive,to say the least.
| michaelevensen wrote:
| So absurd, Finix's site even mimics Stripe's.
| cmauniada wrote:
| Its literally the same layout and styling...
| starpilot wrote:
| God I hate clickbait.
| vuldin wrote:
| That site is one of the most annoying ones I've been to in a
| while. It makes me agree to their tracking, and if I want to
| customize what trackers I allow then I have to click on each
| individual tracker from a list of around 20 or so to go to
| their site and disallow. There's not a chance I'll be going
| through that much work to look at that site.
| MarkSanghee wrote:
| I am surprised to see this could really happen - Wondering what
| would happen to the partners and associated led this transaction.
| Did anyone find out something about this? I couldn't at least
| through the article.
| tempsy wrote:
| I thought their whole pitch was to be an "anti-Stripe" that lets
| you own your own payments platform
| Ensorceled wrote:
| Are you saying a "Stripe killer" is not a Stripe competitor?
| ThePhysicist wrote:
| Maybe they are trying to avoid a conflict of interest in
| preparation of Stripes IPO? Giving up 21 million might be better
| than losing the chance to participate in a large IPO if you're
| kicked out due to violating a non-compete. I am no expert in VC,
| maybe someone with more experience can chime in?
| sergiotapia wrote:
| Change the title to Finix please.
|
| Sequoia is giving away $21M to Finix as it walks away from deal
| Havoc wrote:
| That's a sure way to scream "ulterior motive" at the top of your
| lungs. I doubt anyone is buying the PR as written.
| kepler wrote:
| The design, look and feel looks like a copy of stripe's website.
| gkoberger wrote:
| The framing is weird here.
|
| It makes it sound like the deal fell through but Sequoia still
| gave them $21M to be nice.
|
| In reality, they had already given them the money in exchange for
| a board seat/equity/etc. When they realized they couldn't
| continue this relationship, the only option was to relinquish the
| half of the deal they could control. They probably couldn't get
| the money back even if they wanted to, and there's no way they'd
| attempt to and risk their reputation.
|
| It makes sense for Sequoia and their LPs (Stanford, etc). They
| put $18 million into Stripe at a $100 million valuation, and
| Stripe is now worth $35Bn and growing. Sacrificing $21M to not
| hurt a relationship with Stripe is a rounding error for them.
| pbreit wrote:
| I wonder if selling, perhaps at a discount, to a relatively
| passive secondary buyer like Industry Ventures would have been
| an option?
| cmauniada wrote:
| I think that might have opened them up to even more press. It
| would have also made the next investor not be as keen as to
| why Sequoia was pulling out in the first place... Looks like
| they weighed all their options and went with the one which
| would cause the least pain to them and the company.
| jessriedel wrote:
| What's the argument you're making? That if Sequoia sold the
| stake for, say, $10M (taking a $11M loss), then outsiders
| might misinterpret that as Sequoia losing faith in Finix
| and trying to cash out? And this would be true for any
| amount larger than $0?
| aabhay wrote:
| There's honor at stake when you give another investor
| discounted shares.
|
| And if you think in 10+ year time horizons, honor is
| truly a more valuable asset than cash
| dehrmann wrote:
| And as a startup raising capital, you'll still consider
| Sequoia. They didn't screw Finix at all, here.
| riazrizvi wrote:
| $21m worth of lemons into lemonade.
| mlyle wrote:
| I don't understand why they couldn't have just held onto the
| shares and given up the board seat / preferred rights.
| ablekh wrote:
| Unbelievable. _Due diligence_ for Series A rounds is pretty
| comprehensive. How in the world this process, especially in such
| a solid VC firm as Sequoia, could miss a potential significant
| conflict of interests is beyond my understanding.
| frankdenbow wrote:
| This is the part that baffles me. Surely someone at Sequoia
| would have asked Stripe what they felt about the deal before it
| closed?
| ablekh wrote:
| Certainly. However, it is more than just asking an existing
| portfolio company - I think that any solid VC firm would /
| should have skipped a potential-conflict-of-interests-deal
| _regardless_ of an opinion by said portfolio company. It is
| the _VC side_ 's due diligence after all.
| EGreg wrote:
| Imagine if they instead invested $100K in 210 startups that have
| been working their ass off :)
|
| I realize, of course, that they couldn't do that in this case.
| But anyone who says governments have waste versus the private
| market never considered the sheer amount of waste in large
| corporations :)
|
| https://news.ycombinator.com/item?id=19921386&p=2
| Edmond wrote:
| Whenever I hear about some startup going under after absorbing
| millions I always wonder the same, "if only they'd invested
| that $75 million in 75 judiciously chosen companies"...
|
| Of course the people making these clearly poor investment
| decisions have perfected their justifications.
| bpt3 wrote:
| The primary difference is that private firms are generally held
| accountable for waste, while government frequently uses it as a
| justification for increased funding.
| stevespang wrote:
| You don't think Sequoia partners/investors might sue over such an
| error ? Sequoia should have done better due diligence.
| pbreit wrote:
| I wonder if Finix should have raised the issue? Article oddly
| remiss.
| eightysixfour wrote:
| "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 wrote:
| Sure, 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 wrote:
| No, 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 wrote:
| Many 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.
| intuitionist wrote:
| It'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.
| matchagaucho wrote:
| Stripe is presumably close to dropping an S1 and wants to
| prevent another WeWork due-diligence finding that "our
| primary investor is building a competitor".
| eightysixfour wrote:
| I 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 wrote:
| That'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 wrote:
| I 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?)
| yanowitz wrote:
| They could give back $21m of their carry.
| caseysoftware wrote:
| Investors 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.
| petters wrote:
| Couldn't they have tried to sell their stake instead? Perhaps
| the same reason?
| eightysixfour wrote:
| Probably 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 wrote:
| They could have sold the stake without the board seat (any
| 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.
| technotony wrote:
| There'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.
| richardlblair wrote:
| This very much feels like "Do a bad, do a good"
| paulddraper wrote:
| Of course don't take the money back, but at least sell your
| shares.
| gajus wrote:
| Everyone 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.
| duxup wrote:
| Yeah 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 wrote:
| 1b 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.
| [deleted]
| duxup wrote:
| Could 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 wrote:
| Well, you'd put $10M of the $1 billion into Sequoia and
| __then __ask "what do you know about"...
| jjn2009 wrote:
| I have a theory that this is just the scape goat for what is
| really a desire to decrease funding during the corona virus
| panic. Not that being over leveraged in payments companies is a
| good thing but it might not be the primary motivator here.
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