Sequoia gives away $21M investment in Finix as it walks away from deal(techcrunch.com)
techcrunch.com
Sequoia gives away $21M investment in Finix as it walks away from deal
https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-million-to-a-payments-startup-it-funded-as-it-walks-away-from-deal/
86 comments
That 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?
Shouldn't this come out of Seqoia's, rather than the investor's pockets?
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.
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.
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.
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."
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."
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.
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.
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.
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.
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.
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".
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?)
They could give back $21m of their carry.
Couldn't they have tried to sell their stake instead? Perhaps the same reason?
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.
$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.
They 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.
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.
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.
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.
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.
> 1b wins. You have no capital.
If you have a good network you can raise capital. It all you have is capital you can't buy a network.
If you have a good network you can raise capital. It all you have is capital you can't buy a network.
Getting returns when you're investing 500M is easier than when you're investing 1B. Just ask Softbank how they big-check strategy is working for them.
Note: I run a 50M AUM VC.
Note: I run a 50M AUM VC.
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...."
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...."
Well, you'd put $10M of the $1 billion into Sequoia and then ask "what do you know about"...
I think they might be a bit more picky about my 10 mil to start and less than forthcoming.
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This very much feels like "Do a bad, do a good"
Of course don't take the money back, but at least sell your shares.
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.
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.
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.
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.
I wonder if selling, perhaps at a discount, to a relatively passive secondary buyer like Industry Ventures would have been an option?
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.
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?
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
And if you think in 10+ year time horizons, honor is truly a more valuable asset than cash
Whose honor? I'm honestly confused about what the argument you're making. What's dishonorable about selling discounted shares if you can't keep them?
If they decided to cash out for any amount, that would go against their track record of holding on to companies and exiting when they are much larger in evaluation.
This would not only raise eyebrows, but eventually the truth will come out. Put yourself in the shoes of a buyer, if you were buying out Sequoia's shares and after a few weeks/months news came out that they only sold their shares because of this. Not only that, but that Finix is pretty much competing with Stripe, which they have no chance of succeeding at, it would tarnish Sequoia's reputation and also open them up to litigation. As someone else in this thread pointed, $21 Million is a rounding error for them.
This would not only raise eyebrows, but eventually the truth will come out. Put yourself in the shoes of a buyer, if you were buying out Sequoia's shares and after a few weeks/months news came out that they only sold their shares because of this. Not only that, but that Finix is pretty much competing with Stripe, which they have no chance of succeeding at, it would tarnish Sequoia's reputation and also open them up to litigation. As someone else in this thread pointed, $21 Million is a rounding error for them.
> news came out that they only sold their shares because of this.
Why would this be kept a secret? Why doesn't Sequoia, upon realizing their conflict of interest, say "Attention everyone: we have to sell this investment for conflict-of-interest reasons. We can't reasonably give you our board seat and other influence, just the financial state, so we will sell it for a large discount."
Why would any of that tarnish Sequoia's reputation or open them up to litigation? (I mean, other than the minor reputational hit they have already taken for not doing thorough due diligence, which is being revealed regardless.)
Why would this be kept a secret? Why doesn't Sequoia, upon realizing their conflict of interest, say "Attention everyone: we have to sell this investment for conflict-of-interest reasons. We can't reasonably give you our board seat and other influence, just the financial state, so we will sell it for a large discount."
Why would any of that tarnish Sequoia's reputation or open them up to litigation? (I mean, other than the minor reputational hit they have already taken for not doing thorough due diligence, which is being revealed regardless.)
Fair point, I am sure they have people much smarter than me in charge of making decisions like that. I am purely speculating at this point but that route could also lead to just being dragged out (if the offer was made public).
There might be a lot of reasons, and I am sure there would have weighed all their options and gone with this decision.
There might be a lot of reasons, and I am sure there would have weighed all their options and gone with this decision.
I'd be furious if the VC firm I gave a large portion of my company to wanted to give their equity, weeks later, to another firm. Even if it was a firm I liked.
Why? (No board seats, just the equity.)
All investors aren't equal, and Finix likely had a few term sheets and picked Sequoia over other VC firms. So it would be a bait-and-switch, even if unplanned. Wouldn't you want control over who owns you? VCs with equity, even without a board seat, still have a good amount of control or access to information.
Plus, if it was at a discount, it immediately makes the stock feel "cheap". Doesn't matter what the reasoning is, it'll just feel devalued to everyone involved.
Plus, if it was at a discount, it immediately makes the stock feel "cheap". Doesn't matter what the reasoning is, it'll just feel devalued to everyone involved.
What control can't be abdicated? Like, why can't it just be a contract that says "this new VC firm gets x% of stock (and so x% of future dividends), but the stock has no voting rights"?
(It doesn't make much sense to me that selling under these circumstances makes the stock feel cheap while throwing the stock in the trash bin doesn't. But I'll take your word on the psychology.)
(It doesn't make much sense to me that selling under these circumstances makes the stock feel cheap while throwing the stock in the trash bin doesn't. But I'll take your word on the psychology.)
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.
This is the part that baffles me. Surely someone at Sequoia would have asked Stripe what they felt about the deal before it closed?
I haven’t explored what exactly it is that Finix do, so this is just shooting from the hip, but a few possibilities:
(1) It wasn’t immediately apparent without getting deep into the weeds that they competed with Stripe;
(2) Finix pivoted in a manner that caused them to compete with Stripe more directly;
(3) There was a controversy at the beginning about whether there was a conflict, and someone broke the tie and decided it wasn’t enough of a conflict to worry about, and then someone else at Sequoia gained more influence or proximity, or reconsidered something they were previously sure of, and the balance tipped in the other direction.
(1) It wasn’t immediately apparent without getting deep into the weeds that they competed with Stripe;
(2) Finix pivoted in a manner that caused them to compete with Stripe more directly;
(3) There was a controversy at the beginning about whether there was a conflict, and someone broke the tie and decided it wasn’t enough of a conflict to worry about, and then someone else at Sequoia gained more influence or proximity, or reconsidered something they were previously sure of, and the balance tipped in the other direction.
I have no comments on (2) & (3), though they sound a bit too speculative. However, (1) does not make sense to me, since due diligence, pretty much by definition, should have included "getting deep into the weeds" (especially for Series A and, even more so, by a prominent VC firm).
BTW, kudos to you for your December 2018 blog post on bootstrapping (the relevant HN discussion does not disappoint either).
BTW, kudos to you for your December 2018 blog post on bootstrapping (the relevant HN discussion does not disappoint either).
Consider that there are two sides to this: Stripe and Finix. Due dilligence on Finix may well have been solid enough in isolation, but have unveiled things that requires non-public information about Stripe that few people were privy to before someone could connect the dots.
Or someone seriously dropped the ball, of course - it happens.
Or someone seriously dropped the ball, of course - it happens.
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.
It's completely baffling.
Not only do they do many of the exact same things that Stripe does, but even their design aesthetic is ripped directly from Stripe's, down to the signature tilted parallelogram.
Compare:
- https://www.finixpayments.com/
- https://stripe.com
Not only do they do many of the exact same things that Stripe does, but even their design aesthetic is ripped directly from Stripe's, down to the signature tilted parallelogram.
Compare:
- https://www.finixpayments.com/
- https://stripe.com
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?
I would wager that this is because Stripe openly complained with them and demanded a public dissociation if Sequoia wanted to be eligible to invest in future rounds of Stripe.
They try to spin this like it's a good thing for Finix, but the reality is that every other VC in the world will now wonder what dead bodies are hiding in the closet there.
If I would be Finix I would heavily focus on profitability and taming whatever demons you have inside the company to avoid going to capital markets for a very long time.
They try to spin this like it's a good thing for Finix, but the reality is that every other VC in the world will now wonder what dead bodies are hiding in the closet there.
If I would be Finix I would heavily focus on profitability and taming whatever demons you have inside the company to avoid going to capital markets for a very long time.
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.
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.
Having looked at the some of the guys who work there and their net worth, I think they'll survive,to say the least.
Is there any partner at Sequoia that isn’t worth millions?
> Finix has told TechCrunch before that, unlike Stripe, it doesn’t think of itself as a payments company but rather a payment infrastructure company. Most notably, it likes to note that it doesn’t take a percentage of transaction fees but instead charges customers a monthly software fee, along with a sliding fee associated with the number of payments they process. Yet Stripe has a product, Stripe Connect, that operates much the same way and has since its debut in 2013.
Ehhh... sounds (and looks) very much like a clone of Stripe to me. And saying, "we're different because we are infrastructure", is just icing on the dishonesty cake. Not sure why Sequoia would ever have invested in a copycat to Stripe in first place.
Ehhh... sounds (and looks) very much like a clone of Stripe to me. And saying, "we're different because we are infrastructure", is just icing on the dishonesty cake. Not sure why Sequoia would ever have invested in a copycat to Stripe in first place.
>Not sure why Sequoia would ever have invested in a copycat to Stripe in first place.
may be 21M is just a pocket change handled by junior associates there. The "copycat" part was probably learnt by the seniors much later and from Stripe people.
may be 21M is just a pocket change handled by junior associates there. The "copycat" part was probably learnt by the seniors much later and from Stripe people.
So absurd, Finix's site even mimics Stripe's.
Its literally the same layout and styling...
...and I wait, and wait for Stripe "clone" for adult industries that is more user-friendly than competitors in this field. Yes, I know that everyone is afraid sex, and VCs are terrified of legal struggles. But there's such a huge niche to fill in for some bright and brave minds. :)
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.
The design, look and feel looks like a copy of stripe's website.
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
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
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.
Of course the people making these clearly poor investment decisions have perfected their justifications.
The primary difference is that private firms are generally held accountable for waste, while government frequently uses it as a justification for increased funding.
That's a sure way to scream "ulterior motive" at the top of your lungs. I doubt anyone is buying the PR as written.
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.
I don't understand why they couldn't have just held onto the shares and given up the board seat / preferred rights.
I thought their whole pitch was to be an “anti-Stripe” that lets you own your own payments platform
Are you saying a “Stripe killer” is not a Stripe competitor?
I mean, considering Sequoia's net worth, $21M is tip money for them.
I wonder if Finix should have raised the issue? Article oddly remiss.
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.
Kind of crazy they couldn't find somebody to swap with
Props to the Sequoia partner who led PR for this.
Change the title to Finix please.
Sequoia is giving away $21M to Finix as it walks away from deal
Sequoia is giving away $21M to Finix as it walks away from deal
God I hate clickbait.
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.
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.