What could prompt a venture capital investor to exit a startup that is only a few years old? It may happen that the startup is not “performing” as the investor expected, and in such a case it is understandable if the investor decides to exit. However, in the case of Sequoia Capital and Finix, it seems that an entirely different reason led to the investor’s exit.
In the world of venture capital investments, investing in a company that carries out activities competing with a startup already existing in the investor’s portfolio can prove risky. Here is a textbook example. For perhaps the first time in its history, Sequoia Capital parted ways with one of its startups, citing a presumed conflict of interest. What may be even more shocking is that it gave up its board seat, preferential rights, shares, and also waived the entire investment amount. Presumably, this was not a small cheque. According to some sources, Sequoia Capital voluntarily gave up USD 21 million with this move.
What could have happened, and what could have led to this point? The exact details are not known, but one thing is certain: in early March, Finix informed its employees that Sequoia Capital — which had led the company’s USD 35 million Series B investment round the previous winter — and the company would part ways. Finix told its employees that the reason for the separation was that Sequoia Capital was exiting the company because Finix was directly competing with Stripe, one of Sequoia Capital’s largest external portfolio investments.
By allowing Finix to keep its capital, Sequoia Capital enabled Finix’s previous investors to invest an additional USD 10 million in the company, as a result of which the company now has a total of USD 65 million in capital.
Who would complain about a USD 21 million cheque from Sequoia Capital?
Sequoia Capital’s investors were probably not pleased with the news. Still, it can be assumed that Sequoia Capital will not lose the financial support of any of its investors because of this, given the revenues and results it has achieved over the years.
But was it really only the competing activities that forced Sequoia Capital to exit the company? Pat Grady, who participated in the transaction on behalf of Sequoia Capital, stated: “While we previously believed that Finix did not constitute a direct competitor to any of our existing portfolio companies, after the investment we were confronted with data that painted a completely different picture of the market. This decision has nothing to do with Finix, and everything to do with Sequoia Capital’s desire to honour the commitments it has made.”
While Sequoia Capital probably wanted to separate from Finix in the least painful way possible, it is still difficult to understand why it felt it should give USD 21 million to Finix from money made available to it by institutions such as Stanford and various hospitals, so that Sequoia could invest on their behalf.
Of course, by giving up its investment in favour of Finix, Sequoia Capital did not commit a crime. However, the question arises why they did not choose another alternative, such as converting the capital into a loan that Finix could have repaid at a low, or even 0%, interest rate. It could also have been agreed that Finix would keep a quarter, or even half, of the capital provided by Sequoia Capital as a generous fee compensating for the separation.
According to Finix founder and CEO Richie Serna, he is “excited about the future and closer cooperation with Inspired Capital.” Regarding Sequoia Capital, he stated that although the change in their relationship was unexpected, they had never felt more energised about Finix’s future and its position in the market. They respect how Sequoia Capital handled the situation, as well as the commitment it shows toward its portfolio companies. Throughout the entire separation process, Sequoia Capital proved to be steadfast and helpful.
Whether Sequoia Capital made the right decision will be shown by time. But while we are still pondering this mystery and its possible causes, Finix has, as we can see, practically already moved on. We cannot blame them — who would not, with such a strong financial foundation?