
Sequoia gives away $21M investment in Finix as it walks away from deal - ykm
https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-million-to-a-payments-startup-it-funded-as-it-walks-away-from-deal/
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eightysixfour
"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
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
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
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.

~~~
eightysixfour
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
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.

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gkoberger
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.

~~~
dehrmann
And as a startup raising capital, you'll still consider Sequoia. They didn't
screw Finix at all, here.

~~~
riazrizvi
$21m worth of lemons into lemonade.

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ablekh
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
This is the part that baffles me. Surely someone at Sequoia would have asked
Stripe what they felt about the deal before it closed?

~~~
abalashov
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.

~~~
ablekh
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).

~~~
abalashov
Thank you, that’s really kind of you!

~~~
ablekh
My pleasure! Feel free to get in touch, whenever you feel lonely
professionally or otherwise - will be happy to chat.

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ThePhysicist
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?

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cynusx
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.

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aresant
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.

~~~
cosmodisk
Having looked at the some of the guys who work there and their net worth, I
think they'll survive,to say the least.

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ianstormtaylor
> 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.

~~~
trhway
>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.

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michaelevensen
So absurd, Finix's site even mimics Stripe's.

~~~
cmauniada
Its literally the same layout and styling...

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monkin
...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. :)

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kolbe
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.

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kepler
The design, look and feel looks like a copy of stripe's website.

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EGreg
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](https://news.ycombinator.com/item?id=19921386&p=2)

~~~
Edmond
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.

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Havoc
That's a sure way to scream "ulterior motive" at the top of your lungs. I
doubt anyone is buying the PR as written.

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MarkSanghee
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.

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jariel
There's something more going on here I think.

~~~
m0zg
Likely good lawyering on the part of Finix. If Sequoia could recover the
investment, it would. $21M is not a joke even to them.

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mlyle
I don't understand why they couldn't have just held onto the shares and given
up the board seat / preferred rights.

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tempsy
I thought their whole pitch was to be an “anti-Stripe” that lets you own your
own payments platform

~~~
Ensorceled
Are you saying a “Stripe killer” is not a Stripe competitor?

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risyachka
I mean, considering Sequoia's net worth, $21M is tip money for them.

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pbreit
I wonder if Finix should have raised the issue? Article oddly remiss.

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jjn2009
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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danimal88
Kind of crazy they couldn't find somebody to swap with

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smallgovt
Props to the Sequoia partner who led PR for this.

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sergiotapia
Change the title to Finix please.

Sequoia is giving away $21M to Finix as it walks away from deal

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starpilot
God I hate clickbait.

~~~
vuldin
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.

