When a startup is struggling, what’s the duty of investors? This question is front and center as Sequoia has walked away from controversial startup Citizen, cutting it off from funding and resigning from the board.
From a report out this weekend in the Financial Times:
Sequoia Capital has resigned from the board of controversial crime-tracking app Citizen after it told the company it would not participate in its latest attempt to raise capital amid a funding crunch for tech start-ups.
[Sequoia partner Mike] Vernal resigned from the board earlier this month after Citizen’s management approached venture investors with a proposed deal to raise new funds and recapitalise the business by restructuring its debt and equity, said two people close to the deal.
The deal will virtually wipe out Sequoia’s investment. The firm’s decision to stop funding Citizen has some in Silicon Valley crying foul:
One of the people close to Citizen said Sequoia’s decision was “ruthless” and that, as its earliest backer, it had “abandoned” the company in its hour of need.
Across Silicon Valley, venture capitalists are carrying out an “internal triage” of the “companies that matter . . . and those where the [return on investment] makes continuing to invest irrational”, the person added.
There is no public information on Citizen’s performance. But clearly, it’s not doing well
Successful startups don’t see their equity wiped out.
So Sequoia is faced with a tough choice. Should it give more money to a struggling company, or cut its losses?
It chose the latter. And since Sequoia will no longer be a meaningful investor in Citizen, Vernal naturally stepped down from the board.
The “hour of need” hand-wringing misses the point. No one is entitled to venture capital.
If a company isn’t performing, how can Sequoia put more of its investors’ money where it’s likely to be lost? Sequoia has a responsibility to the universities, pensions, and charities it works for.
We also have no idea what internal dysfunction may exist at Citizen. Its founder has shown poor judgment in the past:
In 2021, its founder Andrew Frame faced scrutiny for offering a reward to find a man wrongly suspected of arson. Prior to Citizen, Frame created a similar app called Vigilante that was banned by Apple over content concerns.
Declining to re-invest doesn’t mean Sequoia won’t support Citizen in other ways. The firm can provide advice, introductions, and more.
But this is business, and capital goes to the people who can best use it.
Whenever you get a dollar from an investor, assume it’s the last. Find paying customers and get your company on firm footing.
Then, VC’s will be begging to invest. And you can be the one to choose.
What do you think of Sequoia’s decision?
Leave a comment and let me know!
More on tech:
Sequoia Cutting Back on China Investments
The Hard Thing About Hard Things
I See Negative Gross Margin Businesses
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Photo: Citizen Founder & CEO Andrew Frame