According to a Saturday (Feb. 25) Financial Times (FT) report, Sequoia had been one of Citizen’s earliest and largest backers, leading a $12 million Series A round in 2017 and naming partner Mike Vernal to its board.
Earlier this month, however, Vernal resigned after Citizen’s management approached venture investors with a proposed “pay to play” deal that would have obligated them to take part in a new fundraising round or risk seeing their equity stakes heavily diluted, the sources said.
Although Citizen raised the money it needed from other backers, one of the sources called Sequoia’s decision not to take part “ruthless,” saying they had “abandoned” the startup.
PYMNTS has reached out to Sequoia for comment but has not yet received a reply.
The FT report notes that venture investors say these sort of “cram down” funding rounds — where a company is forced to favor new investors — have become more common as private market tech valuations decline.
“You’re about to see a huge amount of companies where their existing [shares] are wiped out,” a portfolio manager at a large private investor told the FT.
“You’re going to see more capital coming in from the outside [to prop up cash-strapped companies] and obliterating earlier stakes.”
Meanwhile, venture capital (VC) firms are having a harder time raising funds, as noted here last week, with funding in the fourth quarter of 2022 at the lowest point in nine years.
The decline was driven by the same factors that affected tech startups last year: a drop in the number of sellers going public through initial public offerings (IPOs) and stocks and valuations falling as interest rates and inflation rose.
PYMNTS also recently looked at the “sea change” happening in the world of VC fundraising, as FinTech companies increasingly shift away from a “growth-at-all-costs” mindset in favor of focusing on profitability.
But Rob Moffat, partner at U.K.-based venture capital (VC) firm Balderton Capital, told PYMNTS last week that only focusing on profitability is not necessarily a winning tactic “in the business of growing great technology and software businesses.”
He said that some businesses can be profitable early on, while others that need capital and see losses for some time can still eventually reach profitability.
In the latter case, those firms should not be denied funding if they can meet key metrics such as strong gross margins, enough funds to repay sales costs within a year and strong client retention, Moffat told PYMNTS.
He said his company will consider investing once those boxes are checked and “we’re very confident that you have all of those pieces that can [help you] grow to profitability.”