So, the original post below I wrote a full 10 (!) years ago in the first few months of SaaStr.com, in November 2012. Back then, folks all over Twitter were making fun of Sequoia for investing $20m+ in an iOS app that never launched and failed.
But they missed the point of how the game was played. The same week, Sequoia also sold Meraki to Cisco and made $240,000,000 on that deal. You can lose $20,000,000 if you make $240,000,000 the same week.
We see the same today with FTX. A crazy loss. But a tiny one, compared to the huge wins in the exact same VC fund.
And so we see it again, 10 years later. After Sequoia has a string of 10x funds. Yes, FTX is going to zero. And yes, it looks like fraud was involved. It’s not OK. But, in the end, Sequoia is already up $7.5 Billion in the same fund it lost $150m on in FTX. Losses like this are part of Going Big.
Sequoia only lost 2% of a 3x+ fund on FTX, a rounding error
There’s an FTX or two in every VC portfolio
Some may even be more than just 1%-3% of the committed capital pic.twitter.com/hqca4dfVxY
— Jason ✨Be Kind✨ Lemkin (@jasonlk) November 10, 2022
A look back at sort of the same thing, same top fund, 10 years earlier, from 2012:
I had a draft post I’d written weeks ago entitled something like “Color: Just an Enormously Large Seed Round Gone Horribly Wrong”, or something like that. Which I guess it was — $41,000,000 to build an iOS app with no revenue that no one ever used.
But it wasn’t that interesting, that post/story, so I let it rest. It didn’t all come together for me until the other day.
Then I saw that enterprise WiFi company Meraki was acquired by Cisco for $1.2 billion dollars the other day. Just a few weeks after Color is wound down. Now what does an enterprise WiFi company have to do with a consumer iOS app?
Well, only one thing near as I can tell. They were both funded by Doug Leone (who I don’t know and have never met) at Sequoia Capital.
It looks like Sequoia was the first investor in Meraki, pre-product, pre-anything, just the team. I think it’s fair to assume they owned 20%, possibly more. So ignoring basis, Leone and Sequoia cleared $240,000,000 on Meraki.
On to Color. OK, this one didn’t pan out as well. But let’s do some back-of-the-envelope math. Yes, they raised $41m pre-launch. But I doubt they spent it all. Let’s assume they spent half, and returned the other half to the investors. And let’s assume Leone and Sequoia put in 70% of the capital. So 70% x $20m = a $14m loss for Leone and Sequoia on Color.
Now, to a small fund, or a new VC, I’d think a $14m loss would just be awful. It would be to me.
>> But coming the same quarter as a $240m gain, a $14m loss is a rounding error. At least as long as you only have one or two of them. 😉
Going Big. Means Losing Biggish a few times, at least.
Something to keep in mind based on who you take money from. Make it match your ambitions, your upside goals, and your downside tolerance.
Excellent post. This is something you should think about not when raising any round of money but also when considering acquisition offers. When your investors say, this could be big one day – what they mean is – hey, I couldn’t care less about making $10M in a year. For you, a $10M check (or a $2M check) could be life changing amount of money. Different stakeholders often have different definitions of life-changing success – monetary and otherwise.
Similarly, getting acquired by the right company could alter your career trajectory but VCs couldn’t care less about that (and should not).
For sure. I wanted to just alude to that point here and a related one … both Meraki and Color had to have the outcomes they did. There was no middle course for either.
That’s a huge topic, and in truth, a third rail, we should and will dig into in more depth.
Here, I just wanted to allude to it, and not distract from the point that Color seems to make almost no sense on its own … but perfect sense when in the context of Meraki.