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.
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Author: Jason Lemkin