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VC firms are getting stingier with startups. Tribe Capital’s struggles show why

December 23, 2022, 4:26 PM UTC
Former FTX CEO Sam Bankman-Fried
Tribe Capital’s portfolio includes bankrupt crypto exchange FTX. Above, former FTX CEO Sam Bankman-Fried leaves a New York court on Thursday after being released on a $250 million bail package.
Stephen Yang—Bloomberg/Getty Images

Venture firm Tribe Capital wrote to a select group of its co-investors earlier this month with some bad news.

Tribe was slashing its internal valuation of Canadian-British startup Invenia, on which it had bet $30 million, by 95%. Invenia co-founder and Chief Executive Officer Matthew Hudson had been “terminated” and a board-led investigation found he’d “secretly, systemically and repeatedly inflated the revenue and profitability of the company,” according to the memo, which was sent by Invenia board member and Tribe CEO Arjun Sethi. 

Bloomberg News reviewed a copy of the memo, the contents and details of which, along with Hudson’s termination, haven’t previously been reported.

Bad news for Tribe

The markdown is the latest in a run of bad news for Tribe, the San Francisco-based firm started four years ago by former staff of Social Capital, Chamath Palihapitiya’s venture fund. Now Sethi and his team are re-evaluating several well-funded startups which, in Invenia’s case at least, Sethi said would have benefited from more oversight.

“Similar to a lot of other people, we probably need to rethink what it is to be a good board member,” Sethi, who said he joined the board in March, said in a phone interview. “We had to come in, and step up and be the adults.”

As several prominent startups have floundered — including crypto exchange FTX, which went bankrupt last month — venture investors have been reckoning with the repercussions of years of exuberant investment in emerging companies and their founders. Firms have slowed their pace of investing in recent months, offering stingier terms to founders while demanding greater transparency and rigor during due diligence to try and avoid additional fallout.

Just two years ago, Tribe had enthusiastically pitched Invenia, which uses machine learning to manage electrical grids, to potential co-investors.

“It’s not every day that we get the chance to partner with a company that is generating nearly half-a-billion in revenue, is doing good for the environment, and… profitable since their series-A,” Andrew Przybylski, a partner at Tribe Capital wrote to the potential investors, according to a letter reviewed by Bloomberg. He offered them the opportunity to buy into a Series B round that would value Invenia at $940 million. The lead investor was listed as Al Gore’s Generation Investment Management, with an initial public offering slated for 2022.  

According to Sethi, Hudson no longer has anything to do with the company. A UK filing shows he was terminated as a director of the company as of Oct. 28, listing no reason for the change. Gore’s firm didn’t end up investing in the company, Sethi said. Tribe’s focus going forward, he said, will be exploring ways to recoup its investment, which represents 8.9% of Tribe’s $335 million second fund.  

Bloomberg reached out for comment via email and LinkedIn messages to Hudson, current CEO Christian Steinruecken, Chief People Officer Oksana Koval, Chief Science Officer Cozmin Ududec and scientific adviser David Duvenaud, all listed as co-founders of Invenia. Ududec and Duvenaud were also contacted via their Twitter profiles. Voicemails left on a landline listed for Steinruecken at Cambridge University, and at Invenia’s office landline weren’t returned. A call to a cell phone linked with Hudson’s name was answered by a person who said they didn’t know Hudson or where he was.

Falling valuations

In addition to resolving specific problems at Invenia, Tribe is grappling with a portfolio that also includes FTX and crypto exchange Kraken, which recently settled allegations that it violated US sanctions against IranSeveral other of its investments have been caught up in an industry-wide decline in valuations, according to Tribe’s latest assessments.

One-click payments company Bolt Financial, which raised money at an $11 billion valuation in 2021, is now valued by Tribe at $4.5 billion, an investor update for the quarter through Sept. 30 shows. Tribe also cut the valuations of equity management platform Carta and insurance startup Huckleberry. While still overall bullish on cryptocurrency companies, Tribe has also marked down its valuations of Kraken and Digital Currency Group. Representatives for Bolt, Carta, Huckleberry, Kraken and DCG didn’t respond to requests for comment.

Overall, Tribe has slashed its first fund’s carried value by 28%, or $129.2 million, and its second fund by 14%, or $61.4 million, the update shows. This revamped estimate includes FTX at a $32.5 billion valuation  — a lofty sum considering other FTX backers, including Tiger Global, Sequoia Capital and Softbank Group Corp., have all written the investment down to zero. Tribe is monitoring the FTX situation closely and plans to update its valuation at the end of December, according to the update.

Sethi explained Tribe’s methodology in the phone interview, noting that it marked down some bets “proactively” and that some impaired valuations could surge again. The company’s internal calculations place it among the top venture firms delivering returns, as of the end of the September quarter. 

Both the number of venture firms and the average fund size have grown largely unchecked over the past decade. Venture funds in the US raised a record $100 billion in 2021, according to Pitchbook, a war chest that’s been poured into private upstarts, valuing some more highly than their publicly traded counterparts. When equity markets fell this year, startups also felt the pinch. They laid off tens of thousands of employees, and if they were able to raise more funding it usually took longer and was done at the same or a lower valuation.

VC investments down sharply

VC investments are now on track for the sharpest drop in more than two decades, according to research firm Preqin, surpassing the declines of the dot-com crash and the financial crisis.

Venture investors are trusted by pension funds, endowments and others who invest in their funds to use good judgment when valuing assets and deciding when to adjust their valuations. Because the timeline for exiting investments could be years away, firms usually mark up or down the value of their assets on a quarterly basis.

Yet for many firms, internal valuations remained unchanged, at least on paper. While Tribe first flagged potential problems with Invenia to investors in September — and said discrepancies could go back as far as the time of its initial investment in late 2020 — its latest performance calculations don’t include the full write down of its stake.

Of the nine startups Tribe Capital flagged as highlight investments during the first quarter to potential investors in its third fund, four were considered “lowlights” by the end of September.

Tribe’s next challenge will be impressing investors in its third venture fund. Tribe has now closed the fund after raising $394 million of the $500 million that it initially targeted a year ago, Sethi said.

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