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Illustration: Sarah Grillo/Axios

Sequoia Capital is some of the smartest money on Sand Hill Road, with a decades-long knack for making early bets on world-changing companies. So how did it just make the sort of mistake that even the greenest of "Shark Tank" wannabes wouldn't make?

The bottom line: Sequoia got stuck inside of its own filter bubble.

Driving the news: Sequoia last month announced that it led a $35 million Series B round for Finix, a San Francisco-based payments infrastructure platform.

  • As TechCrunch first reported, Sequoia subsequently decided that its investment was in conflict with existing portfolio company Stripe, and opted to walk away.
  • This meant effectively donating its $21 million check to Finix, which then raised an additional $10 million from PSP Growth and existing backers like Inspired Capital — with PSP's Penny Pritzker taking the board seat that originally belonged to Sequoia.

So what really happened? Yes, Sequoia did due diligence, and initially determined that neither the product nor business models were competitive.

  • Product: Finix is kind of a choose-your-own-adventure for payments, creating API building blocks that clients can mix and match. The advantage is flexibility. Stripe is more holistic, offering an already-assembled solution. The advantage is ease-of-use.
  • Business model: Finix requires its clients to become payments companies themselves, whereas Stripe acts as the payments company. That basically means that Finix users bear both interchange risks and upside, whereas Stripe users bear neither.

The trouble was that these nuanced distinctions were only really understood by experienced payments professionals, and that's who Sequoia spoke with during due diligence.

  • It didn't also talk with the ordinary merchants and software companies that view Finix and Stripe as rivals because, in the end, they're competing for the same customers and offering solutions to the same problem.
  • But, after making the investment, Sequoia did begin learning more about how normies understood the market.

Sequoia and Finix did discuss the possible Stripe conflict during negotiations, although it's unclear if Sequoia had the same conversations with Stripe. It's our understanding, however, that Stripe did not ask Sequoia to walk away from Finix — that's a decision the VC firm made on its own.

  • One thing we still don't know is if Sequoia's limited partners are being refunded for their investment. Working on that...

The takeaway isn't that the king got taken down a notch, even though it did. It's a reminder that you can't be the smartest guys in the room if you don't learn from those who might seem to know less.

Editor's note: The story has been corrected to note that PSP Growth wasn't an existing investor.

Go deeper

Mike Allen, author of AM
55 mins ago - Economy & Business

America on borrowed time

Illustration: Aïda Amer/Axios

Economic recovery will not be linear as the world continues to grapple with the uncertainty of the pandemic.

Why it matters: Despite being propped up by an extraordinary amount of fiscal stimulus and support from central banks, the state of the global economy remains fragile.

Scoop: Gina Haspel threatened to resign over plan to install Kash Patel as CIA deputy

CIA Director Gina Haspel. Photo: Win McNamee/Getty Images

CIA Director Gina Haspel threatened to resign in early December after President Trump cooked up a hasty plan to install loyalist Kash Patel, a former aide to Rep. Devin Nunes (R-Calif.), as her deputy, according to three senior administration officials with direct knowledge of the matter.

Why it matters: The revelation stunned national security officials and almost blew up the leadership of the world's most powerful spy agency. Only a series of coincidences — and last minute interventions from Vice President Mike Pence and White House counsel Pat Cipollone — stopped it.

Updated 13 hours ago - Politics & Policy

Coronavirus dashboard

Illustration: Sarah Grillo/Axios

  1. Health: Coronavirus deaths reach 4,000 per day as hospitals remain in crisis mode — CDC warns highly transmissible coronavirus variant could become dominant in U.S. in March.
  2. Politics: Biden says, "We will manage the hell out of" vaccine distribution — Biden taps ex-FDA chief to lead Operation Warp Speed amid rollout of COVID plan — Widow of GOP congressman-elect who died of COVID-19 will run to fill his seat.
  3. Vaccine: Battling Black mistrust of the vaccines"Pharmacy deserts" could become vaccine deserts — Instacart to give $25 to shoppers who get vaccine.
  4. Economy: Unemployment filings explode againFed chair: No interest rate hike coming any time soon —  Inflation rose more than expected in December.
  5. World: WHO team arrives in China to investigate pandemic origins.