VC Exuberance Leads to 95% Writedowns: The Consequences

Tribe Capital wrote to a select group of its co-investors earlier this month to inform them of some bad news.

Tribe is slashing its internal valuation of Invenia, a Canadian-British startup, by 95%. Invenia co-founder and CEO Matthew Hudson has been "terminated" and a board-led investigation found he had "secretly, systemically, and repeatedly inflated the revenue and profitability of the company," according to a memo sent by Invenia board member and Tribe CEO Arjun Sethi.

Bloomberg News has reviewed a copy of the memo detailing Hudson's termination, which has not been previously reported.

This latest setback comes as a blow to Tribe, a San Francisco-based company that was only founded four years ago by former employees of Social Capital. Now, Sethi and his team are re-evaluating several well-funded startups, which in Invenia's case would have benefited from more oversight, according to Sethi.

"I think we need to rethink what it means to be a good board member," said Sethi in a phone interview. "We had to come in and step up and be the adults."

As several prominent startups have floundered in recent months, 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, offering stingier terms to founders while demanding greater transparency and rigor during due diligence to try and avoid additional fallout.

Two years ago, Tribe pitched Invenia, a machine learning platform for managing electrical grids, to potential co-investors. Invenia's machine learning capabilities promised to revolutionize the way electrical grids are managed, and Tribe was eager to get involved. However, despite its potential, Invenia ultimately failed to attract the necessary investment and was forced to shut down.

"It's not every day that we get the chance to partner with a company that is doing so well," Andrew Przybylski, a partner at Tribe Capital, wrote to potential investors. 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.

Sethi stated that Hudson is no longer associated with the company. A UK filing from Oct. 28 shows that he was terminated as a director of the company with no given reason. Gore's firm did not invest in the company, according to Sethi. The focus for Tribe moving forward will be exploring ways to regain the investment, which is 8.9% of Tribe's $335 million second fund.

Bloomberg reached out for comment 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.

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, according to an investor update for the quarter through Sept. 30. 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 the carried value of its first fund by 28% ($129.2 million) and its second fund by 14% ($61.4 million), according to an update. This revised estimate includes FTX at a $32.5 billion valuation – a significant sum considering that other FTX backers, including Tiger Global, Sequoia Capital and Softbank Group Corp., have all written off the investment. Tribe is monitoring the FTX situation closely and plans to update its valuation at the end of December.

In a phone interview, Sethi explained Tribe's methodology, 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.

There has been a dramatic increase in both the number of venture firms and the average fund size over the past decade. In 2021, venture funds in the US raised a record $100 billion, according to Pitchbook. This money has been poured into private upstarts, valuing some of them more highly than their publicly traded counterparts. However, 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.

According to research firm Preqin, VC investments are now on track for the sharpest drop in more than two decades, surpassing the declines of the dot-com crash and the financial crisis. This is a significant change from the previous years, and it is one that is sure to have a major impact on the industry.

Venture capitalists are typically trusted by pension funds, endowments, and other long-term investors to use good judgement 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.

Although many firms' internal valuations remained unchanged on paper, Tribe first flagged potential problems with Invenia to investors in September. The company said discrepancies could go back as far as the time of its initial investment in late 2020, but its latest performance calculations don't include the full write down of its stake.

Of the nine startups that Tribe Capital flagged as highlight investments during the first quarter, four were considered "lowlights" by the end of September. This highlights the potential risks associated with investing in startups.

Tribe's next challenge will be impressing investors in its third venture fund. Tribe has now closed the fund after raising $394 million, which was its initial target a year ago, Sethi said.