In a recent social media post, Brendan Foody, co-founder of AI talent platform Mercor, accused one of the world’s top venture capital firms, Sequoia, of engaging in ‘dual-pricing’ valuation tricks to artificially inflate startup valuations. This practice involves investing in two tranches at different valuations, where a lead investor invests a significant portion of its capital at a lower, preferential valuation, while putting a smaller amount in at a drastically higher price.
According to Foody, Sequoia’s dual-pricing strategy allows the firm to create the perception of a dominant market winner by announcing high headline valuations, while masking the fact that the lead investor’s actual average entry price was significantly lower. This is exemplified in the case of Serval, an AI-driven IT helpdesk startup that announced a $75 million Series B at a $1 billion valuation led by Sequoia. However, just days earlier, the company had been valued at less than $400 million as part of a Series A extension in which Sequoia participated.
Sequoia’s Shaun Maguire responded to Foody’s accusations, stating that dual-pricing is not unique to Sequoia and is simply a market reality. He claimed that other investors are willing to pay high prices for hot companies, often at multiples above what Sequoia is willing to pay. As a result, Sequoia structures its participation differently, investing in two tranches at different valuations.
However, Foody’s accusation raises significant questions about the transparency and fairness of this practice. While Maguire’s explanation frames it as a market reality, it does not address the issue of what founders are telling people who don’t already know about the lower tranche. Furthermore, employee stock options should theoretically be priced based on the blended value of all tranches, not just the headline number.
The controversy surrounding Sequoia’s valuation practices highlights the need for greater transparency and accountability in the venture capital industry. As Foody noted, ‘the lack of transparency around these dual-pricing structures is a major issue.’
This practice is not an isolated incident; it is part of a broader trend where VCs and founders manipulate or overstate annual recurring revenue (ARR) to attract investors. The VC Niko Bonatsos addressed this issue during a recent TechCrunch event, noting that some companies may be inflating their ARR numbers.
The dual-pricing structure and the manipulation of ARR numbers are just two examples of how the venture capital industry is gaming the perception of success in a hyper-competitive market. It is essential for investors, founders, and employees to understand these practices and demand greater transparency from VCs.
Sequoia’s response to Foody’s accusations has sparked debate within the industry, with some arguing that dual-pricing is a necessary evil in a competitive market, while others see it as a symptom of a larger issue. The controversy surrounding Sequoia’s valuation practices serves as a reminder of the need for greater transparency and accountability in the venture capital industry.
**Update:** This article has been updated to include additional context and information on the dual-pricing structure and its implications for the venture capital industry.
Source: Original article