Sequoia Capital has resigned from the board of controversial crime-tracking app Citizen after it told the company it would not participate in its latest attempt to raise capital amid a funding crunch for tech start-ups.
The New York-based app, which has 7mn-plus users, allows people in US cities to live-stream crimes and access real-time reports from 911 calls. It has raised about $133mn from large venture investors including Greycroft, 8VC and Lux Capital, according to data from Crunchbase.
Sequoia was among Citizen’s first and largest backers, leading a $12mn “series A” fundraising shortly after it launched in 2017 and appointing partner Mike Vernal to its board.
However Vernal resigned from the board earlier this month after Citizen’s management approached venture investors with a proposed deal to raise new funds and recapitalise the business by restructuring its debt and equity, said two people close to the deal.
Sequoia’s decision to walk away from Citizen after six years of investment comes as venture capital firms have reined in spending amid an economic downturn that has damped sentiment for riskier investments. Thousands of start-ups with an urgent need for capital will be forced to confront a collapse in their valuations, agree to punitive debt deals or face insolvency.
The people close to the company said Citizen offered a “pay to play” deal, obliging existing investors to participate in a new fundraising round or else their equity stakes would become so diluted that their shareholding would be effectively wiped out.
The new fundraising had an equity conversion ratio of about 10:1, meaning the shares of those not involved in the current funding round would be reduced to a tenth of their previous value.
Venture investors said these “cram down” fundraising rounds, in which a company is forced to provide generous preferences to new investors, are becoming more common as a slump in tech valuations hits private markets.
“You’re about to see a huge amount of companies where their existing [shares] are wiped out,” said a portfolio manager at a large private investor. “You’re going to see more capital coming in from the outside [to prop up cash-strapped companies] and obliterating earlier stakes.”
In some cases, early-stage investors are choosing to walk away from companies that had been kept afloat during a pandemic-driven boom that led to frothy valuations and high investor demand, the person said.
Citizen raised the funds it required from a number of its existing backers, the people said.
However, Sequoia refused to participate in the fundraising. One of the people close to Citizen said Sequoia’s decision was “ruthless” and that, as its earliest backer, it had “abandoned” the company in its hour of need.
Across Silicon Valley, venture capitalists are carrying out an “internal triage” of the “companies that matter . . . and those where the [return on investment] makes continuing to invest irrational”, the person added.
Sequoia declined to comment.
Citizen has faced controversies, including criticism that it encourages a culture of surveillance and that its use can lead to racial profiling and harassment.
In 2021, its founder Andrew Frame faced scrutiny for offering a reward to find a man wrongly suspected of arson. Prior to Citizen, Frame created a similar app called Vigilante that was banned by Apple over content concerns.
Citizen did not respond to requests for comment.