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Michael Moritz

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Weekend Analysis

Why Sequoia’s Klarna board drama made the VC world wince

The attempted ousting of legendary ex-Sequoia investor Michael Moritz paints a chaotic picture inside Klarna’s boardroom as it approaches a public listing.

Swedish fintech company Klarna has had a week that sounds more like an episode of “Succession” than reality.

First, Sequoia partner Matt Miller, with the backing of his firm, asked Klarna shareholders to oust Sequoia ex-chair Michael Moritz from the board, The Information first reported.

It was an astonishingly bold move. Moritz was credited with much of Sequoia’s success during his 38-year tenure at the firm, having led its investments into Google, PayPal and Stripe. He’s also a close ally of Klarna CEO Sebastian Siemiatkowski and wrote the firm’s first check to Klarna back in 2010.

Moritz left Sequoia in July to focus on his wealth management firm, Sequoia Heritage. He handed over his board seat at Sequoia to Miller but had remained on as an independent adviser.

By Tuesday, Sequoia had retracted its request after lobbying from Siemiatkowski, apologized, and by Thursday, replaced Miller with Andrew Reed as board member, according to The Information and the Financial Times. Siemiatkowski called Reed a “perfect fit for Klarna” in a message to Klarna shareholders. Reed co-leads Sequoia’s growth investing strategy and is on the board of design software company Figma.

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A spokesperson for Sequoia said that the firm withdrew its emergency meeting request “upon a fuller assessment” and that they “fully support Michael as Chairman of Klarna.”

Infighting at the name-brand firm immediately reverberated across the VC world—not only for the “palace intrigue,” as one investor put it, but also because tensions like Klarna’s are painfully relatable these days. The IPO window is still mostly shut, interest rates are high, and investors are facing pressure from their LPs to get liquidity out. Something’s got to give.

The pressure is especially high for “fund-drivers,” investments that can make or break the return profile of a fund. Sequoia holds a 22% stake in Klarna, and its IPO (reportedly slotted for 2025) will return dividends several times over its initial investments.

“Sometimes you see this [type of shake-up] at high-performing companies, where there’s a lot of money at stake,” according to Jay Ganatra, managing partner at Infinity Ventures.

All eyes on Klarna

Klarna’s IPO journey is being closely watched. In November, the company reported its first quarterly operating profit in four years. The listing will be a long time coming. Founded in 2005, Klarna successfully rode the wave to the big leagues during 2020’s fintech boom and peaked at a $45.6 billion valuation at its $639 million Series H, led by SoftBank.

But one year later, it was one of the first major fintech names to take a valuation haircut: an $800 million investment in July 2022 that marked it at $6.7 billion.

“Klarna was very creative. In the past they just focused on being a BNPL,” said Maggie Vo, managing general partner at Fuel VC, a Miami-based firm that has a consumer fintech growth strategy.

But with an eye toward the public markets and interest rates rising, Klarna substantially diversified its revenue streams. “They transformed themselves into a one-stop shop for consumers. It’s no longer just a payments platform,” Vo added.

A Klarna spokesperson said that no official timeline has been set for an IPO.

Palace intrigue

The full picture of the dispute is still being pieced together. The Information reported that it revolved around Klarna’s Swedish shareholder agreements ahead of a potential IPO, and according to Bloomberg, the future role of Klarna co-founder and angel investor Victor Jacobsson sparked board divisions.

But Sequoia is also facing its own pressures from LPs, especially after its embarrassing investment in crypto exchange FTX, a leadership overhaul, and a spinoff of its Chinese arm. At least one large LP in Sequoia was reevaluating its future position in the US firm, the Financial Times reported in September.

Increased pressure from LPs may be giving GPs an incentive to push for a faster exit than what the founder envisioned.

“Investors have agendas and they’re generally going to be looking for a return at the timing that they need for their fund or that they think is appropriate for this company among many others in their portfolio,” said Michael Torosian, a partner at law firm Baker Botts.

Despite stirrings from a few of its LPs, Sequoia appears to be in a stronger position than many venture firms. For the fiscal year ending June 2023, Sequoia marked up 15 of its funds, according to financial statements from the University of California Regents, one of its LPs. Some of its strongest performers, like its 2021 investment in OpenAI, are likely driving up its fund valuations.

A VC may also try to oust a former partner from a board if they’ve joined a rival venture firm, which isn’t the case with Moritz, or if the former partner has differing strategic visions on big-picture items.

“Venture funds are going to think that the independent seat is skewed in their favor if they have a former partner, colleague, sitting in that seat. But that’s not always the case, especially if there’s been a bad departure,” said Bardia Moayedi, a lawyer at Snell & Wilmer.

Founders are caught between a rock and a hard place: They have to contend with investors desperate for liquidity, early employees with stock options, and their own notions of their company’s value.

And until someone cracks that IPO window, boardroom tensions will only get hotter.

Featured image of Michael Moritz by Michael Kovac/Getty Images

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