Sequoia Capital exits crime app Citizen amid funding crunch

Sequoia Capital has stepped down from the board of controversial crime-tracking app Citizen after telling the company it would not participate in its latest attempt to raise capital because of a funding crunch for tech startups.

The New York app, which has more than 7 million users, allows people in cities across the United States to live stream crimes and access real-time reports of 911 calls. It has raised about $133 million from major venture investors like Greycroft, 8VC and Lux ​​Capital, according to Crunchbase.

Sequoia was one of Citizen’s first and largest backers, leading a $12 million “Series A” fundraising shortly after its 2017 launch and appointing partner Mike Vernal to its board.

But Vernal resigned from the board earlier this month after Citizen’s management approached venture investors with a proposal to raise new funds and recapitalize the business through a debt and equity restructuring, two people close to the deal said.

Sequoia decided to exit Citizen after six years of investment as venture capital firms cut back on spending amid an economic downturn that dampened appetite for riskier investments. Thousands of startups in urgent need of capital are forced to face the collapse of their valuations, punitive debt deals or insolvency.

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People close to the company said Citizen offered a “pay to play” deal that would oblige existing investors to participate in a new fundraising round or face dilution of their equity holdings to the point that their ownership would effectively disappear.

The new fundraising showed a capital conversion ratio of around 10:1, meaning that the shares of those not involved in the current financing round would decrease to a tenth of their previous value.

Venture capitalists say these “crowded” 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 going to see a lot of companies where they already exist [shares] they will be wiped out,” said a portfolio manager for a large private investor. “More capital is coming from outside [to prop up cash-strapped companies] and cancel previous stakes.”

In some cases, early-stage investors are choosing to exit companies they held during the pandemic-induced boom, which led to frothy valuations and high investor demand, the person said.

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Citizen raised the necessary funds from a number of existing backers, the people said.

However, Sequoia refused to participate in the fundraiser. A person close to Citizen said Sequoia’s decision was “cruel” and that, as its earliest backer, it had “left” the company in its hour of need.

In Silicon Valley, venture capitalists perform “internal classification” among “significant companies”. . . and those where the [return on investment] makes it irrational to continue investing,” the person added.

Sequoia declined to comment.

Citizen has faced controversy, including criticism that it encourages a culture of surveillance and that its use could lead to racial profiling and harassment.

In 2021, its founder, Andrew Frame, came under scrutiny after offering a reward for finding a man wrongly suspected of arson. Before Citizen, Frame created a similar app called Vigilante, which was banned by Apple due to content concerns.

The citizen did not respond to comments.