With Twitter expected to default on millions still due, investors at VC firms it committed to fund now face the challenge of helping to find a buyer or risking the volatile billionaire’s online wrath.
By Alex Konrad, Forbes Staff
InJanuary, the leaders of several venture capital firms that had taken money from Twitter received a note from their last remaining contact at the social media company. Sent from a personal account, the email informed them that the team that stewarded those investments had been obliterated as part of Elon Musk's shambolic takeover of the social media platform.
Someone in Musk’s sphere would likely reach out, the former Twitter employee explained. But neither they, nor their former colleagues, almost all of whom had quit or been laid off, knew who that might be or what would happen next. “The person who did this was trying to help some of the GPs [general partners] who were hurt by [the departures],” one venture capitalist told Forbes. “They apologized for their inability to do better by them.”
Before Musk took it private in October and gutted it, Twitter the public company was an active and outspoken corporate backer of the startup ecosystem. In recent years, those investments especially focused on founders and funders from underrepresented backgrounds. On the startup side, that’s included Black-led 7th Ave, a toolmaker for web3 creators. On the venture side, Twitter announced commitments to six firms in 2021, including MaC Venture Capital, the firm co-led by former Washington, D.C. mayor Adrian Fenty, and Female Founders Fund. All told, Forbes found that Twitter promised to invest about $1 million to $2 million each, or about $20 million overall, in those firms and in at least four others led by Black, Latinx or women partners.
Today, with Twitter’s corporate development team mostly departed, according to sources, that portfolio – particularly the startup investors it backed – is suddenly orphaned from those who championed it. And as Twitter’s new regime looks to cut costs any way possible, from reportedly failing to pay office rent to cloud and software bills to charitable donations already deducted from employee paychecks – that’s meant a problem for VC funds that don’t receive all their investment dollars upfront, like a startup does. For larger firms, or ones that had called most of the promised money, Twitter’s disappearing act is a headache. For smaller firms and those yet to receive much of the committed money, it’s a nightmare.
“It’s an unforced error” for Twitter to be putting firms in such an uncertain position, said one investor who agreed to take Twitter’s million. “There are enough challenges raising new funds, and raising funds as an underrepresented investor, as it is.”
Forbes reached out to more than 20 former Twitter employees, founders and investors backed by Twitter, and other investors in the ecosystem over the course of the past two months. Many spoke to us. But none agreed to speak on the record or be named, for fear of retaliation and lost business opportunities.
From those conversations, however, Forbes has learned that several firms have indeed been approached by an associate of Musk’s. Twitter does not intend to answer any capital calls for money it still owes, that person has said, according to multiple sources. And while Twitter has reached out to at least several prospective buyers about its positions, Musk’s camp has also leaned on the firms to solve Twitter’s problem — despite no legal obligation to do so — by helping identify buyers themselves.
“This is a decision they have made, and it’s really lousy.”
An individual identified as making such inquiries on behalf of Twitter did not not respond to a request for comment. Twitter responded to a request for comment with a poop emoji.
Corporate investors shifting strategies under a new CEO or pulling back from startup investing in a bear market isn’t shocking. What’s unusual about the situation facing Twitter-backed funds is the company’s apparent intent not to honor some of its existing contracts — and the bully pulpit of Musk, proudly “anti-woke” and always seemingly ready to air out a dispute on his own social media platform.
“My understanding is that Twitter has cash to pay employees, to keep the lights on,” said Ed Zimmerman, chair of the tech group at law firm Lowenstein Sandler and a founding partner at First Close Partners, which also backs underrepresented fund managers. “This is a decision they have made, and it’s really lousy.”
Over the two years before Musk’s purchase, Twitter first got into the business of investing in venture funds —particularly ones led by managers from underrepresented groups — with several objectives in mind. First was the direct benefit to the fund managers. A $1 million or $2 million check could help anchor a smaller fund; for funds of any size, however, it would serve as a powerful signal that a well-known public company was throwing its support behind a fund manager, making it easier for them to attract and close other investments.
Then, there was the social impact of backing such investors, who might be more likely to support “historically excluded communities,” as a Twitter corporate blog post about the program described it. That mission increased in urgency following the tragic murder of George Floyd in May 2020; in the following year, Twitter’s corporate development team met with more than 65 such funds, the company said at the time.
“The pool of people who knew about the venture investing in any detail dwindled to virtually one person.”
Twitter was in the habit of buying 10 to 12 startups each year, according to a source with knowledge; by investing in underrepresented VC funds, the company believed it could gain visibility into promising startups that might develop into strong acquisition targets. For every deal Twitter closed, its corporate development team met with about 100 companies, the source claimed. Close communication with friendly VC firms could help sift through the noise and ensure the companies coming in the door reflected Twitter’s own diverse user base, two people said.
“Our diversity goals weren’t about being woke, they were about how people used our service and making sure we didn’t dilute our [company-wide staffing] diversity goals through M+A,” said one former Twitter employee, who noted that several women founders, including Squad cofounder Esther Crawford and Threader cofounder Marie Denis, remained at the company for a time after acquisition. “It was working.”
In May 2021, Twitter announced it had backed three such firms: MaC Venture Capital, Ulu Ventures and Vamos Ventures. Two months later, it announced three more investments: Chingona Ventures, Female Founders Fund and Hannah Grey (named after its two women partners’ daughters). One more fund, Collide Capital, named Twitter as a limited partner in a press release as recently as October, the month that Musk’s overwrought Twitter takeover attempt became reality. Forbes is also aware of as many as three other funds that Twitter also backed but that weren’t publicly announced. All declined to comment for this story.
From September onward, everyone publicly linked to the program — from corporate development professionals to Twitter’s chief people and diversity officer and even its chief financial officer, who once tweeted proudly about the program — departed Twitter, either via layoff or willingly because they “read the writing on the wall,” according to a source. By the time one of the last executives to leave wrote to tell VC firms about their departure in January, word had already spread that some managers were hearing from an unknown person ostensibly now working at Twitter, former startup cofounder Suril Kantaria. Identified last month by The Financial Times as a Musk associate tasked with helping to cut costs at Twitter. Kantaria’s LinkedIn claims he serves as “interim head of finance” at the company.
“The pool of people who knew about the venture investing in any detail dwindled to virtually one person,” said one venture capitalist who was in touch with several affected managers at the time. “They were told that there was basically one person in finance who still knew anything about the investing program, and so if they wanted to get the rest of the capital that they had not yet called, he was their best hope.”
Thrust into a no-win situation, the fund managers backed by Twitter have good reason not to speak up. When a high-net-worth individual whose public equities or cryptocurrencies go up in flames, or a corporation shuts down its startup program in a downturn, they’ll typically work collaboratively with funds to find a buyer interested in backing the firm over the long run, several experts told Forbes. The buyer can take over the commitment, and when the VCs go out to raise another fund, they don’t have to talk about an LP backing out of renewing its commitment, let alone defaulting on its existing one.
“It was supposed to be an investment that would be impactful without being an impact investment, and we loved that.”
But because of the parties involved, the situation between Twitter and its backed venture funds is an outlier of outliers from such a ho-hum scenario. “Being an emerging manager, especially an underrepresented one, is a fragile position to be in,” said Zimmerman at Lowenstein Sandler. “As a category, it’s already hard to get folks in your corner. So if you’re seen speaking ill of someone who committed to your fund, there’s concern that that’s a bad look. And advertising that you had an LP default, there’s no upside,” he added.
Then there’s Twitter’s new owner, Musk, who has shown a seemingly limitless capacity for picking fights, and threatening lawsuits, on his own website, where he currently boasts the most followers of anyone in the world, at 135 million-plus (even if millions are likely bots). “What’s interesting here is the ‘who.’ You don’t want to be seen as ‘with me or against me’ with him,” said a partner at another law firm that works with a number of venture funds. “If someone defaults, that’s not your fault. But if they go on Twitter and say you’re a bad person or a bad fund, that would be bad.”
So it’s perhaps unsurprising that firms might opt to keep their heads down, waiting for Musk’s Twitter to default. That legal term means that Twitter will have failed to wire the committed capital the next time it’s requested within 10 business days, as well as a second-notice period. At that point, VC firms have a menu of punitive options to choose from. Firms that don’t need the money might opt to simply shrink their fund size, limiting an LP’s allotment to what they already wired. If the money is more crucial to looming startup investments, they might tack on a severe interest rate to what’s owed until it’s sent.
Forcing an LP like Twitter to wire money it doesn’t want to, however, would likely require suing the backer for breach of contract and securing a judgment to then pursue. Such an extreme move would be unprecedented — and in the particular case of Twitter and the litigious Musk, likely catastrophic. In two decades working with such fund agreements, Mintz investments fund practice chair Kari Harris said she’d only seen a handful of defaults of any kind. “There are real-world consequences of a default,” she said. “The reality is that it never happens. 99% of the time, the parties are going to work it out and come up with an answer.”
Should Musk’s associates find a desirable buyer, such as a well-regarded fund-of-funds, hospital system or foundation, several fund managers said they’d be inclined to approve a sale and move on. Given a cooled market for private equity investments, however — which historically has disproportionately affected underrepresented groups in fundraising — such a deal is far from guaranteed. At least one blue-chip LP has already passed. Duke Helfand, a spokesperson for the Cedars-Sinai healthcare system’s investment office, which manages about $3 billion in assets, confirmed it “had a brief conversation with a Twitter representative, but declined to engage further.”
VC firms are under no legal obligation to help Twitter find a buyer, nor do they need to approve one they find unacceptable, experts agreed. Nor can Twitter claim ignorance or internal dysfunction as valid reasons not paying up. The other way to get Twitter off a fund’s investor list: seize its position once it goes into default, redistribute what it already invested as more upside for remaining LPs, and move forward with a smaller fund. In that scenario, one firm leader is prepared to explain to prospective investors why Twitter left a hole, stigma be damned. “I’ll be happy to say who defaulted and why,” they said. “I don’t have an issue with letting people know this happened.” Like the others, they asked not to be publicly named.
But there’s a sense of loss for others, who remembered Twitter as a once-promising partner whose executives shared their values and provided valuable feedback on the startup ecosystem. “It was supposed to be an investment that would be impactful without being an impact investment, and we loved that,” another firm leader said, noting they’d turned down other corporations interested in investing following the murder of George Floyd.
Musk’s upending of Twitter has turned that tactical boost into a regret. “Now, there is no benefit to the affiliation,” they said.
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