Was a reason ever given? I'm not exactly surprised by this, but it seems pretty irrational, especially if the distributed company is already working reasonably well (which presumably it is, if they've just closed another round).
I actually ran into the CEO a year after this happened and he still believed it to be true. "There's no way we would've been able to pull off our last pivot without everyone sitting around the table late at night spitting out ideas".
Oh well. I'm at a better company now.