Maybe I'm missing something, but I'd chalk it up to 2 groups with deep, deep pockets making a long shot bet because they can.
Once Sequoia invested, the acquisition was derisked for someone like Google. Then Google just needed to offer a price of some multiple of the investment ("How about 5x? Not bad for 6 months!"). Conversely, Sequoia might have hoped for a flip knowing Google was so aggressive for social startups at the time and invested accordingly. As far as I can tell, the Color leadership were blinded by their own genius and these early "signals" of success and they screwed up their acquisition, launch, and thus far all meaningful execution.