In the most turbulent 12 months in its 51-year history, Sequoia divested its highly profitable China unit, trimmed the size of its cryptocurrency investment fund and lost veterans including veteran Michael Moritz. important partners.
Now, Silicon Valley’s most prominent venture capital firm is struggling to keep investors confident.
At least one big Sequoia backer is weighing its future position with the U.S. company, while others are concerned about recent missteps, including a $225 million bet on cryptocurrency exchange FTX in 2021, But failed. One of the Sequoia’s longest-standing supporters called the deal “a humiliation unique in their history.”
This summer, Sequoia Chief Executive Roelof Botha traveled through New York, Boston, Chicago and the Bay Area, meeting with more than 50 of the firm’s largest “limited partners” who invest in its funds.
The July trip wasn’t about fundraising, but about assuaging the concerns of financial institutions, nonprofits, pension funds and family offices, which, on Sequoia’s reputation as one of the world’s savviest tech start-up investors, are paying Sequoia Injected billions of dollars. ups, including Apple, Google, Instagram and OpenAI.
“Who do they want to be; what is their brand?” said one principal at Sequoia LP, a sovereign wealth fund. He will continue to back Shen Nanpeng, the billionaire owner of Sequoia’s soon-to-be-spun China division, but is evaluating his position in Sequoia’s, U.S. and European businesses.
“We knew what Shen wanted to be: the most successful investor in Asia,” he said. “How about Sequoia America?”
“Our aim is to be the best performing investment partner in the world,” Botha told the FT. “as always.”
During the U.S. trip, Botha and senior lieutenants Alfred Lin and Pat Grady reassured limited partners of the firm’s slimming and other changes at the firm, such as starting from Investing in new tools long after going public has deepened connections with founders and established companies to capitalize on the AI boom.
Another Sequoia investor described this period as “the most profound change in the company’s history,” based on more than 20 interviews with its limited partners, current and former Sequoia investors, and rival groups and startup founders. interviews.
Despite the turbulence of the past 12 months, Sequoia believes its limited partners will stick around. “Our 51-year track record gives us breathing room,” said one of the firm’s venture capitalists.
Decoupling from China
In June, Botha began ditching Silicon Valley’s most ambitious and successful attempt to build a global presence.
Sequoia’s U.S. and European businesses will spin out of the China unit run by Mr. Shen, who led successful early investments in Alibaba and TikTok parent ByteDance.
The Chinese unit, renamed Sequoia (the Chinese translation of Sequoia), will continue to manage nearly $56 billion in assets. Sequoia’s India and Southeast Asia operations will form the third entity.
The move comes after months of pressure from Washington to invest in China. Sequoia Capital’s Chinese unit has previously taken controversial stakes in sanctioned drone maker DJI and surveillance startup DeepGlint.
Weeks after Sequoia announced the spinoff, the White House issued an executive order limiting U.S. investment in technologies such as artificial intelligence that could advance China’s national security.
While Sequoia’s move would end a lucrative profit-sharing arrangement with its Chinese arm and could limit future investments in Asia’s big market, a person close to the firm said it would resolve a political dilemma .
“Sequoia was not mentioned in the executive order. Before the separation, I was sure it would be,” they said.
Ana Marshall, the chief investment officer of the $13 billion Hewlett Foundation, which has been a limited partner at Sequoia for 20 years, called the spinoff “courageous.” Allowing Botha and his team to focus on investing rather than managing a complex global company.
“I don’t know how often they talk to China and India, but I’m glad they’re back doing what they do best,” she said. “Limited partners should be excited about what just happened.”
bad bet
In 2021, Sequoia Capital invested $225 million in FTX and subsequently published a 13,000-word biographical blog about its founder, Sam Bankman-Fried.
The following year, FTX collapsed. Bankman-Fried is awaiting trial on fraud charges. Sequoia Capital’s investment has gone to zero. The blog has since been deleted, but its legacy won’t be erased so easily. A Sequoia limited partner called the incident a “total disaster.”
The firm recently cut the size of its fund dedicated to investing in cryptocurrency companies from $600 million to $300 million.
Elon Musk’s decision to invest $800 million in Twitter’s $44 billion acquisition last year also angered some limited partners.
Botha said Musk made his first job offer to PayPal in 2003. Sequoia has also backed other promising Musk ventures, including SpaceX and the Boring Company. But by Musk’s own estimates, Twitter (now renamed X) is worth less than half of what he paid for it.
“I’m not surprised they backed him,” said the head of an investment fund that is one of Sequoia’s top limited partners. “I think they see him as part of the Sequoia family. I don’t think it’s influenced by personal conflict. It’s a question of ‘does Elon’s plan make sense and does the price make sense.’ Now obviously not, but now It is too early to draw conclusions.”
lifelong investor
China, FTX and Musk may have grabbed the headlines, but the limited partners say perhaps the most significant of Botha’s changes is the success of a new investment vehicle called the Sequoia Capital Fund.
Venture capital firms have traditionally earned fees by backing startups in their early stages and cashing out when they go public or sell.
Sequoia’s new fund, announced in 2021, breaks with that tradition by holding shares of companies even after their IPOs, as Botha is adamant that certain tech stocks will continue to outperform long after they go public.
The fund, along with a new accelerator program for early-stage companies called Arc, enables Sequoia to provide “permanent capital” for the life of a company, according to limited partners.
Others said the new fund was a response to growing competition from groups like Andreessen Horowitz, SoftBank and Tiger Global, which were investing heavily at the time, creating a boom in equity in start-ups. A “seller’s market”.
“Sequoia will do whatever it takes to stay ahead,” said Eric Doppstadt, chief investment officer of the Ford Foundation, Sequoia’s oldest limited partner. “They were never a company that could be accused of complacency.”
Sequoia rewards LPs for their faith. Over the past four-and-a-half years, the company has invested just $2 billion in startups, but has allocated $34 billion in cash and stock, according to a person familiar with the company’s finances.
Therefore, when the Sequoia Capital Fund is launched in 2021, almost all LPs will choose to invest their funds in it. With alternatives being ruled out from Sequoia’s future investments, some believe there is no choice.
In the ensuing months, the Sequoia fund was hit by a broader market downturn that sent tech stocks down sharply.
“I didn’t predict a huge crash, but we knew there were risks,” said one longtime limited partner.
The fund has since bounced back and outperformed the Nasdaq this year, according to a person with knowledge of the fund’s performance.
“If (the new fund) allows Sequoia to own a security that becomes a product of Google or Amazon, the early pain will be forgotten,” said one backer.
“These are fundamental changes,” said another of Sequoia’s oldest limited partners. “Cutting down the size of the company, cutting two funds, cutting ties to international entities and having a leadership change is difficult. It’s definitely a huge change for an organization and it’s too early to tell if it will be successful morning.”
Peak five years
© Josh Edelson/Bloomberg
1972
Sequoia Capital was founded by Don Valentine
1975
Sequoia Capital Invests $600,000 in Atari
1978
Sequoia Capital Invests $150,000 in Apple
1996
Doug Leone and Michael Moritz are the new leaders of the company
Year 1999
Sequoia Capital Invests $12 Million in Google
Year 2003
Roelof Botha joins from PayPal
2005
Sequoia China established
Year 2009
Sequoia Capital Leads $585,000 Round in Airbnb
2012
Sequoia Capital Leads $50M Round in Instagram
2017
Botha becomes a leader in US and European businesses
2021
Sequoia Capital Invests in OpenAI
2021
Sequoia Capital Fund Announces Establishment
2022
Botha strengthens operational global partnership
2023
Sequoia’s businesses in the U.S. and Europe, India and Southeast Asia, and China are split into separate entities
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