In 1972, a VC firm was started with a modest $3 million fund. Many years later, it was a renowned player in Silicon Valley’s tech space with investments in organizations like Apple, Google, Zoom, Instagram and Nvidia. It expanded globally, going to places like China and India and becoming powerhouses in those regions as well. In China, it funded companies like Alibaba and ByteDance and in India and the general SEA region, it funded companies like Zomato, BharatPe, CarDekho, OYO, Blinkit, BYJU’s and more. This VC firm was Sequoia and while it seemed to operate independently in different regions, there was solid shared infrastructure. Maybe, no longer, though.
Sequoia Capital has decided to split into three independent entities: The US area would have Sequoia Capital US, the China area would be called HongShan and the SEA area would be called Peak XV Partners.
The VC fund announced in June 2023 that years of diverging strategies and growing market leadership in different regions compelled the enterprise to split into three independent funds. The US arm of Sequoia Capital has directed its focus towards early-stage investments, whereas China has prioritized non-tech ventures such as infrastructure and public equities. According to Sequoia, the varying approaches pursued by these entities have played a role in the decision to split, allowing each entity to customize its investment focus and approach based on the unique market dynamics and opportunities within its respective region.
Sequoia Capital India & SEA’s MD Shailendra Singh stated that the firm would continue to be managed by the current leadership team and would continue to invest from the most recently raised set of funds focused on India and SEA. And why not? Since their inception, Sequoia Capital (US/Europe), Sequoia China, and Sequoia India & SEA have operated as separate entities with independent investment decision-making. However, due to brand confusion and conflicts in portfolios, the leaders of each business have decided to establish fully independent partnerships with distinct brands, aiming to better serve founders and Limited Partners.
It may be that the India and China entities have become market leaders, leading to increased complexity in running a decentralized global investment business. Representatives have also mentioned that central back-office functions have proven to be more hindrances than advantages in this dynamic situation.
Could it be that this move acknowledges the growing significance of Southeast Asia and India? Does it align with a maybe-always-believed understanding of a multidimensional world, where different regions exhibit distinct market potential? By establishing specialized entities and tailoring their strategies, maybe, there could be a significant impact on these markets and empower innovative entrepreneurs in these thriving regions.
But, is it all about freedom and empowerment and being your own thing? Maybe, it’s, also, about fraudulent issues that Sequoia India has faced. If the overall Sequoia Capital is known for integrity and trust, could some fraudulent activities of Sequoia India’s portfolio companies hurt the overall reputation? This includes the governance issues and allegations of financial fraud against co-founders in several Indian and Southeast Asian portfolio companies, like BharatPe, Trell, GoMechanic and Zilingo, maybe further prompting the need for a strategic realignment to address corporate governance concerns and maintain the trust of investors. At the same time, Sequoia was a major backer of crypto exchange FTX, which spiralled out of control, leading to an apology letter that was sent to LPs.
Additionally, unsuccessful startup IPOs and delays in IPO preparations may have shown the Indian public markets to be very competitive and difficult. Major venture investors no longer have as many alternatives to earn returns on their investments in India as they once did. Sequoia Capital may have had to reconsider its strategy and consider dividing its operations in order to maintain its recognizable brand and successfully navigate the changing business environment, as a result of the confluence of these difficulties, including the fraud cases and the difficult Indian market.
Furthermore, conflicts arising from broadening portfolios and overlapping investments have also played a role in the decision to split. Portfolio companies from different regions may be competing with each other, creating potential conflicts and awkward situations. By establishing independent entities, maybe, these conflicts could be mitigated and provide greater focus and support to startups within each region.
For instance, Peak XV has invested in Druva, which overlaps with the business model of Cohesity, a Sequoia US portfolio company. Peak XV’s portfolio includes companies like Sirion Labs (which competes with IronClad), Atlan Data (which competes with Stemma), Clevertap (which competes with Kahuna) and Pingsafe (which competes with Wiz). And China’s portfolio has ByteDance, which competes with Josh.
And also, it could be due to issues with China. US President Joseph Biden has been working towards restricting the flow of US dollars into China. This strategy could, maybe, hinder China’s development of some technology, with a plan to curb foreign investments in China.
At the same time, there have also been reports of underperforming returns. A Twitter thread from Eric Newcomer mentions that the $65 billion Texas investment fund UTIMCO put about $100 million into the Sequoia Capital Fund and that investment is down about 20%. Though, some argue that a negative 20% IRR in year 1 may be standard.
That being said, with all this talk of independence, could the separate firms handle the economics?
No, seriously, what about the economics?
A VC firm like Sequoia has partners pool their money together to invest in these startups. The company hopes that by investing in a startup, the startup will succeed and make a lot of money in the future.
The management fee is similar to the regular compensation that the partners of the venture capital company receive for their efforts in overseeing the firm’s operations and investments. It often represents a portion of the total sum that the partners have contributed to the venture capital fund. For instance, if the management charge is 5% and the total amount invested by the partners into the VC fund is 100 rupees, the firm would earn 5 rupees as a management fee. This fee aids in the VC firm’s ability to maintain operations and pay its bills.
There’s also the carry structure. When the VC firm and its partners invest in startup companies, they hope that these startups will become successful and make a lot of money in the future. The carry structure is a way for the partners to share in that success. When a startup that the VC firm invested in becomes successful and makes a profit, the partners receive a portion of that profit, which is called the carry, which is like a special bonus for the partners. The carry is usually a percentage of the profit, and it’s determined when the VC fund is set up. For example, if the carry is 20% and the startup makes a profit of 1000 rupees, the partners would receive 200 rupees as their share of the carry.
So, Sequoia Capital is said to have a 3% management fee and a 30% carry structure. Sequoia’s Indian partners may not get that anymore and may have to go for a 2% management fee and 20% carry structure, which is said to be the industry standard. And international LPs may not want to spend as much money in India and Southeast Asia in the future. Before, there was a cross-sharing of carry, but this split could change everything. That being said, this would give each regional entity more flexibility for pursuing its own investment opportunities.
And with the changing market landscape and AI dominating the 2023 headlines, could there be a change in the mindset of potential conflicts this year? And how will this split affect the broader VC landscape? Would other global firms re-evaluate their strategies based on this?
Breakups are never all that fun. Sure, sometimes it’s for the best of the concerned parties, but it’s still the end of a union. The Sequoia split may be something that affects the tectonic plates of the VC landscape and when more and more VC firms are looking to step it up and rebrand and find new ways to be different, this is something completely different.
The cost of not being independent is often discussed, well, what is the cost of independence and paving your own way?
A sequoia tree is one of the hardiest and sturdiest trees in the world, with a thick bark that makes them resistant to fungal rot, flame-resistant and which cannot be torn apart by wood-boring beetles. Basically, that makes them super resilient. But, what happens when that tree divides itself into three? Can they keep themselves standing upright? Do they become SINO: Sequoia In Name Only? Or is this the tale of other firms that have gone their own way and managed to stay shining? All eyes on the three, anticipating the future.
The Sequoia Split: When A Cult VC Firm Breaks – Rizing (substack.com)
