Venture capital’s biggest global brand is breaking up, with Sequoia’s China and India and Southeast Asia funds relaunching as new firms HongShan and Peak XV Partners.
By Alex Konrad, Forbes Staff
The world’s most storied global venture capital firm is breaking itself up. Sequoia, known for early investments in U.S. tech companies such as Airbnb, WhatsApp and Zoom in the U.S., as well as international heavyweights like ByteDance and GoTo via its China and India funds, is splitting into three fully distinct firms.
Sequoia’s global leadership confirmed the news in a letter to limited partners on Tuesday morning signed by the leaders of the three firms, Roelof Botha, Neil Shen and Shailendra Singh. The resulting firms — Sequoia Capital representing the U.S. and Europe, HongShan in China and Peak XV Partners in India and Southeast Asia — plan to complete the separation “no later than” March 2024.
In separate interviews with Forbes, the three investment heads said the decision to split up Sequoia’s global brand was a gradual discussion that intensified over the last several months. They cited conflict between the funds’ respective startup portfolios, brand confusion as they diverged in strategies and increasing complexity of maintaining centralized regulatory compliance as factors — while acknowledging, but attempting to downplay — a frostier geopolitical environment.
“Things seemed to be going in a direction where it gets harder, not easier,” Botha said. “This isn’t a retreat saying, ‘white flag, we failed.’ It’s more of a victory in the sense that we have these fully independent businesses that can go even further.”
Founded in 1972 as a $3 million fund, Sequoia became a fixture in Silicon Valley’s tech hub for its early investments in companies such as Apple
AAPL
Whereas Sequoia’s U.S. business (which has expanded to include Europe and Israel) could more recently claim standouts such as Airbnb, DoorDash, Snowflake, WhatsApp and Zoom, Sequoia China could boast of their own long list, including Alibaba and Meituan as well as TikTok parent ByteDance; the India and Southeast Asia funds could point to Byju’s, GoTo and Zomato, among others. Across its funds, Sequoia regularly placed the most partners on Forbes’ Midas List, the annual ranking of the world’s top venture capitalists, with 10 investors in 2023 led by Shen, who ranked no. 1 for the fourth time. A Sequoia investor has taken the top Midas slot in half of its 22-year history.
But from the start, Sequoia considered its regional funds largely independent, with decentralized dealflow and portfolio decision-making. Partners from one geography would not review potential deals by another’s; instead, the funds shared back-office functions including compliance, finance and investor relations, basic infrastructure and an online portal for limited partners. Investors in those different regional funds overlapped — and partners often invested personally in each other’s funds. But the regions had already diverged in some respects, the partners said, with investor relations becoming more localized, and funds setting up their own software.
Moving forward, the new firms will set up their own infrastructure, and partners will not invest in each other’s funds. Any profit sharing (as well as back-office functions) between the regional funds will cease by December 31. Sequoia declined to comment on its previous profit arrangement.
Despite decades of venture dominance, recent headlines have been less kind to Sequoia’s brand. Its U.S. and Europe unit has faced questions about an investment in Elon Musk’s new Twitter and a high-profile flameout in crypto exchange FTX. And the U.S. fund’s move in February 2022 to a different fundraising model via the Sequoia Capital Fund, which allocates capital from one massive and open-ended fund, and allows for longer equity holding periods, came just before a market correction. In a March concession, it allowed limited partners a one-time exemption to withdraw capital, the firm confirmed following a report by The Information. (A source with knowledge said it did so to provide relief for those needing access to liquidity given the market’s shift.) The fund held more than $13 billion in assets as of earlier this year, per a filing.
The China side of the business, meanwhile, has continued to grow even while the geopolitical relationship between countries in each region, particularly between the U.S. and China, has cooled. Sequoia China remains a large shareholder in ByteDance, holding a 10% position potentially worth tens of billions of dollars, as Forbes reported in May. Sequoia’s U.S. fund is also a ByteDance shareholder through growth funds it set up in past years to invest in emerging portfolio companies worldwide. ByteDance, of course, is the parent company of TikTok, which has faced numerous controversies and regulatory scrutiny from U.S. lawmakers in recent years. In 2020, former global leader Doug Leone from its U.S. and Europe fund lobbied the Trump administration on ByteDance’s behalf; last year, that fund reportedly hired a Washington, D.C.-based consultancy for help.
Shen remains a board director at ByteDance, and declined to comment specifically on that investment. But speaking generally, he rejected the notion that a separation of the funds would make it easier for China-based companies to go public, either in Hong Kong or elsewhere. “These are no longer young companies,” he said. “I don’t want to overestimate our ability to help a company IPO simply because we have meaningful ownership.”
In their separate interviews, Botha, Shen and Singh all denied that geopolitical tensions were a specific catalyst for the move. Conflict between their broadening portfolios played more of a factor, they all said. Prominent companies in each portfolio have been in direct competition in the past, such as Stripe in the U.S. and Airwallex in China, which competes with a Sequoia India company. But they’re increasingly likely as China-based and India-based businesses look to grow beyond their domestic market sooner, and the rise of remote work has blurred geographic lines. Botha told the story of a U.S.-based Sequoia portfolio company complaining recently that an Indian-based rival backed by Sequoia’s team there was telling prospective customers it was the firm’s big bet in the category.
“That’s awkward, right?” Botha said. “From a customer’s point of view, you’re trying to buy technology from the company you think Sequoia anointed, that has the weight of Sequoia behind it, but now there are two of them and it’s confusing.”
From his Singapore base, Singh noted that frustration could run both directions: he told the story of a prominent (but unnamed) U.S. tech company that complained to its Sequoia partner in the U.S. about a Sequoia India investment it believed would be competitive in the future. But Singh’s team had written their check more than a year before, he said. Sequoia India has since cashed out, without the US. unicorn ever launching a rival tool. In the current boom of artificial intelligence companies, Singh imagined similar clashes. (Sequoia is an investor in OpenAI through its U.S. fund.) “If we got locked out of important companies in our region and couldn’t invest in them because of founder conflict in AI, that would be pretty debilitating,” Singh said.
The funds were also growing apart in other ways. Despite a decade-plus of convening limited partners in one room to review new funds from all three geographies, Sequoia India and Southeast Asia and Sequoia China raised their most recent funds — a $2.85 billion fund and $9 billion respectively — independently. (Shen said that while some of that money came from U.S. institutions, it is mostly “foreign money,” with none coming from within China itself.) And while the U.S. business doubled down on early-stage investing with a $195 million seed fund announced in January, the China unit has more recently prioritized non-tech investments, including in infrastructure, as well as its hedge fund public equities practice.
Inthe U.S. and Europe, Sequoia — named after California’s famous redwood trees by the late Don Valentine, who had said he wanted the firm’s name to outlast his own — will remain Sequoia. So will remain two other independent businesses, Sequoia Heritage (an endowment-style family office) and Sequoia Capital Global Equities (a public/private crossover firm). Sequoia India’s new name, Peak XV Partners (pronounced as “fifteen”) comes from the original name for Mount Everest, Singh said. Sequoia China already went by 红杉 in Chinese, meaning redwood, and will now adopt the English transliteration of HongShan, according to Shen. “Many Chinese entrepreneurs probably don’t even know how to spell Sequoia,” he said.
Shen doesn’t anticipate his investor base shifting much as HongShan. “If investors are not comfortable with China, they don’t invest. I don’t think choosing a new name is going to make a difference. But most investors are looking at a return perspective, a performance perspective,” he said.
Because Singh’s funds were already registered in Mauritius, which he said restricts funds to fewer than 100 limited partners each, Peak XV’s limited partner base was already only partially overlapping with the other Sequoia regions. That would continue, he added. “We love Sequoia, but our brand is our relationships, and we feel our own brand is strong,” Singh said. “It will take us forward in a nice way.”
And at the remaining Sequoia, Botha scoffed at any suggestion that the firm won’t be moving forward from a position of strength (at least by its own historical standards). He’s still confident in his fellow PayPal
PYPL
Moving forward, Botha said he hoped the firms would consider each other cousins with a shared heritage, even if they will no longer have any special relationship. “It’s been an enormous success, because we ourselves were entrepreneurial and helped give rise to four additional fabulous businesses that are now leaders in their own right,” he said, referring to the businesses besides his own. And as for Sequoia Capital: “I haven’t been as excited about tech investing in the U.S. and Europe for a decade,” Botha said. “This reminds me of the early days of the Internet.”
MORE FROM FORBES
Read the full article here
