- Silicon Valley leaders are divided over Sequoia’s new VC fund structure.
- Some call the move a “gamechanger” that will have major ripple effects across the entire industry.
- Others say it is “convoluted,” and will damage long-term relationships with large institutional LPs.
Sequoia Capital just made an important chess move in revamping its fund structure, but those in venture capital are split on whether it will have an outsized impact on the rest of the industry.
The firm recently announced it will dramatically restructure its US and European investments into a single fund, called The Sequoia Fund, eliminating the traditional 10-year fund cycle in which limited partners expect to get paid back.
“Innovations in venture capital haven’t kept pace with the companies we serve,” Sequoia Partner Roelof Botha wrote in a blog post.
One school of thought is that Sequoia’s move is a “gamechanger” that will likely cause major ripple effects across the rest of the industry, according to venture capital peers, LPs, and startup founders.
In particular, the ability for LPs to get their money back from the fund annually means they’ll have more
liquidity
options over a shorter period of time, compared to the old fund model.
“We’re also supportive of increased flexibility of allowing LPs to get their money out and actualize returns,” said Beezer Clarkson, a partner at Sapphire Partners, an LP in venture funds.
She also anticipates many more VC fund structures to follow Sequoia’s lead, particularly as the tax code continues to evolve. The Biden administration is currently proposing a tax increase on carried interest income, a major threat to how the vast majority of VCs make their fortunes.
Box CEO Aaron Levie said Sequoia is doing something that should have happened in venture long ago because Tiger and Coatue have proven that the model of bridging public and private investing works.
Sequoia already holds around $45 billion of US and European public equities, including shares of companies like Airbnb, money that it will put back into The Sequoia Fund, according to Axios.
The move will help Sequoia boost returns because it can hold onto public companies indefinitely, instead of distributing funds back to LPs. At the time of their IPOs, Sequoia-backed companies like ServiceNow, Square, Snowflake and
Zoom
were collectively worth around $43 billion, according to PitchBook data, far less than the current $100 billion-plus valuation of just one of those companies.
Sequoia, though, is no stranger to a crossover fund. It’s operated the Sequoia Capital Global Equities fund since 2009 with investments in late-stage private companies and public companies.
Sequoia says the fund changes won’t immediately apply to investments in India or China. But its China arm reportedly launched a hedge fund focused on health and biotech stocks in August, a sign that the line between public and private market investing in the region is already blurring.
Sequoia’s fund revamp also indicates that it will become more of a long-term capital allocator like Warren Buffett, a move the top quartile VC firms will be forced to follow, said Xavier Helgesen, co-CEO of Enduring Ventures, a long-term holding company modeled after Berkshire Hathaway.
“Mediocre VCs that are fat and happy on 2/20 [2% annual management fee and 20% carry] are gonna suffer and that is good for the market,” said Helgesen. This is Sequoia’s way of telling other VCs to “level up or get out of the game,” he added.
On the other hand, Brandon Brooks, a founding partner at Overlook Ventures says Sequoia’s decision will have very little impact on the VC model and doesn’t expect other investors to follow suit.
“I really don’t see any VCs considering this model. It’s convoluted, not cost-efficient and ultimately I see it damaging relationships with large institutional LPs who will lose out on the money over time,” said Brooks.
Other investors say the fund strategy shift is a sign the iconic VC firm is becoming more like Tiger Global and other hedge funds, except Sequoia will nurture companies instead of just providing capital.
This will be an important distinction that will ultimately prove to be a differentiating factor in Sequoia’s favor, said Hoxton Ventures investor Hussein Kanji. “Trees live longer than tigers and are a lot harder to take down,” he said.
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