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Sequoia Capital Split: Investment Conflicts, Competitive Games, and Geopolitics.

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Could geopolitical tensions be the catalyst for this change?

Original Title: "Behind Sequoia Capital's Split: Geopolitics, Investment Conflicts, and Future Games"

Original author: Alex Konrad

Original source: TechFlow Deep Tide

Sequoia Capital, the world's most famous venture capital firm, is splitting up. Sequoia Capital is known for its early investments in American technology companies (such as Airbnb, WhatsApp, and Zoom) and its investments in international giants (such as ByteDance and GoTo) through its China and India funds. It will now be split into three completely independent companies.

The global leadership of Sequoia confirmed this news in a letter to LP on Tuesday morning, signed by the leaders of three companies, Roelof Botha, Neil Shen, and Shailendra Singh. The resulting company - representing Sequoia Capital in the United States and Europe, HongShan in China, and Peak XV Partners in India and Southeast Asia - plans to complete the separation "no later than" March 2024.

During a separate interview with Forbes magazine, the three investment managers stated that the decision to dissolve the Sequoia Global Brand was gradual and lasted for several months. They cited conflicts between the funds' respective venture investment portfolios, brand confusion caused by strategic differences, and increased complexity in maintaining centralized regulatory compliance as factors - while also acknowledging, but attempting to downplay, the harsh geopolitical environment.

"Things seem to be moving in a direction of becoming more difficult rather than easier," said Botha. "This is not surrender - 'white flag, we failed'. In a sense, this is a victory because we have these completely independent businesses that can go further."

Sequoia Capital was founded in 1972 with only $3 million in funds, and later became an important part of Silicon Valley's technology center. Through early investments in companies such as Apple, Cisco, Google, and Nvidia, its assets have grown to billions of dollars over the past few decades. In the mid-2000s, the company began setting up funds in China and India, managed by local investment partners. (It later closed its Israeli fund, which was established in 1999.) However, unlike the outstanding achievements of Sequoia's US business (now expanded to include Europe and Israel) in recent years, such as Airbnb, DoorDash, Snowflake, WhatsApp, and Zoom, Sequoia China proudly has its own long list of investments, including Alibaba, Meituan, and ByteDance, the parent company of TikTok; the India and Southeast Asia funds can identify companies such as Byju's, GoTo, and Zomato. Sequoia partners rank highest on Forbes' "Midas List," the annual ranking of the world's top venture capitalists, with 10 investors selected in 2023, and the first place is Shen (Nanpeng), who has been ranked first for the fourth time. Sequoia investors have received the highest honor on the "Midas List" for half of its 22-year history.

From the beginning, Sequoia believed that its regional funds were relatively independent, with decentralized trading processes and portfolio decisions. A partner in one geographic region would not review potential transactions in another region; instead, these funds share logistical functions, including compliance, finance and investor relations, infrastructure, and online portals for partners. Investors from different regions overlap, and partners often personally invest in each other's funds. However, partners have indicated that there have been some differences in certain areas, investor relations have become more localized, and each fund company is building its own software.

In the future, new companies will establish their own infrastructure, and partners will no longer invest in each other's funds. Any profit sharing (as well as logistical functions) will cease to be shared between funds in different regions on December 31. Sequoia declined to comment on its previous profit arrangements.

Despite Sequoia's long-standing dominance in the venture capital industry, recent headlines have not been kind to its brand image. Its US and European divisions are facing issues with investments in Elon Musk's new Twitter and failures on the cryptocurrency exchange FTX. Meanwhile, the US fund took a different fundraising approach through the Sequoia Capital fund in February 2022, which allocates funds from a large, indefinite fund and allows for longer equity holding periods, but this occurred before the market correction. According to a report by The Information, it allows limited partners to waive capital calls all at once. (One source said this was done to ease liquidity for those who needed it due to market changes.) As of earlier this year, the fund had over $13 billion in assets.

Meanwhile, Sequoia's business in China continues to grow, despite the geopolitical tensions between regions, particularly between the US and China. According to Forbes' May report, Sequoia China remains a major shareholder of ByteDance, holding approximately 10% of the shares, potentially worth billions of dollars. Sequoia US Fund is also a shareholder of ByteDance, investing in emerging portfolio companies globally through its growth funds established in recent years. Of course, ByteDance is the parent company of TikTok, which has faced multiple controversies and regulatory scrutiny from US lawmakers in recent years. In 2020, Doug Leone, the former global leader of Sequoia, lobbied the Trump administration on behalf of ByteDance on its US and European funds; last year, the fund reportedly hired a consulting firm in Washington, DC to provide assistance.

Neil Shen is still a board member of ByteDance and declined to comment specifically on this investment. However, in general, he opposes the view that separating funds will make it easier for Chinese companies to go public in Hong Kong or elsewhere. "These are no longer young companies," he said. "I don't want to overestimate our ability to assist a company's IPO just because we have substantial ownership."

In their respective interviews, Botha, Shen, and Singh all denied that geopolitical tensions were the specific catalyst for this change. They all stated that conflicts between expanding investment portfolios played a larger factor. Well-known companies in each portfolio have directly competed in the past, such as Stripe from the United States and Airwallex from China, which competed with a company supported by Sequoia India. However, as Chinese and Indian companies increasingly seek to expand beyond their domestic markets and remote work becomes more prevalent, this situation is becoming more likely, blurring geographical boundaries. Botha recounted a recent complaint from a Sequoia investment portfolio company based in the United States, stating that an Indian competitor supported by the Sequoia team told potential clients that this was the company's big bet in this category.

"This is awkward, isn't it?" said Botha. "From the customer's perspective, you are trying to purchase technology from a company that you believe is designated by Sequoia, with Sequoia's influence behind it, but now there are two, which is confusing."

Singh pointed out that frustration can occur in both directions: he recounted a well-known (but unnamed) American technology company complaining to its Sequoia partner in the United States that it believed Sequoia India's investment would be competitive in the future. But Singh said his team had written a check more than a year ago. Sequoia India has withdrawn. In the current boom of artificial intelligence companies, Singh imagines similar conflicts. (Sequoia Capital invested in OpenAI through its US fund.) "If we are excluded from investing in important companies in our region due to conflicts among AI founders, the result will be very destructive," Singh said.

These funds are also diverging in other ways. Although limited partners from three geographic regions have gathered in a room to review new funds for over a decade, Sequoia India and Southeast Asia and Sequoia China have independently raised their most recent funds - $2.85 billion and $9 billion respectively. (Shen Nanpeng) said that although some of the money came from US institutions, it was mainly "foreign capital" and did not come from China itself. Although the US business announced a $195 million seed fund in January this year, with a focus on doubling down on early-stage investments, the Chinese business has recently focused more on non-tech investments, including infrastructure, as well as its hedge fund public stock practices.

In the United States and Europe, the redwood named after the famous California redwood tree will continue to retain its name, which was proposed by the late Don Valentine, who expressed the hope that the name of the company would last longer than himself. Redwood Heritage (a philanthropic family office) and Redwood Capital Global Equities (a public/private crossover company) will also continue to exist as independent businesses. The new name for Sequoia India, Peak XV Partners (pronounced "fifteen"), comes from the original name of Mount Everest, Singh said. According to Shen, Sequoia China has already been using the Chinese name "红杉" (meaning redwood tree), and will now adopt the English transliteration "HongShan". "Many Chinese entrepreneurs may not even know how to spell Sequoia," he said.

Shen (沈南鹏) does not believe that there will be a significant shift in his investor base due to HongShan. "If investors are not comfortable with China, they will not invest. I think choosing a new name will not have any impact. But most investors consider things from the perspective of returns and performance," he said.

The Singh Fund has been registered in Mauritius, where the fund is limited to less than 100 limited partners. The limited partner base of Peak XV only partially overlaps with other Sequoia regions. Singh added that this situation will continue. "We love Sequoia, but our brand is built on relationships, and we believe our own brand is strong, which will propel us forward in a positive way," said Singh.

As for the split Sequoia, Botha scoffs at any comments that the company will not continue to move forward from a position of strength (at least according to its own historical standards). He remains confident in his PayPal alumni network and South African compatriot Musk, saying, "See what happens on Twitter," and stating that FTX, while "unfortunate," is only a small loss for a fund with "multiple other winners." He says that even if this means the company continues to hold some company stocks that have gone public and subsequently dropped in price, he does not regret the shift in the model of the Sequoia fund. "Can we distribute everything? If you look at the performance of our fund and the companies we support, it's hard to say we're in a weak position," he argues.

Looking to the future, Botha expressed his hope that the two companies will see each other as cousins with a shared heritage, even if they no longer have any special relationship. "This is a huge success because we ourselves are entrepreneurs who have helped give birth to four other outstanding companies, which are now leaders in their own right," he mentioned other companies besides his own. As for Sequoia Capital: "I haven't been this excited about technology investments in the US and Europe in ten years," Botha said. "It reminds me of the early days of the internet."