Sequoia Capital is divided into three, what are the considerations behind the "split" of venture capital giants?

Produced by Radar Finance Hongtu Text|Meng Shuai Editor|Deep Sea

Sequoia Capital, known as "the world's most successful venture capital institution", is about to "split".

According to Sequoia Capital's plan, Sequoia Capital will achieve independent operation of Sequoia China, India/Southeast Asia, and local funds in Europe and the United States by March 31, 2024, and conduct business under different brands.

Radar Finance learned that Sequoia Capital, which originated in Silicon Valley, was founded in 1972. More than 30 years later, in 2005, Sequoia Capital joined hands with Shen Nanpeng to officially enter the Chinese venture capital industry, and Sequoia India/Southeast Asia followed suit. Among them, Sequoia China, helmed by Shen Nanpeng, has not only gained a reputation but also made a lot of money by relying on multiple investments in the Chinese Internet track.

Unlike Sequoia China, Sequoia America and Europe have been in a bad situation in recent times, with a series of problems such as falling asset values, failed investment Twitter, and FTX bankruptcy weighing on Sequoia America and Europe. Compared to the first two, the market for Sequoia India/Southeast Asia is still at a relatively early stage. Some analysts believe that the inconsistency of the development pace of Sequoia in the three major markets of China, the United States and Europe, and India/Southeast Asia may accelerate the process of Sequoia Capital spin-off to a certain extent.

Global venture capital giant Sequoia Capital "split into three"

Sequoia Capital is about to usher in the era of "tripods", and in the recently released "Letter to the Founders of Sequoia China's member companies", Sequoia China revealed more details.

Specifically, Sequoia China will continue to use the "Sequoia" Chinese brand name and adopt the new English brand name "HongShan", Sequoia America and Europe will continue to use the "Sequoia Capital" brand name, and Sequoia India/Southeast Asia will use the new brand name "Peak XV Partners".

As soon as the news of Sequoia Capital's spin-off came out, it immediately attracted the attention of many people in the venture capital circle. Sequoia Capital believes that the flexibility brought by different brands can allow each region to create more value for founders and LPs serving each region.

Why is the news of the sequoia capital spin-off so much attention? In fact, Sequoia Capital has a lot of origins. Globally, Sequoia Capital, together with SoftBank and Tiger Global Fund, is known as the "Big Three" of venture capital institutions.

In the list of "2022 Hurun Global Venture Capital Institutions" released by Hurun Research Institute in September last year, Sequoia Capital topped the list. With its investment in 328 unicorn and gazelle companies around the world, Sequoia Capital successfully won the honor of "The World's Most Successful Venture Capital Institution".

Even well-known leading venture capital institutions such as SoftBank, Tiger Global Fund, Tencent, CICC Capital, Goldman Sachs, Hillhouse Capital, IDG Capital, and Matrix Partners Venture Capital are not as large as Sequoia Capital's investment scale. Taking the four well-known leading venture capital institutions ranked 2nd to 5th on the list as an example, the number of unicorn and gazelle companies invested by SoftBank, Tiger Global Fund, Tencent and CICC Capital in the same period was 217, 196, 122 and 115 respectively.

Compared to these rivals, Sequoia Capital is far ahead in investing in unicorn and gazelle businesses. Compared with itself, Sequoia Capital's investment scale is also growing. In just half a year, the number of unicorns in which Sequoia Capital participated increased by 28, and the number of gazelles participating in the investment increased by 15.

Further sorting out Sequoia Capital's past investment projects can be described as a rich record. Now the world's leading star enterprises, behind Sequoia Capital is not a few.

As a world-renowned venture capital giant, Sequoia Capital's story can be told in the seventies. In 1972, in the realm of Silicon Valley, a world-renowned high-tech industrial zone and a place of talent gathering, Don Valentine founded Sequoia Capital. With a series of amazing investment cases, Don Valentine was praised as the "father of Silicon Valley venture capital" by the industry and outside.

In Don Valentine's view, investing in a company with a huge market demand is better than investing in a company that needs to create market demand. Don Valentine's investment philosophy is also interpreted by the outside world as "betting on the track, not the racer".

Under this investment philosophy, Sequoia Capital discovered the PC pioneer Apple Computer in the mainframe era; When PCs were booming, Sequoia Capital cultivated network equipment companies 3Com and Cisco; When the Internet era came, forward-thinking Sequoia Capital invested in Yahoo and Google.

In addition to the aforementioned companies, star projects such as PayPal, LinkedIn, YouTube, Instagram, WhatsApp and Airbnb have also been deeply branded with Sequoia Capital.

Shen Nanpeng: The "King of Venture Capital" behind Sequoia China

Among Sequoia Capital's huge territory, Sequoia China is most closely related to Chinese enterprises. Radar Finance learned that Sequoia China was founded by Sequoia Capital and Shen Nanpeng.

As the founder of Sequoia China, Shen Nanpeng has studied at Shanghai Jiaotong University, Columbia University, and Yale University. After entering the society, Shen Nanpeng successively worked for Citibank, Lehman Brothers Asia and Deutsche Bank.

Before founding Sequoia China with Sequoia Capital, Shen Nanpeng also had a glamorous entrepreneurial resume. In 1999, Shen Nanpeng, Liang Jianzhang, Ji Qi and Fan Min joined hands to start a business, successfully building Ctrip, which now has a leading position in the domestic online travel market. In 2002, Shen Nanpeng founded the Homeinns hotel chain, and then Homeinns successfully knocked on the door of NASDAQ.

A number of successful entrepreneurial experiences have made Shen Nanpeng's reputation in the industry more and more famous. In 2005, Shen Nanpeng resolutely left Ctrip. He hit it off with Sequoia Capital and created Sequoia China, which will have a profound impact on China's Internet industry.

However, Sequoia China was founded much later than Sequoia Capital. In 2008, Shen Nanpeng led Sequoia China to successfully raise RMB funds, making Sequoia China one of the first venture capital institutions in China to open dual-currency investment.

Although Sequoia China was launched more than 30 years later than Sequoia China, Sequoia China's track record in the investment community is also outstanding. Tianyan investigation shows that up to now, Sequoia China has accumulated as many as 1,231 public investment events, with 215 managed funds and 119 foreign investment funds.

The lineup of Chinese companies that Sequoia China has bet on can be described by the word "luxury". On Sequoia China's official website, the list of invested companies has many pages: Alibaba, JD.com, Ant Financial, ByteDance, Didi Chuxing, iQiyi, NIO, Sina, 360, Vipshop, Pinduoduo, Kuaishou...

Because Sequoia China has successively "betted" on a number of leading companies, some media have commented that Shen Nanpeng is "a man who bought half of China's Internet". With his outstanding record in Sequoia China, Shen Nanpeng has also repeatedly topped the Forbes list of the world's best venture capitalists.

According to Sequoia China, in the course of development in recent years, Sequoia China's investment direction has become more extensive and diverse than before. In addition to the technology industry, which it was good at, Sequoia China has also begun to lay out areas that were less involved before, such as medical health and traditional consumption. In addition, Sequoia China has established a new infrastructure fund to invest in infrastructure in China's new economy industries, and in recent years has begun to develop M&A investments.

In this spin-off, Sequoia China's Chinese name has been retained, but its English name will be changed from Sequoia's English word "Sequoia" to Sequoia's pinyin "HongShan".

For the name change, some voices believe that it will have a certain impact on Sequoia China's brand influence in the short term, but Shen Nanpeng believes that Sequoia China chooses a new name to make any difference, most investors still take return and performance as the biggest factors to consider.

The difference in the development of the three entities, or accelerate the "separation" of Sequoia

In the more than 50 years since Sequoia Capital was founded, Sequoia Capital's business entities and teams in various regions have become leaders in the local market. So what does this spin-off mean for Sequoia Capital?

In fact, in recent years, as Sequoia Capital's stall has become larger and larger, how to manage and operate a decentralized global investment business has become a problem that Sequoia Capital has to face. For example, Sequoia Capital's more in-depth localization in various regions has made the global centralized operation model of some back-office functions gradually become a burden rather than an advantage.

At the same time, as Sequoia Capital invests in companies in different regions go international and compete for industry leadership positions on a global scale, it is inevitable that there will be some competition between these companies, and the sharing of the same brand in each Sequoia region has also caused some problems for these founders and member companies.

"In the face of these complexities, we need to go even further and embrace a local-first strategy to achieve our mission in all regions and stay ahead of the curve. As a result, Sequoia Global has decided to achieve full regional independence and operate under different brands by March 31, 2024," Sequoia China said in a letter to the founders of Sequoia China member companies.

Roelof Botha, Shen Nanpeng and Shailendra Singh, the main heads of Sequoia Capital's three regions, also revealed in interviews that the decision to spin off Sequoia's global brand was actually formed in continuous discussions. They also noted that the split of Sequoia was primarily due to conflicts between Sequoia Capital's fund's respective startup portfolios, unclear brand positioning due to strategic divergence, and increasing complexity of regulatory compliance.

It is worth mentioning that although Sequoia Capital's three regional sub-brands are three brothers of one mother, in fact, the current operation of the three of them is different. Compared with the rapid development of Sequoia China in recent years, the current situation facing Sequoia America and Europe is not optimistic.

According to the Q4 2022 Global Venture Capital Report, in the fourth quarter of last year, global venture capital showed a downward trend for the fourth consecutive quarter. In the third quarter of last year, the size of global venture capital reached $102.2 billion in 9,767 transactions, but by the fourth quarter of last year, global venture capital investment had fallen to $75.6 billion in 7,641 transactions, the lowest level since the second quarter of 2019.

Among them, venture capital investment in the Americas, Asia and Europe decreased from 4,022 transactions of US$49.6 billion, 3,052 transactions, US$30.4 billion and 2,476 transactions of US$21.2 billion in the third quarter of 2022 to US$39.2 billion of 3,322 transactions, US$22.6 billion of 2,157 transactions and US$12.9 billion of 1,936 transactions in the fourth quarter.

At the same time, the value of investment exits also fell sharply year-on-year, from 4,174 investment exit transactions of US$1.427 trillion in 2021 to 2,997 investment exit transactions of US$308.8 billion in 2022. The decline was most pronounced in the United States, where the total exit value fell from US$753.2 billion to US$71.4 billion.

According to media reports, as of March this year, in addition to the cash allocated to LPs, the value of Sequoia America's assets fell 38% in nine months to $53.2 billion, which means that the company's asset value has been caught up by the junior A16Z.

In October 2021, Sequoia announced the establishment of a single, perpetual fund in the U.S. and European markets called the Sequoia Evergreen Fund, for which it will no longer have a duration period. As of May 2 this year, the five major holdings of Evergreen Fund, Snowflake, Unity, DoorDash, Robinhood and UiPath have all plummeted compared with the initial stock price.

In the second half of last year, Sequoia Capital promised to provide an $800 million investment for Musk's acquisition of Twitter, which is not considered a good deal. After Musk acquired Twitter, Twitter's valuation went all the way down. According to media reports, Fidelity recently adjusted its equity valuation for Twitter. Compared with the price Musk paid at the time of the acquisition, Fidelity believes that Twitter's current valuation is only 1/3 of that time.

The bankruptcy of FTX also caused Sequoia America to suffer huge losses. According to Sequoia Capital, its two funds invested US$150 million and US$63.5 million in FTX.com and FTX US, respectively. With the bankruptcy of FTX, the funds invested by Sequoia in the early stage were lost.

Some analysts pointed out that in the long run, Sequoia Capital's spin-off has far-reaching significance. In the early days, entities in multiple Sequoia regions shared the same brand, which could maximize synergy and brand effect. However, as the degree of business development in each region has diverged, the differences between different Sequoia entities have become more apparent. Therefore, after the spin-off, Sequoia Capital's business in each region will be more flexible and open, and it will be better able to adjust to the different market environments in each region.

Compared with the US, Europe and China markets, Sequoia India/Southeast Asia is relatively weak in size and scale, and the local emerging markets are in the early stage of innovation and entrepreneurship as a whole, and there is more room for development. Therefore, spinning it out allows it to grow more independently and explore the local entrepreneurial ecology more autonomously.