Sequoia Capital Plan Restructuring: Proposed establishment of evergreen funds

A few days ago, Sequoia Capital revealed a blockbuster news in the form of an open letter. Sequoia Capital announced that the company plans to reshape the investment structure through sequoia funds, reorganize Sequoia Capital around a single permanent structure, and establish The Sequoia Fund. The fund will hold all of its investments in the U.S. and Europe, including shares in public companies.

Bold innovation

Sequoia Capital mentioned that since 1972, we have been at the forefront of the times, witnessing visionary business and technology leaders pushing the limits of what's possible. And that's just the beginning.

Venture capital innovation hasn't kept pace with the companies we serve. Our industry is still constrained by the rigid 10-year fund cycle that began in the 1970s. As chips shrink and software flies to the cloud, venture capital continues to operate on the equivalent of floppy disks. Once upon a time, the 10-year fund cycle was reasonable. But the assumptions it is based on no longer hold, prematurely weaken meaningful relationships and misalign the company and its investment partners.

The best entrepreneurs want to make a lasting impact on the world. Their ambitions are not limited to 10 years. Patience and long-term partnerships can produce extraordinary results. For Sequoia Capital, the 10-year fund cycle is obsolete.

Based on this, Sequoia Capital announced that it will make "the boldest innovation to date to help the founders build together in an enduring company in the 21st century." ”

Next, Sequoia Capital's limited partners will invest in Sequoia Funds, an open-ended liquid portfolio. Sequoia Funds will in turn allocate funds to a series of closed-end sub-funds for venture capital at each stage, from inception to initial public offering. The returns from these ventures will flow back to sequoia funds in a continuous feedback loop. Investments will no longer have an "expiration date".

Sequoia Capital said that this new structure completely eliminates the artificial time frame set by all people in the fund's cooperation with enterprises, "which allows us to help them fully realize and realize the value potential of the enterprise over the course of several decades." Sequoia can hold public stock long after a corporate IPO and seek the best long-term returns for LPs, most of which are nonprofits and endowment funds. "In the future, sequoia funds will focus on creating long-term incremental value for member companies and LPs.

"Unlimited Games"

Usually, the Evergreen Fund does not have a fixed duration or has a long duration. From this point of view, compared with the existence of limited funds, the competitive advantage is obvious. Usually, the fund generally invests and withdraws for 10 years (the general duration of domestic existence is 7-9 years or even shorter, foreign is 12-14 years), and the proceeds obtained therefrom are returned to the investors of the fund. Evergreen Fund hopes that the investment project has been held until the value is maximized, the investment project does not have to worry about exit pressure, after the company is listed, as long as the business development prospects can be expected, the fund can continue to hold, especially the Internet company continues to grow rapidly for a long time after listing.

Buffett mentioned at a shareholder meeting in 2010 that PE investment is a bad model for value-seeking people. He gave an example: an investment institution invested in a company, invested for 4-5 years, sold it and raised a second fund, bought the company back after three years, held it for 4-5 years and sold it again, each holding was about 5-6 times, but it missed several times in the middle, so it may actually be fifty times the return, but only twenty times. Did not enjoy this kind of super return from long-term compound interest.

The Evergreen Fund has also designed mechanisms to improve the liquidity of LPs. Every once in a while (usually 5-7 years, 4-5 cycles, e.g. today's capital fund is 28 years), the LP can ask for an exit. This is done by assessing the valuation of the project company as a basis for payment to the LP, while paying dividends to the general partner (GP). This design makes it easier for LPs to adjust committed capital, and its openness and flexibility make many LPs more reassuring. Exit requires an assessment of the valuation of the portfolio at that time. The valuation of the project company is the main challenge of the Evergreen Fund, but it can be agreed with the LP in advance, and the valuation is evaluated by third-party bidding, the profit of the project company, or by a mutually recognized third party; but in general, the LPs of the Evergreen Fund are long-term investors, and most of the LPs who invest in the Evergreen Fund value the long-term concern of such funds to the project company, rather than the short-term DPI, so they often do not immediately ask for cashout within a few years after the establishment of the fund. But if many LPs require cash-out, fund operations will encounter great challenges.

In terms of the investment cost of LPs, Evergreen Fund also has certain advantages. There has been a lot of discussion in the market about how the fees of the fund standard 2-20 have evolved. One of the strategies that has attracted widespread attention is the evergreen fund structure, for LPs, because there is no duration, the GP only needs to set up a fund instead of several consecutive periods of funds, charging only a single management fee, which is beneficial to the LP of continuous investment, reducing costs while preventing "capital rent-seeking" and financial leverage.

For fund operations, evergreen funds can focus on value creation in the long term compared to ordinary funds. For example, there is no pressure to continuously raise funds, of course, it also avoids many cumbersome transactional work in the fundraising process, and can focus on the investment itself. At the same time, there is no pressure to exit the term, and the asset is sold in particular (sometimes at a discount) to meet the pressure on the short-term investment period.

For entrepreneurs, capital is more patient, and in theory, it can help entrepreneurial teams to put the sunshine farther away and pursue a larger vision. GPs do not have the pressure to invest a certain amount of money in a few years, and can be slowly watched and slowly selected, which is not good for projects that need rapid financing and teams that use time pressure as bargaining chips.

In recent years, traditional private equity funds have been increasingly challenged, with high management fees, lack of liquidity for LP investments, and the fact that the best companies were sold first has made many institutional investors dissatisfied with the standard fund structure. In the long run, fund structures and strategies are becoming more diversified, allowing startups to find the best source of capital to meet their needs, choose the growth goals and business strategies that best suit the business, and give institutional LPs more allocation options.

epilogue

Under the regulatory framework of the United States, Sequoia Capital's vision is extremely innovative, while unifying institutional brands and fundraising channels, it is likely to give the primary market investment that lacks liquidity the possibility of high liquidity, but under the domestic framework, it is limited by regulatory red lines such as capital pooling and nesting, and lacks the practical reality of practice.