Sequoia Capital has just exploded the venture capital fund model

Sequoia Capital, one of the oldest and most successful venture capital firms in the world, forms a single fund to hold all of its U.S. and European investments, including stakes in publicly traded companies, Axios has learned.

Why is this important: Venture capital is the money of innovation, but the industry itself rarely innovates. This is a radical exception.

  • “We believe that the VC model is obsolete”, explains Roelof Botha, partner of Sequoia. “It creates a strange dynamic between us and the founders, where on the eve of an IPO, they ask if we’re going to have to quit their boards and quickly distribute the stock. Why should this be the default, in especially when this is the case a lot of value creation happens later? “

Details: The Sequoia Fund will serve as a variable capital vehicle; the sole sponsor of all future Sequoia “sub-funds” (seed, venture capital, growth, etc.). The sub-fund managers will decide when to contribute assets to The Sequoia Fund, optimizing their own return profiles.

  • Limited partners will keep accounts with the Sequoia Fund, with annual redemption rights, and will make allocation requests to the sub-funds from these account balances. In other words, closed funds and open funds will feed continuously.
  • The sub-funds will maintain Sequoia’s premium structure, including a 30% deferred interest, while the Sequoia fund will have management fees below 1% and long-term performance fees with what I’m told. said to be “a very high obstacle”.
  • Sequoia employees will contribute at least 5% of The Sequoia Fund’s capital.

Following: Sequoia also plans to become a registered investment advisor, which could allow it to expand its investments in areas such as crypto and secondaries. The company also told investors that it never plans to go public.

  • These changes will not immediately apply to Sequoia’s investments in India or China, such as ByteDance, owner of TikTok, although these platforms could eventually be integrated.

The why : Sequoia argues that all of this is designed to better align the interests between itself and the founders, and itself and its limited partners.

  • In terms of founders, the argument is being able to stay involved and invested long after a company has gone public. Roelof Botha, for example, remains on Square’s board of directors.
  • In terms of LPs, Sequoia believes the traditional fund structure made it sell stocks too early (including in companies like Google). Internal analysis of distributions over the past 15 years shows that if Sequoia had held stocks for just another 12 months, it would have generated over $ 8 billion in additional returns.

Tax consequences: Sequoia currently owns around $ 45 billion in U.S. and European public equities, at a cost of just $ 2 billion, and has already agreed to invest a large portion of it in the Sequoia fund (including shares of companies like Airbnb ).

  • The company believes it has crystallized the tax treatment of deferred interest on these transfers, when all future transfers would be at contemporary tax rates. Expect the IRS to look at Sequoia’s analysis in great detail.

Chronology: The firm began discussing this concept almost a year ago, in consultation with a select group of sponsors. Earlier this year, he asked LPs to approve some high-level structural changes, without providing details, and last Monday the details were shared. LP briefings are scheduled for tomorrow and Thursday.

  • Axios spoke to three longtime Sequoia LPs, each of which supported the movement. Part of the reason is that selling shares is the responsibility of Sequoia, rather than LPs (some of whom may not have active public equity offices), but the larger part is that Sequoia has never really taken them wrong before.
  • One of the concerns is increased volatility, as the value of the Sequoia Fund could be significantly affected by fluctuations in technology stocks. It’s not something that CR portfolio managers typically deal with on a quarterly basis.

The bottom line: Venture capital is often a matter of quick follow-up, and rival firms may have called management meetings before coming to the end of this story. But there’s a good chance that Sequoia will be the one to make these kinds of changes, due to its outsized public holdings and unrivaled brand reputation.


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