Author: Alex Konrad; Compiler: Deep Tide TechFlow

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

Sequoia's global leadership confirmed the news in a letter to LP on Tuesday morning, signed by the leaders of the three companies Roelof Botha, Neil Shen (Shen Nanpeng) and Shailendra Singh. The resulting firms — Sequoia Capital representing the US and Europe, HongShan representing China and Peak XV Partners representing India and Southeast Asia — are scheduled to complete the separation “no later than” March 2024.

In separate interviews with Forbes magazine, the three investment chiefs said the decision to dissolve Sequoia's global brand was gradual and took several months. They factor in conflict between the funds' respective startup portfolios, brand confusion resulting from strategic divergences and the added complexity of maintaining centralized regulatory compliance -- while acknowledging, but trying to downplay -- a harsher geopolitical environment. **

"Things seem to be going in the direction of getting harder, not easier," Botha said. "It's not a capitulation — 'white flag, we've failed'. It's a victory in a sense because we have these completely independent businesses that can go so far."

Founded in 1972 with only a $3 million fund, Sequoia has since become an important part of Silicon Valley's technology hub, expanding its assets to $1,000 in the ensuing decades through early investments in companies such as Apple, Cisco, Google, and Nvidia. billions of dollars. In the mid-2000s, the firm began setting up funds in China and India, managed by local investment partners. (It later closed an Israel fund established in 1999.) But unlike Sequoia's U.S. business (which has now expanded to include Europe and Israel) in recent years with standouts like Airbnb, DoorDash, Snowflake, WhatsApp, and Zoom, Sequoia's China proudly has its own long list of investments, including Alibaba, Meituan and TikTok parent ByteDance; Indian and Southeast Asian funds can point to the likes of Byju's, GoTo and Zomato. Sequoia Partners ranks highest on the "Midas List" of Forbes, which is the annual ranking of the world's top venture capitalists. In 2023, 10 investors are selected, and the first is Shen (Shen Nanpeng), who has already Topped the list four times. Sequoia Investors has earned top honors on the Midas List for half of its 22-year history.

But from the beginning, Sequoia believed that its regional funds were relatively independent, with decentralized transaction processes and portfolio decisions. Partners in one geographic area do not review possible deals in another; instead, the funds share back-office functions, including compliance, finance and investor relations, infrastructure, and an online portal for partners. Investors in these different geographies overlap, with partners often investing individually in each other's funds. But the regions are already diverging in some ways, with investor relations becoming more local and funds building their own software, the partners said.

** In the future, the new company will build its own infrastructure, and the partners will no longer invest in each other's funds. Any profit sharing (as well as back office functions) will cease to be shared between the different regional funds on December 31st. Sequoia declined to comment on its previous profit arrangements. **

While Sequoia has dominated venture capital for years, recent headlines have not been kind to its brand image. Its U.S. and European divisions faced questions about investments in Elon Musk's new Twitter and failed attempts at crypto exchange FTX. And the US fund adopted a different fundraising model in February 2022 through the Sequoia Capital Fund, which allocates capital from a large, indefinite fund and allows for a longer equity holding period, but the move occurred in the market before correcting. It allows limited partners a one-time exemption from withdrawing capital, according to a report from The Information. (A person familiar with the matter said this was done to ease those who need liquidity due to market changes.) As of earlier this year, the fund had more than $13 billion in assets.

Meanwhile, Sequoia's business in China continues to grow, even as geopolitical ties between each region, especially between the U.S. and China, grow distant. Sequoia China remains ByteDance's majority shareholder, with a roughly 10% stake that could be worth billions of dollars, Forbes reported in May. Sequoia US Fund is also a shareholder of ByteDance. Through its growth fund established in the past few years, it invests in emerging portfolio companies globally. ByteDance, of course, is TikTok's parent company, which has faced much controversy and regulatory scrutiny from U.S. lawmakers in recent years. In 2020, Doug Leone, the firm’s former global leader, lobbied the Trump administration on ByteDance’s behalf at its U.S. and European funds; last year, the fund reportedly hired a Washington, D.C.-based consulting firm to help.

Neil Shen (Shen Nanpeng), who remains on ByteDance's board of directors, declined to comment specifically on the investment. But in general, he rejects the notion that separating the funds would make it easier for Chinese companies to list in Hong Kong or elsewhere. "These are not young companies anymore," he said. "I don't want to overestimate our ability to assist a company with an IPO just because we have substantial ownership."

In their separate interviews, **Botha, Shen (沉南鹏) and Singh all denied that geopolitical tensions were a specific catalyst for this change. **They both said that conflict among expanding portfolios played a bigger factor. Well-known companies in each group have competed directly in the past, such as Stripe in the US and Airwallex in China, which competes with a company in Sequoia India. But that is increasingly likely as Chinese and Indian companies seek to move beyond their home markets earlier and remote work takes off, blurring geographic lines. Botha recounts a recent complaint by a U.S.-based Sequoia portfolio company that an Indian competitor backed by the Sequoia team told potential clients that it was the firm's big bet in the category.

"It's embarrassing, right?" Botha said. "From a customer standpoint, you're trying to buy technology from a company that you think Sequoia has named, and there's Sequoia's influence behind it, but now there are two, and it's confusing."

Frustration can go both ways, Singh notes: He recounts how a well-known (but unnamed) U.S. technology company complained to its Sequoia partners in the U.S. that it believed an investment by Sequoia India would be competitive in the future. force. But Singh said his team had written the check more than a year ago. Sequoia India has exited. In the current boom of AI companies, Singh imagines a similar conflict. (Sequoia Capital invested in OpenAI through its U.S. fund.) “It would be very disruptive to be locked out of investing in important companies in our region because of conflicting AI founders,” Singh said.

The funds are also diverging in other ways. While LPs from all three geographies have gathered in a room to review new funds for more than a decade, Sequoia India and Southeast Asia and Sequoia China each raised their most recent funds independently — respectively. $2.85 billion and $9 billion. (Shen (Shen Nanpeng) said that while some of the money came from US institutions, it was mainly "foreign funding" and none from China itself.) While the US business announced a $195 million seed fund in January, The focus is doubling down on early-stage investments, but the China business has recently increased its focus on non-tech investments, including infrastructure, as well as its hedge fund's public equity practice.

In the United States and Europe, Sequoia, named after California's famous sequoia tree, will continue to retain its name, which was suggested by the late Don Valentine, who had expressed hope that the company's name would outlast his own. Sequoia Heritage (an endowment-based family office) and Sequoia Capital Global Equities (a public/private crossover firm) will also continue to exist as separate businesses. Sequoia India's new name, Peak XV Partners (pronounced "fifteen"), comes from Mount Everest's original name, Singh said. According to Shen (Shen Nanpeng), Sequoia China has already used the Chinese name Hongshan, which means Sequoia tree, and will now adopt the English transliteration of "HongShan". "Many Chinese entrepreneurs probably don't even know how to spell Sequoia," he said.

Shen (Shen Nanpeng) does not think his investor base will be greatly shifted because of HongShan. ** "If investors aren't comfortable with China, they won't invest. I don't think choosing a new name will make a difference. But most investors are looking at it from a return and performance standpoint," he said . **

Singh, whose fund is already domiciled in Mauritius, which he said limits funds to fewer than 100 LPs per LP, said that Peak XV's LP base already only partially overlaps with other Sequoia locations. He added that this situation will continue to exist. "We love Sequoia, but our brand is built on relationships, and we think our own brand is strong, and that's going to propel us forward in a good way," Singh said.

As for a post-split Sequoia, Botha scoffed at any comment that the company wouldn't move forward from a position of strength (at least by its own historical standards). Still confident in his fellow PayPal alumni and fellow South African Musk, he said: "Look on Twitter to see what happens," and said FTX, while "unfortunate," was a good time for a fund that "had multiple other winners." Said it was only a small loss. He said he has no regrets about Sequoia's fund model shift, even if it means the firm continues to hold shares in companies that have gone public and whose shares have since fallen. "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 argued.

Looking ahead, Botha said he hopes the two companies will see each other as cousins with a shared heritage, even if they no longer have any special relationship. "It's been a huge success because we were entrepreneurs ourselves and helped spawn four other fantastic businesses that are now leaders in their own right," he said of the others besides his own. As for Sequoia: "I haven't been more excited about tech investments in the U.S. and Europe in a decade than I am now," Botha said. "It reminds me of the early days of the internet."