Sequoia is questioning the fundamentals of venture capital

Sequoia leaves things open

In an industry where little has changed in a half-century, Sequoia Capital announced a big structural overhaul. The firm is creating a new open-ended fund, the Sequoia Fund, which will hold positions in some of its companies that have gone public.

Sequoia will still have closed-end subfunds underneath the Sequoia Fund to focus on seed, venture, growth and so on. And the new fund structure only applies to its U.S. and Europe operations, Sequoia's Roelof Botha wrote in a post announcing the changes. It's not clear when or if it might apply to the firm's India and China branches.

It's a striking move from an industry leader. If Sequoia were happy to just cash checks, it might not have made the change. But the firm has prided itself on staying hypercompetitive in an industry being roiled by outsiders like SoftBank and Tiger Global.

• Sequoia has long talked about holding shares of companies long after they go public. Botha is still a board member at Square, for example. The traditional VC fund structure, where funds typically have a 10-year lifespan, doesn't easily accommodate that.
• Sequoia now holds $45 billion in public stock alone, on which it has $43 billion in gains.
• The new structure allows Sequoia to capture more of the upside when a company goes public and rises in value afterwards.

Sequoia's not the first to go evergreen or invest in public companies. Sutter Hill Ventures has long been the exceptional open-ended fund among Bay Area investors. Maverick Ventures is another example. And corporate funds like GV are often evergreen.

• Being evergreen means avoiding some of the strange behaviors VCs engage in as a fund nears its end date. "One of the things we tell entrepreneurs: the typical fund cycle is [VCs] trying to have companies exit so the VC can go do their next fundraise. Now they have eased some of that pressure," said Don Butler, managing director at Thomvest Ventures, which has an open-ended fund with one LP, Peter Thomson of Woodbridge.
• Crosslink Ventures and others have crossover strategies to invest in public and private companies.
• But Sequoia is Sequoia, and that means other firms may look very closely at its new structure.

Investing in liquid public stocks makes Sequoia into a different kind of investor. It's now placing bets on more than just its ability to help founders build companies.

• Sequoia is registering as an investment advisor, something that firms such as Battery Ventures and Andreessen Horowitz have done. That registration also helps firms invest in cryptocurrencies, Botha noted.
• In theory, Sequoia could also directly invest in public equities. Butler notes that Thomvest has done this when its research has found that the best company in a sector is already public. Botha didn't mention any plans to do that in his post about the fund.
• In any case, managing a big portfolio of publicly traded investments will require different skills — and means going up against the wide world of public equity managers.

Will there be a stampede on Sand Hill Road to follow Sequoia? Some are skeptical, if only because having such a large portfolio of public company shares is a high-class problem to have.

• "It's laughable to think that Sequoia just blew up the VC fund model," Ho Nam, co-founder and managing director of Altos Ventures, said on Twitter. "The vast majority of VC funds don't have tens of billions of profits tied up in public stocks (and they never have), so what Sequoia does here is not that relevant to the rest of the VC industry."
• "If you're saying they're revolutionizing startup funding, then I think you're just looking at it the wrong way," said Jerry Neumann of Neu Venture Capital.

Still, Sequoia has everyone looking. Even if an evergreen master fund isn't the answer for every VC, investors should be closely examining their fund structures and asking if they still make sense. Everything else about the world of startup finance has come under question lately.

— Tomio Geron

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A MESSAGE FROM NS1

To fulfill the skyrocketing demand for superior digital experiences and to continue delivering new technology that improves our world, we need people to keep dreaming and inventing and exploring and experimenting. While much of this may come from the known tech giants, life-changing innovation can — and should — emerge from companies of all sizes across all industries and cultures.

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Five questions for …

George Mathew, Insight Partners

George Mathew joined Insight as a managing director in February. He specializes in startups in AI, ML, data and analytics.

What was your first job, and what's a skill you still use from it?

My first job was a sales engineering role at Fort Point building ecommerce systems in the mid-'90s. That job was great because you had to be an effective computational systems thinker in how the entire stack was deployed for a scalable ecommerce infrastructure, which influences how I think to this day.

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Investment memo! Pitch decks are great, but it's way more important to build understanding and conviction in a deal by doing the work versus reading a pitch deck.

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Cars! In particular, the electrification of classic cars. As we decarbonize the auto industry, many classic cars will no longer be drivable due to emission standards. The most interesting answer is to electrify them.

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A MESSAGE FROM NS1

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