Friday Letter: Sequoia’s gambit is low risk

Sequoia Capital is now an RIA and calls its new fund structure 'a fundamental disruption to the venture capital model.' LPs will only stand to benefit.

The talk of the venture town this week has been about Sequoia Capital and its decision to restructure its US and European operations into a singular, permanent structure called The Sequoia Fund.

As part of this change, Sequoia is now becoming a registered investment adviser.

And my first thought was, “Aren’t they already?”

It’s a trend we’ve seen in recent years, in which funds have registered with the SEC as RIAs. Think Andreessen Horowitz, Battery Ventures, Founders Fund and General Catalyst, to name a few. Also, Touchdown Ventures has been registered as an RIA since its formation in 2014, so it’s not just reserved for the megafunds.

Touchdown explored the benefits of the RIA in this column in Medium two years ago. One of the advantages is that venture firms are limited by the percentage of their funds they have at their disposal to “invest in secondary offerings, other venture funds or the pubic equity of companies they took public” unless they are registered as an RIA.

That certainly explains, in part, Sequoia’s move.

As Sequoia explained in another Medium post, the RIA “expands our flexibility to support our portfolio companies through various financing events, such as secondaries or IPOs. It also enables us to further increase our investments in emerging asset classes such as cryptocurrencies and seed investing programs.”

There’s a lot more to dissect in Sequoia’s decision.

Apart from the RIA, the restructuring means that going forward, its LPs will invest into The Sequoia Fund, an open-ended liquid portfolio made up of public positions in a selection of their portfolio companies. “The Sequoia Fund will in turn allocate capital to a series of closed-end sub funds for venture investments at every stage from inception to IPO. Proceeds from these venture investments will flow back into The Sequoia Fund in a continuous feedback loop.”

Investments will no longer have expiration dates.

Sequoia calls this “a fundamental disruption to the venture capital model.”

Sequoia Capital is awash in capital and ranks as the fourth largest venture firm worldwide, based on the past five years of fundraising activity that is shown in our own VCJ 50 in November 2020 (check back after Nov 1 for our 2021 VCJ 50). Its funds include growth and seed-stage vehicles as well as funds in India and China, yet the funds in those countries will not be part of the restructuring.

The restructuring means the firm could hold onto shares long after a company goes public, which has been a growing topic in venture as public valuations have soared and investors feel constrained. After all, they want to retain their ties to the companies they backed early on and many feel they are leaving money on the table when a company exits and the VCs leave the board.

So although it’s fascinating to muse over, Sequoia’s new fund structure will only benefit LPs. But the question remains how a long-investment horizon in a Sequoia fund will not only impact the firm, but the rest of the venture community as well.

Let me know what you think. You can hit me up at agoldfisher@buyoutsinsider.com.