Leveraging the brand

Sequoia Capital must feel like an elephant hiding behind a telephone pole. No matter how hard it tries to conceal itself—declining media interview requests and maintaining its ban on press releases—it can’t help but draw attention.

All eyes were on Sequoia in 2006, and not just because it recorded the year’s biggest exit. It would have been a notable year for the firm even without the $1.65 billion sale of YouTube, because Sequoia leveraged its brand to fuel the biggest expansion in its history. It marched into China and India, pushed into growth stage investing and beefed up its investor roster. All the while, Michael Moritz & Co. dramatically increased their investment pace.

To better grasp Sequoia’s strategy, we combed through private deal and fund-raising data collected by Thomson Financial (publisher of VCJ) and scrutinized SEC filings and other public records. There were some revelations. For example, we knew Sequoia was an active investor, but we were surprised to learn that it did more deals in 2006 than it had done in any previous year except for 1999. And while we knew Moritz was busy, we didn’t know to what extent. He was Sequoia’s most active investor by a significant margin last year and was just as likely to participate in a $100 million growth round for a data processing company as he was in a Series A for an online social network for women. Sequoia’s international push was also more aggressive than we realized. The firm invested in a combined 18 Chinese and Indian companies last year, most of them outside the traditional VC sweet spot of early stage information technology.

Bay Area to Bangalore

The firm’s push into China and India no doubt came as a surprise to dedicated Sequoia watchers. Don Valentine, who founded the Menlo Park, Calif.-based firm in 1972, had previously panned China as a place to invest. He told a group of investors in September 2004 that his firm had not placed bets abroad in its history and it was unlikely to do so any time soon. He bemoaned a lack of accounting standards and intellectual property protection and predicted the Chinese market would crash within five years.

Sequoia invested more than $390 million in 72 companies around the world in 2006, making it the biggest year in the firm’s history, save for 1999.”

Sequoia has taken the idea of venture growth deals one step further by participating in buyouts. It’s not surprising for the firm to take aim at tech buyouts. Through its various funds and partners’ money, Sequoia represents the single largest investor in buyout shop Francisco Partners, according to Francisco Managing Partner Dipanjan Deb. And buyouts have been going gangbusters of late, with one-year returns more than double that of venture firms during the last quarter of 2005.

Maybe that’s what convinced Sequoia to partner with Kohlberg Kravis Roberts & Co. to buy 85% of the software division of Flextronics for $765 million. (Sequoia chipped in about $69 million for a 9% stake.) The deal was likely brokered by Moritz, who had previously invested in Flextronics and sat on the company’s board until October 2005.

People power

To boost its odds of success with growth and international investments, Sequoia has made strategic additions to its roster of investors. It continued its charge into China with the addition of three associates: investment banker Kevin Pan, formerly of China International Capital Corp. Ltd., IT-focused growth investor Glen Sun, previously with General Atlantic, and management consultant Shauna Xie, formerly with Monitor Group. The trio of associates joins two managing partners, one vice president, one principal and one associate hired by Sequoia in late 2005 as the core of its new China office.

Sequoia also bolstered its growth effort with three new partners: Scott Carter and Alexander Harrison, formerly with Summit Partners, and Chris Olsen, formerly of Technology Crossover Ventures. They have been charged with getting the growth fund off the ground and helping more senior partners find and vet deals.

Sequoia Capital India has invested in a coffee exporter and retailer, a car-rental shop and a hair product company.”

The addition of the three associates in China, as well as the trio supporting the growth effort, is a departure for Sequoia, which has traditionally sought partners with deep operating experience. Bringing on junior people to support the team is one way to increase the bandwidth of senior partners. The firm can do more deals because each senior partner is less entangled in the details. The junior partners bring energy to the senior partners’ investing wisdom. It’s a form of leverage.

Exit watch

Like every other VC, exits flowed like molasses for Sequoia last year. But no other VC could point to a 2006 home run like YouTube. The video sharing company, founded in 2005, took on $11.5 million in equity financing and grew to an acquisition value of $1.65 billion by October. Its only backers were Sequoia and hedge fund Artis Capital Management. It was a stunning success for its investors and made the Sequoia team seem as though they could find fountains of money in the middle of a desert.

Sequoia further distanced itself from the pack as the year drew to a close with the successful IPO of portfolio company Isilon Systems (Nasdaq: ISLN). The Seattle-based digital media storage company had the third best opening day performance of all IPOs last year. It priced at $13 per share on Dec. 15 and was trading around $24 on Dec. 20. Sequoia holds 11.65 million shares (19.3% of the total) valued at about $280 million.

Sequoia also notched five acquisitions of bubble-era portfolio companies, three of which were of undisclosed value, one of which was sold at a discount to what it had raised from VCs and one, PortAuthority Technologies, which was sold for nearly twice what the investors put in.

Sequoia further distanced itself from the pack as the year drew to a close with the successful IPO of Isilon Systems. It had the third best opening day for all 2006 IPOs.”

With three portfolio companies in registration, Sequoia is looking to return even more money to LPs in the New Year. One company that looks particularly well positioned for an IPO is Sourcefire. The security startup was slated to be acquired for $225 million by Israeli company Check Point Software Technologies in March, but the deal fizzled due to delays in the government approval process for the cross-boarder deal. Sourcefire went on to raise $23 million in a Series D from Sequoia and others, then filed IPO registration papers in October. The proposed $75 million offering would make Sourcefire the first security startup to go public in five years. It strengthened its case in the third quarter by becoming profitable for the first time.

Moritz madness

Sourcefire is one of the few Sequoia deals Michael Moritz doesn’t have his fingerprints on. He was Sequoia’s busiest deal maker last year, participating in at least 10 investments totaling $230 million in commitments, according to Thomson Financial. He invested across the board in 2006, placing bets on everything from a high-powered battery startup to a WiFi router company to an online shoe shop. Moritz also invested across company stages. He led a $5 million Series A in Sugar Publishing, a blogging and social network for women, led Sequoia’s participation in the $100 million deal for ITA Software, and had a hand in the Flextronics Software buyout.

Sequoia is by no means a one-man show. Moritz’s partners were busy, too. Overall, the firm invested more than $390 million in 72 companies around the world in 2006, making it the biggest year in the firm’s history, save for 1999, according to Thomson Financial. Sequoia’s other big deal makers were Michael Goguen (seven deals), Mark Kvamme and Mark Stevens (six deals each) and Jim Goetz, Neil Shen and Haim Sadger (five deals apiece).

Only the beginning

As much as it wants to remain in the background, Sequoia won’t be able to avoid scrutiny in 2007. Will it hit another consumer Internet home run? Will its bets in China and India cement its new-found position as top VC, or will those markets suddenly go sour?

The truth is it will take several years before it becomes clear if the strategy Sequoia put in place last year will pay off. For example, it took Draper Fisher Jurvetson five years to get the Skype and Baidu exits from its DFJ ePlanet Ventures global venture fund. It may not take that long for Sequoia. The China market has matured since DFJ went there in 2000. And Sequoia has tapped veteran investors in that market, including one who cut his teeth with ePlanet. In India, Sequoia is leveraging an established venture firm to accelerate its activities.

But don’t expect to hear too much from press-shy Moritz and crew in 2007. They worked hard raising new funds and exiting from deals last year, so they’ll keep busy investing in new deals and counting their profits this year.