Sequoia Capital is looking to expand beyond early stage venture capital, with plans to create a hedge fund and to become an alternative asset manager, according to multiple sources familiar with the plans.
The firm hired Michael Beckwith, a former principal with tech hedge fund Maverick Capital, to help create the hedge fund, and it hired Eric Upin, the former chief investment officer for Stanford University’s endowment, to manage a new alternative asset managment platform. Sequoia’s website says Beckwith, who invested in global technology companies in systems, software, services and cleantech for Maverick, will focus on “global public market investments” for Sequoia. Upin was not yet listed on Sequoia’s website as of May 12.
Asked about the new hires and the details of the new fund at the National Venture Capital Association’s annual meeting on May 7, Sequoia Partner Michael Moritz said, “The rumors you read in the Journal are true.” (The news about the hedge fund was first reported by peHub, an affiliate of VCJ, and a WSJ story about Sequoia’s hedge fund plans cited peHub as the soure of the news.) Moritz would not elaborate, saying, “We’re keeping our lips tightly sealed.”
VCs had mixed reactions to the news.
Tom Crotty, a general partner with Battery Ventures, says he wasn’t surprised because a number of venture capital firms have had hedge funds for years, including Battery, Matrix Partners and Summit Partners. Battery started its hedge fund about three years ago and it is now about $105 million in size, Crotty notes. He adds that Sequoia’s hedge fund plan, plus its hiring of Upin from Stanford, may indicate that Sequoia sees itself more as an asset management firm than as a pure venture capital firm.
, a partner with Kleiner Perkins Caufield & Byers, called Sequoia’s plans “interesting,” but he says KP has no plan to follow suit. “We want to be the best early stage VC in IT, life sciences and green tech—and now green growth,” Schlein says. “We don’t know anything about hedge funds.”
Sequoia has been looking to hire investment professionals with hedge fund experience since at least late fall 2007, according to one source. The source adds that he was told the the the size of the fund could be as much as $750 million.
Sequoia’s involvement in a hedge fund is not as strange as it sounds. The firm has close ties with San Francisco-based hedge fund Artis Capital. The two firms have co-invested in YouTube, AdBrite and Aruba Networks, among other companies.
In addition to Artis, several other hedge funds have expanded into venture capital deals, including Alliance Bernstein, D.E. Shaw Group and The Galleon Group.
“I’ve always been surprised Sequoia didn’t go this route sooner,” says Paul Kedrosky, a senior fellow at the Kauffman Foundation and author of a popular venture capital and finance blog called Infectious Greed.
I’ve always been surprised Sequoia didn’t go this route sooner.
Limited partners don’t necessarily frown on public market funds coming from VCs, Kedrosky says. A big crossover fund allows LPs to make bigger allocations, something that can grease the wheels for an investment that otherwise might be too small to merit consideration.
An LP would have “a credible reason to make an investment in the fund and not fight your pension board or alumni office to do it,” Kedrosky says.
It is less clear what role newly hired Upin, the former chief investment officer for Stanford University’s endowment, will play at Sequoia. Upin will manage allocations to Sequoia’s non-core technology funds, according to a venture capitalist who syndicates deals with Sequoia.
Upin was a senior partner and managing director of equity research at Robertson Stephens between 1993 and 2002, after which he spent two years as director of tech research with Wells Fargo. He then joined Stanford Management Co. in February 2005 to oversee public equity investments, and one year later was named CIO when Mike McCaffrey left to hang his own shingle. He announced that November that he’d be leaving Stanford come February 2008, in order to pursue other opportunities.
Sean Caplice, a partner with law firm Gunderson Dettmer who helps firms structure their funds but does not count Sequoia among his clients, says that a venture firm might easily move from a group of specialized funds into an over-arching asset management structure. He declined to speculate on what might be happening at Sequoia.
Jonathan Axelrad, a partner at law firm Goodwin Proctor, which counts Sequoia among its clients, also declined to comment on how Sequoia might structure itself as an asset management firm, citing attorney-client confidentiality agreements.
Upin joined Stanford Management Co. in February 2005 to oversee public equity investments. One year later, he was named CIO when Mike McCaffrey left to start his own firm. Prior to Stanford, Upin was a senior partner and managing director of equity research at Robertson Stephens between 1993 and 2002, after which he spent two years as director of tech research with Wells Fargo.
Sequoia may have good reason to rethink the way it operates. Its global expansion has met with some reticence from its limited partners. At least one institution, the Yale Endowment, complained that the firm was hitting it up to expand into areas where it had no historic success. Sequoia reportedly responded by removing the endowment from its core fund.
“Some LPs are adamantly against this,” Kedrosky says. “The ones that are going into the foreign funds are looking at it as training wheels for some day getting into Sequoia’s main fund. There’s at least one person I know who was told that. In the absence of a foreign fund that’s paid back its initial capital it makes people nervous.” —Alexander Haislip and Daniel Primack with additional reporting by Lawrence Aragon