Sequoia Capital is launching a major adjustment in approach in order to maximize returns despite rising competition in the startup funding industry. In a blog post today, the venerable venture capital company revealed that it is breaking with history, discarding the typical fund structure and its artificial timetables for returning LP investments. According to the article by long-time GP Roelof Botha, the firm’s future investments would shortly all flow through a “single, permanent framework” dubbed The Sequoia Fund:
- Our LPs will now put their money into The Sequoia Fund, an open-ended liquid portfolio made up of public interests in a number of our long-term businesses. The Sequoia Fund will then distribute cash to a series of closed-end sub funds that will make venture investments at all stages of development, from start-up to IPO.
Sequoia’s U.S. and European-focused funds will be the only ones to benefit from these adjustments; the India and China-focused funds will not. The 10-year return cycles are no longer in use, which drove investors to liquidate their public company shares based on predetermined timetables rather than when investments had completely matured. Sequoia claims that investments would no longer have “expiration dates,” instead recycling earnings from startup bets back into its core fund, which will be re-invested in future ventures — a “constant feedback loop,” according to the business. It is a shift that might better match investor motivations with those of founders, who will face the less external temptation to take early departure options under this model:
- The 10-year fund cycle made sense once upon a time. However, the assumptions on which it built are no longer valid, resulting in the premature termination of important ties and the misalignment of firms and their investment partners.
This shift will provide Sequoia far more freedom in deploying funds from the core structure to “Sub Funds” focused on a certain stage or industry, in addition to the change in return deadlines. LPs will give the option to relocate a portion of their commitment in The Sequoia Fund to new Sub Funds, according to Sequoia.
Sequoia also revealed that they had become registered financial advisors as part of the announcement (RIA). In recent years, both General Catalyst and Andreessen Horowitz became RIAs, giving them additional freedom in funding non-traditional assets outside of private markets. A shift lets these organizations adapt to changing market conditions, such financing public companies during periods of high public debuts and capitalizing on startup company capitalization trends like coin offerings.
It is a substantial shift from Sequoia’s long-standing venture capital approach and a huge adjustment for the fund’s limited partners that smaller businesses without Sequoia’s long-term reputation would struggle to make. It also demonstrates how private equity behemoths like Tiger have driven historic venture capital organizations to look internally and make significant adjustments in order to stay competitive.
