Venture capital powerhouse Sequoia Capital is breaking up into three entities around the world, splitting the Chinese and US operations as tensions grow between the world’s two largest economies.
The firm, known for its early backing of Google, Instagram and some of China’s biggest internet companies, will separate into independent partnerships and separate firms, operating under different brands, no later than at the end of March next year, the company said.
“It has become increasingly complex to run a decentralized global investment business,” Sequoia said in a press release signed by regional heads Roelof Botha, Neil Shen and Shailendra Singh. “This has made using centralized back-office functions more of a hindrance than an advantage.”
Sequoia over the years has managed tech investments across the Pacific, weaving in US endowment and pension money with opportunities in two of the world’s largest internet markets. Now, as regulatory scrutiny in both Beijing and Washington escalate, the company is finding it increasingly hard to navigate the policy landscape.
Sequoia was an umbrella brand for three already largely independent ventures: one focused on China, another on the US and Europe, and a third on India and Southeast Asia.
The Sequoia China business will retain its existing name in Chinese and adopt the name HongShan in English. Sequoia India and Southeast Asia, which manages US$9.2 billion ($12.4 billion) across 13 funds, will become Peak XV Partners, a reference to the original name given to Mount Everest. The US and Europe venture capital business will continue to be known as Sequoia Capital.
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At the same time, Sequoia Heritage and Sequoia Capital Global Equities will operate under the Sequoia banner.
China Complications
Sequoia is just one of many investment firms facing the new dynamics of venture investing globally. Coatue Management, SoftBank Vision Fund, Lightspeed China Partners and DST Global are among the entities with stakes in some of the same Chinese companies as Sequoia.
Still, Sequoia China stands apart. It started investing in the country years before most and still gets in at a very early stage. The strategy has led to it owning large stakes in high-profile Chinese IPOs.
Sequoia Capital and its Beijing affiliate spent over a decade scattering billions across China’s multitude of startups, backing the likes of ByteDance Ltd. and JD.com Inc. while becoming a powerhouse brand among the venture firms trying to strike it rich there.
It’s expanded beyond early-stage investing into growth stage, infrastructure, healthcare and consumer, and buyout funds. Sequoia China manages about US$56 billion in assets.
Shen said the firm is splitting because of the growing differentiation in strategy and products between the regions — Sequoia China is much more than an early-stage investor now. Portfolio companies are becoming more international, complicating investments when all three entities are operating under the same umbrella.
“Our product is gradually becoming different from what the two other regions are doing,” Shen said in an interview with Bloomberg on Tuesday.
Shen has run Sequoia’s China presence since 2005. While many rival firms have committees outside China that approve or nix investments there, Sequoia China has been one of the few with its partners making their own on-the-ground decisions.
Shen has managed relationships with startup founders, Chinese officials and a global investor base. Sequoia China invested in about 1,200 portfolio companies in the country and has more than 300 staff in the country.
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The fund raised about US$9 billion for investments in 2022 from pensions, endowment funds and family offices from the US, Europe, the Middle East and Southeast Asia. It raised the money independently without participation from the other two operations.
US limited partners account for about half of the investor base in Sequoia China, according to a person familiar with the matter.
Global Challenges
The prospects for investments in China are now mired in uncertainty. Regulatory actions on both sides of the Pacific are squeezing the nation’s technology industry and creating unpredictability for its financial backers.
China is still weathering a decline in venture capital investments, despite once being touted as a rival to Silicon Valley.
US President Joe Biden plans to sign an executive order that will limit investment in key parts of China’s economy by American businesses, people familiar with the matter have said. The US has also been briefing its G-7 partners on the investment curbs, commonly referred to as reverse CFIUS.
The policies in the works are complementary to ones that review transactions involving investment in the US to determine if they are of national security concern.
In a speech on May 20, National Security Advisor Jake Sullivan confirmed that it “was no secret” that the US has been working on developing the legal authorities for a targeted set of outbound investment controls.
Assistant Treasury Secretary Paul Rosen told a congressional committee last week that the pending order would focus on the flow of US capital into countries of concern such as China that comes with “knowhow and expertise.” This is especially of interest in sub-sectors of the economy that include “advanced semiconductors, artificial intelligence and quantum computing.”
Rosen had previously told a security conference at a law firm in Washington that this investment by US firms can go into “very nascent stages of technology development, overseas in countries and sub-sectors of concern, that can then be used to advance these technologies.” While he didn’t mention Sequoia or any other firm by name, his description closely mirrors venture capital’s business model.
While businesses and law firms have been preparing for the imminent release of the order for months, Rosen gave no hint on timing during the hearing, saying only that his office continues to be involved in conversations about the order and that ultimately the decision to implement it would be up to the president.
