Investors raise questions after Sequoia Capital’s turbulent year

Over the most tumultuous 12 months in its 51-year history, Sequoia Capital has spun off its highly profitable Chinese arm, slashed the size of a crypto investment fund and lost key partners including veteran Michael Moritz.

Now, Silicon Valley’s most storied venture capital firm is fighting to retain the confidence of its own investors.

At least one large Sequoia backer is weighing its future position in the US firm and others are concerned by recent mis-steps, including a $225mn bet on failed cryptocurrency exchange FTX in 2021. One of Sequoia’s longest-standing backers deemed that deal a “humiliation [that] is unique in their history”.

This summer, Sequoia’s chief Roelof Botha travelled across New York, Boston, Chicago and California’s Bay Area to meet more than 50 of the firm’s biggest “limited partners”, who invest in its funds.

July’s trip was not to fundraise but to ease concerns from the financial institutions, non-profit organisations, pension funds and family offices that have poured billions of dollars into Sequoia on the back of its reputation as one of the world’s savviest investors in tech start-ups, including Apple, Google, Instagram and OpenAI.

“Who do they want to be; what’s their brand?” said the head of one Sequoia LP, a sovereign wealth fund. He will continue to back Neil Shen, the billionaire boss of Sequoia’s soon-to-be-separate Chinese arm, but is evaluating his position in Sequoia Capital, the US and European business.

“We know what Neil Shen wants to be: the most successful investor in Asia,” he said. “What about Sequoia US?”

“Our goal is to be the top-performing investment partnership in the world,” Botha told the Financial Times. “Just as it always has been.”

On the US trip, Botha and top lieutenants Alfred Lin and Pat Grady reassured LPs that slimming down alongside other changes at the firm, such as new vehicles to invest in companies from their inception to long after they had gone public, have deepened ties to start-up founders and set up the firm to capitalise on a boom in artificial intelligence.

This account of a period that another Sequoia investor describes as “the most profound change in the firm’s history” is based on more than 20 interviews with its limited partners, current and former investors at Sequoia as well as rival groups, and start-up founders.

Despite the turbulence of the past 12 months, Sequoia is confident its LPs will stick by it. “The fact we’ve had 51 years of good performance gives us breathing room,” said one venture capitalist at the firm.

Decoupling from China

In June, Botha moved to unwind Silicon Valley’s most ambitious, and successful, attempt to build global power.

Sequoia’s US and European operations were to break away from its China arm, managed by Shen, who had led early successful investments in Alibaba and TikTok parent ByteDance.

The Chinese unit, renamed HongShan, a Chinese translation of Sequoia, will remain in charge of nearly $56bn in assets under management. Sequoia’s Indian and south-east Asian business would form a third entity.

The move followed months of pressure from Washington over investing in China. Sequoia’s Chinese arm had previously taken controversial stakes in sanctions-hit dronemaker DJI and surveillance start-up DeepGlint.

Weeks after Sequoia announced the split, the White House issued an executive order limiting US investment in technologies such as AI which could further Chinese national security.

Although Sequoia Capital’s move will end a lucrative profit-sharing arrangement with its Chinese arm, and likely limits future investments in big Asian markets, one person close to the firm said it would resolve a political headache.

“Sequoia was not mentioned in the executive order. Before the separation, I’m sure it would have been,” they said.

Ana Marshall, chief investment officer at the $13bn Hewlett Foundation, which has been a Sequoia LP for 20 years, argued the split was “courageous” and allowed Botha and his team to focus on investing, rather than managing a complex global firm.

“I don’t know how often they were on calls with China and India, but I’m excited they are back doing what they are best at,” she said. “LPs should be thrilled that just happened.”

Bad bets

In 2021, Sequoia made a $225mn investment into FTX, later publishing a hagiographic 13,000-word blog on its founder, Sam Bankman-Fried.

The following year, FTX collapsed. Bankman-Fried is awaiting trial for fraud. Sequoia’s investment has been wiped to zero. The blog has been deleted but its legacy will not be so easy to erase. One Sequoia LP called the affair an “unmitigated disaster”.

The firm recently slashed the size of its fund dedicated to investing in crypto companies from $600mn to $300mn.

The decision to invest $800mn into Elon Musk’s $44bn purchase of Twitter last year also raised some LPs’ eyebrows.

Botha has said Musk gave him his first job offer to join PayPal. Sequoia has backed other promising Musk ventures, including SpaceX and the Boring Company. But by Musk’s own estimation, Twitter, now rebranded X, is worth less than half what he paid.

“I wasn’t surprised they backed him,” said the head of an investment fund that is one of Sequoia’s top LPs. “I think they view him as part of the Sequoia family. I don’t perceive it as tainted by personal conflict. It’s a question of ‘do Elon’s plans make sense and was the price sensible’. Right now obviously not, but it’s too soon to tell.”

Investor for life

China, FTX and Musk may have dominated headlines, but LPs said the most consequential of Botha’s changes is likely to be the success of a new investment vehicle called the Sequoia Capital Fund.

VCs traditionally earn their fees by backing start-ups at an early stage and cashing out at a public listing or a sale.

Sequoia’s new fund, announced in 2021, breaks from that by holding on to stock of companies even after an IPO, based on Botha’s conviction that certain tech stocks will continue to outperform long after going public.

The fund — alongside a new accelerator programme for early stage companies called Arc — positioned Sequoia to provide companies with “permanent capital” throughout their lifetimes, according to LPs.

Others said the new fund was a response to increased competition from groups such as Andreessen Horowitz, SoftBank and Tiger Global which were investing heavily at the time, creating a “seller’s market” for stakes in start-ups.

“Sequoia will do everything to stay on top,” said Eric Doppstadt, chief investment officer at the Ford Foundation, Sequoia’s longest-standing LP. “They are never a firm you could accuse of being complacent.”

Sequoia has rewarded LPs for their faith. A person with knowledge of the firm’s finances said that in the past four-and-a-half years, from just $2bn invested into start ups, it had distributed $34bn in cash and stock.

So when the Sequoia Capital Fund launched in 2021, almost all LPs opted to roll their money into it. With the alternative being shut out of Sequoia’s future investments, some felt there was little choice.

Over the next few months, the Sequoia Capital Fund was hit by the broader market downturn which led to a sharp fall in the price of tech stocks.

“I didn’t predict the enormous crash but we knew there was a risk,” said one longstanding LP.

The fund has since rallied, outperforming the Nasdaq this year, according to a person with knowledge of the fund’s performance.

“If [the new fund] allows Sequoia to hold a security that becomes a Google or Amazon outcome, the early pain will be forgotten,” said one backer.

“These are radical changes,” said another of Sequoia’s longest-standing LPs. “It’s difficult to cut the size of your firm, cut two funds, sever ties with your international entities and undergo a leadership transition. It’s an absolutely enormous amount of change for an organisation and it’s too early to say if it will be successful.”

Five decades at the top

1972

Sequoia Capital is founded by Don Valentine 

1975

Sequoia invests $600,000 in Atari

1978

Sequoia invests $150,000 in Apple

1996

Doug Leone and Michael Moritz become the firm’s new leaders

1999

Sequoia invests $12mn in Google

2003

Roelof Botha joins from PayPal

2005

Sequoia China is launched

2009

Sequoia leads a $585,000 investment round into Airbnb

2012

Sequoia leads a $50mn investment round into Instagram

2017

Botha becomes leader of the US and European business

2021

Sequoia invests in OpenAI

2021

The Sequoia Capital Fund is announced

2022

Botha steps up to run the global partnership

2023

Sequoia’s businesses in the US and Europe, India and south-east Asia and China split into separate entities