Is Sequoia Transforming VC Fund Structures?

Sequoia Capital’s Roelof Botha has announced that the legendary VC firm is drastically changing its fund structuring to align itself with its long term ‘patient capital’ strategy.

Historically, the fund has been at the forefront of innovation in Venture Capital. ‘The Sequoia Fund’ comes after a series of moves made by the firm to expand its services to encapsulate the entire lifespan of companies across the globe.

In an effort to achieve this goal Sequoia has previously created a Hedge Fund and a Mutual Fund as well as its global expansion under Doug Leone and Sir Michael Moritz. In 2005, Sequoia announced its expansion into China and India where the firm opted for a rare decentralised governance model, taking on Neil Shen at the helm of Sequoia China. This led to the success stories such as AliBaba and Tencent for the firm among many others. “The Sequoia Fund” is the next stage in this long term plan.

What is “The Sequoia Fund”?

The firm announced that ‘The Sequoia Fund’ is an open-ended fund structure. This single overarching fund will hold all of the firms western stakes including their “liquid public positions”. The main fund will then allocate capital to a series of traditional closed-ended sub-funds

Consequently, Sequoias LPs can now enjoy a more diversified portfolio and some tax benefits. This is because ‘The Sequoia Fund’ will consist of positions from private seed-stage startups to large public companies

Why the new fund structure?

The new structure enables Sequoia Capital to hold its positions well beyond a company’s IPO. This change comes from the simple fact that a large percentage of the returns from a VC backed company come after its IPO, a fact Sequoia knows far too well.

For example in the ’70s, after investing $150,000 into Apple, Sequoia sold its substantial stake for $6m to re-distribute its returns to LPs. Today Apple is valued at over two trillion dollars. This is one of the reasons why Sequoia has since carefully curated its LPs and taken capital from long term and tax-exempt sources such as endowments and non-profits.

How are VC funds typically structured and why? 

In Venture Capital, funds are typically closed-ended and have a period of 10 years. This means that the fund manager raises a set amount of money from LPs and at the end of the period distributes the earnings back to its investors. 10 years is seen as a good time as venture-backed businesses take much longer to mature and establish. 

It usually takes the fund manager several years after raising their fund to finalize their portfolio. Typically, a VC will not allocate the entire fund right away. Instead, a given percentage will be invested and the rest of the capital will be used to back the winners in the portfolio throughout the fund’s lifetime. Venture Capital follows a ‘power law’, meaning that a few investments make up most of the returns, as a large percentage of the startups in the portfolio will be unsuccessful and fail.

More on traditional VC fund structures here.

What does this mean for new fund managers?

Sequoia has assessed from first principles their needs in a fund structure and have tailored “The Sequoia Fund” to work for them and their playbook. We may see this single fund structure become the norm for the largest elite VC firms such as Sequoia, Andreessen Horowitz, Accel…etc but it is not optimal for emerging managers or relatively smaller firms as they do not have the scale or strategy to necessitate this structure. 

In conclusion, Sequoia is a multistage global venture franchise with billions of dollars of AUM. Though this fund structure is well suited to the long-term strategy of Sequoia, the traditional fund structure is still the best option for new fund managers

This content is provided by VC Lab, the venture capital accelerator. 

The free 16 week VC Lab program provides guidance, structure and a network to complete a fund closing in 6 months or less. Since mid 2020, VC Lab has helped launch over 100 venture capital firms around the world.

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