Sequoia Capital's New Structure Seems More Like VC’s Natural Progression Than A Game Changer

When Sequoia Capital announced late last month it was changing its fund structure, some viewed the shift as revolutionary—with even the firm itself calling the old VC model of 10-year funds “obsolete.”

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However, while the change in the tried-and-true method of doing business in the venture world is noteworthy, it also in many ways seems like just the next logical step in the continued growth of an asset class that has become increasingly large and institutionalized.

“It’s innovative, but it’s more evolutionary than revolutionary,” said Don Butler, managing director at Thomvest Ventures—itself an evergreen fund not beholden to time limits.

The main thrust of Sequoia’s big announcement is that it is doing away with the 10-year fund model and creating the new, open-ended Sequoia Fund. That new main fund will distribute money into close-ended “sub funds” such as seed, venture and growth for new investment, with any exits from those funds replenishing the main Sequoia Fund in a type of VC-related symbiotic relationship.

The new fund is expected to close in Q1 of next year, with limited partners being invited to invest in the new sub-funds based on monies allocated into the larger Sequoia Fund.

Sequoia declined to comment publicly on the new fund.

The public market

The catalyst for such a change is the fact firms such as Sequoia—whose list of investments is a who’s who of tech giants from Apple and Cisco to Snowflake and Zoom—feel constrained by the traditional time-limited VC fund model that forces it to sell its stake in successful public companies in order to close the fund. Although the VC firm may be able to take advantage of a successful exit through the IPO, it can lose out on the value created in the years after.

In a post about the impending change, Sequoia partner Roelof Botha used the firm’s investment in Square as an example. Sequoia invested in Square in early 2011 and had a market capitalization of $2.9 billion when it went public in 2015. By 2020, Square’s market cap was at $86 billion and now stands at more than $106 billion.

“Our industry is still beholden to a rigid 10-year fund cycle pioneered in the 1970s,” Botha wrote. ”As chips shrank and software flew to the cloud, venture capital kept operating on the business equivalent of floppy disks.”

More money, more changes

While the venture world certainly is different than 50 years ago, Sequoia’s new fund model seems to be a reaction to changes brought upon the industry by many of the large firms themselves for the last decade—including Sequoia.

The main driver of this change is the simple fact companies are staying private much longer than in the past. Amazon went public just three years after being founded. Now, due to bigger rounds at even larger valuations, companies can stay private for a decade before even considering going public, cutting significantly into how long a VC firm can hold its public stake before needing to close what is typically a 10-year fund.

Venture’s significant growth in the last decade-plus have made this change in fund structure for large firms like Sequoia almost inevitable due to the way these firms now operate—making the public market not nearly as attractive as the more sheltered private market and the capital now there.

So inevitable, in fact, it has been done before in different ways. In 2018, NEA launched NewView Capital Management with a $1.35 billion fund to help buy up secondaries of tech companies in its portfolio. This allowed the firm to retire the more traditional NEA funds without forcing exits while also holding onto large tech growth companies as their value increased. NewView now has four funds.

The FT reported San Francisco-based venture firm Greenoaks has raised about $1 billion this year for a holding company that would hold investments for longer than traditional venture funds.

Even the Sequoia brand itself has become part of the public/private crossover world. In 2009, Sequoia Capital Global Equities, which operates independently, was founded. The hedge fund has “investments spanning from late-stage private companies to public companies” and was created to expand Sequoia Capital’s technology investing efforts into the public markets, its website reads. SCGE currently manages over $12 billion of assets, according to its website.

Not for everyone

One other thing seems true about the new play by Sequoia—it likely is not something that can be copied by the majority of the venture world.

The success some of Sequoia’s portfolio companies have seen in the public market is one of the reasons the firm is looking to move away from time-limited funds. Many venture firms, however, never see a portfolio company exit to the public markets.

Sequoia holds $45 billion in public positions, with $43 billion being gains. In the past 15 years, the firm has distributed more than twice as much to its limited partners—$29 billion—as it has invested—$12.5 billion.

That type of success is hard to match and likely why we won’t see the majority of the VC world follow.

That success also is what likely emboldened Sequoia to look at a more enduring fund.