Sequoia Capital is launching a major adjustment in approach to maximize returns amid rising competition in the startup funding industry.
In a blog post, the renowned Venture Capital company revealed that it is breaking with history, discarding the typical fund structure and its artificial timetables for returning Limited Partnership (LP) investments. According to the article by long-time Partner Roelof Botha, the firm’s future investments would shortly all flow through a “single, permanent framework” dubbed The Sequoia Fund.
“Moving forward, our LPs will invest into The Sequoia Fund, an open-ended liquid portfolio made up of public positions in a selection of our enduring companies. The Sequoia Fund will in turn allocate capital to a series of closed-end sub-funds for venture investments at every stage from inception to IPO” said a company official.
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 it will reinvest in future investments — a “constant feedback loop,” according to the firm. It’s a shift that could better match investor motivations with those of founders, who will face the less external temptation to take early departure options under this model.
In addition to the change to return timelines, this change will also give Sequoia much more flexibility to deploy funds from the central structure towards “Sub Funds” focused on a particular stage or sector. Sequoia says LPs will be given the option to move part of their allocation in The Sequoia Fund toward new Sub Funds.
Sequoia also revealed that they had become Registered Investment Advisors (RIAs) as part of the announcement. In recent years, both General Catalyst and Andreessen Horowitz became RIAs, giving them additional flexibility in funding non-traditional assets outside private markets. It’s a shift that lets these organizations adapt to changing market conditions, such as financing public companies during periods of high public debuts and capitalizing on upstart company capitalization trends like coin offerings.
It’s a substantial shift from Sequoia’s long-standing venture capital approach, and significant adjustments for the fund’s limited partners that smaller firms without Sequoia’s long-term reputation would struggle to make. Furthermore, it also demonstrates how private equity behemoths like Tiger have driven historic venture capital organizations to look internally and make significant adjustments to stay competitive.