Sequoia Capital is debuting a big shift in strategy as they look to boost their returns amid increased competition in the market for startup financing.
The storied venture capital firm announced in a blog post today that they’re breaking with tradition, abandoning the traditional fund structure and their artificial timelines for returning LP capital. The firm’s future investments will soon all flow through a “singular, permanent structure” called The Sequoia Fund, the post from long-time GP Roelof Botha details:
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.
These changes will notably only apply to Sequoia’s U.S. and Europe-focused funds; the India and China-centric funds won’t adopt this structure.
Gone are the 10-year return cycles, which often pushed investors to liquidate holdings in public companies based on set timelines rather than determinations of when investments had fully matured. Sequoia says that investments will no longer have “expiration dates;” instead, Sequoia will recycle returns from startup bets back into its central fund which it will redeploy into future investments — what the firm calls a “continuous feedback loop.” It’s a change that could greater align investor incentives with founders who will have less external pressure under this model to pursue premature exit opportunities:
Once upon a time the 10-year fund cycle made sense. But the assumptions it’s based on no longer hold true, curtailing meaningful relationships prematurely and misaligning companies and their investment partners.
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.
As part of the announcement, Sequoia also announced that they have become a registered financial advisors (RIA). General Catalyst and Andreessen Horowitz both become RIAs in recent years, a change that allowed them more flexibility in backing non-traditional assets outside of private markets. For these firms, it’s a change that allows them to adjust to the fluidity of market trends, backing public companies during periods of rampant public debuts and seizing on upstart company capitalization trends like coin offerings.
It’s a significant change to the traditional venture capital model Sequoia has long pursued, and a major readjustment for the fund’s limited partners that smaller firms without Sequoia’s long-term reputation likely would not be able to pull off. It also showcases how much private equity powerhouses like Tiger have pushed storied VC firms to look inwards and adopt major changes to stay competitive.