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The Sequoia Fund: Patient capital for building enduring companies
- letmeinhere 5y agofirst thoughts: pro: may remove some pressure to follow growth-at-all-costs business strategy con: may cause employees to have to wait even longer to ever realize any gains from stock options
- astatine 5y agoHas all the makings of a great move. This should hopefully, let founders focus on the business instead of devoting all efforts towards securing an exit for the investors as the fund nears its cycle end. Particularly, if an investment is made later in the cycle.
- TuringNYC 5y agopro: might be a good signal to potential employees that the private-illiquid-stock timeframe will be long (not a quick flip) and best to discount face value of stock
- dcolkitt 5y agoHaving a permanent capital structure may allow employees with equity in portfolio companies to tender their shares for shares in the Sequoia Fund itself. Presumably those would be much more liquid.
- caust1c 5y agoI think the SEC would have something to say about this unless the exercised options made the individual an accredited investor ipso facto. Edit: But maybe that doesn't apply to selling shares on the private market, only buying? Also if it's written into the initial option grant, perhaps that's a way out too.
- someguydave 5y agoI don’t think you need to be an accredited investor to sell, only buy.
- pdog 5y agoGood luck trying to get Sequoia to accept common shares from employees in exchange for diluting their own capital, when they already get preferred shares in a different class through their investments in individual companies.
- dcolkitt 5y agoWhen Sequoia expands their AUM they make more money because they have more assets to collect fees on. This mechanism expands their AUM every time they tender shares. Sure common stock has a discount to preferred stock, but it's not an infinite discount, and it's mostly applicable in the pessimistic scenario. If employees are exercising their options, it's usually because the portfolio company in question has performed well. Sequoia would most likely be happy to acquire shares in those companies at reasonable discounts to preferred, which would make both parties happy. With a permanent capital structure, the most logical thing to do is for them to keep levering up positions in their winning positions.
- someguydave 5y agoPlus, if those employees get Fund shares and sell them back to Sequoia for cash, that opens up room for more investors to enter the Fund without any dilution. I can imagine some closed growth funds might have a hard time finding sellers.
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- svnt 5y agoI have never observed this level of optimism in the wild before.
- eecc 5y agoSo basically the Michael Dell equivalent for VC. Might make sense
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- boringg 5y agoWhats the MD model?
- Fenrisulfr 5y agoI think the reference is MSD partners, the family office (private investment company) of Michael Dell's fortune. They have been described as "patient capital" informally. I can't seem to find any articles using that phrase in reference to MSD Partners, but I've hard it thrown around a lot in discussions of their overall investment approach.
- moneywoes 5y agoHim taking Dell public then private then public again post a merger I believe
- cee_el123 5y agoI would like to see this as a formalization of the fact that companies of the following type need more time if they are to grow ethically companies like Uber, Amazon etc - that subsidize services at the expense of service providers (e.g. drivers, warehouse workers)
- LurkingPenguin 5y agoIs there any evidence that companies like Uber and Amazon would be able to grow "ethically" to the extent they have if they just had more time?
- repomies69 5y agoWe probably have not heard about their ethical competitors which returned -100% to the investors.
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- nickff 5y agoIs there evidence that Amazon treats warehouse workers worse than other warehouse/fulfillment companies do? All the anecdotal evidence I've heard is that Amazon treats people about the same, but pays better than the competition.
- repomies69 5y agoAmazon is the biggest and Bezos has too fancy yacht, thats why they get all the attention. Fair assumption is that amazon is not that different, maybe it is even a bit above average because they get so much attention.
- Nasrudith 5y agoThis raises many questions about how ethics are defined if it is flat out impossible under all market conditions.
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- rkk3 5y agoDoes this even mean anything in practice? When to distribute to LP's is a controversial question for VC's, Some do immediately after IPO & some continue to hold. Seems like Sequoia is just being explicit about potentially holding long term stakes in public companies (with VC Fees?).
- ignoramous 5y agoIn practice it does make a difference because the terms between LPs and Sequoia are now more in-line with the outlook Sequoia has towards the companies it funds; whereas previously, due to the rigid 10-year structure, it wasn't.
- samaman 5y agoI just want everyone here to know that Sequoia is funded by university endowments, and yet still does not have the confidence to invest in bleeding edge technology, picking instead to invest largely in "moat oriented" software. Nothing overtly wrong with it, but I just don't trust them when they claim to finally care more about slower growth companies. https://www.wsj.com/articles/university-endowments-mint-billions-in-golden-era-of-venture-capital-11632907802 https://www.wsj.com/articles/university-endowments-mint-bill...
- rkk3 5y ago> I just don't trust them when they claim to finally care more about slower growth companies. Slower growth companies? The piece is about wanting to hold their stake in portfolio companies like Square, Zoom and Snowflake post-IPO.
- mbesto 5y agoI don't think you understand how University endowment funds work. To put it short they diversify into asset classes - one being top tier VC (Sequoia, a16z, USV, etc.). In other words, endowment funds are investors in virtually every type of company possible - public entities, lending, credit, cash, hedge funds, startups, etc. - they simply don't care what the vehicle is as long as it meets their risk adjusted return goals.
- Animats 5y agoDepends on the university. Stanford got much more aggressive with investments in the 1990s. They spun off the endowment as the Stanford Management Company, headquarters on Sand Hill Road out by the VCs. They did very well - part ownership of Google, Cisco, Yahoo, etc. 12.2% average return per year over 30 years. It was starting to look like SMC was the tail that wagged the dog - a VC fund that ran a school as a side project for the tax break. They had their own CEO. So they were pulled back to the main campus, made a department of the university, and made somewhat less independent.
- cratermoon 5y ago“I think the issue begins in our high schools, and where women particularly in America and also in Europe, tend to elect not to study the sciences when they’re 11 or 12. So suddenly the hiring pool is much smaller.” https://www.vox.com/2015/12/3/11621140/venerated-vc-michael-moritz-opens-mouth-inserts-foot-on-question https://www.vox.com/2015/12/3/11621140/venerated-vc-michael-...
- thesausageking 5y agoa16z, Accel, and now Sequoia have become hedge funds. And Tiger and other hedge funds have started doing VC investments. Interesting bundling and unbundling of the industry.
- boringg 5y agoa16z hedge fund? Please explain.
- qeternity 5y agoBasically a crypto hedge fund.
- thesausageking 5y agoa16z restructured themselves into an RIA and is no longer a VC fund according to the SEC. By giving up the VC fund exemption, they have to follow the regulatory rules for hedge funds including background checks for employees, many more disclosures, 13F filings, etc. They did it because the change lets them to invest in public company stock, buy secondaries, buy crypto tokens, etc.
- mannymanman 5y agoSo all the 'Crypto Funds' they've been raising recently are not for investing in crypto companies, but to trade tokens?
- thesausageking 5y agoMost crypto funds are not structured as VC funds for exactly this reason.
- eldavido 5y ago"Venture Capitalists are just hedge fund managers who can quote the Tibetan Book Of The Dead." — Taylor Mason, Billions, Season 3: Flaw in the Death Star.
- Vox_Leone 5y agoAny initiative capable of making projects viable is always welcome. I'm working on a solution for a 3d image display in space, based entirely on electronics [electron scattering] and it hasn't been easy to find funding. I salute Sequoia Funds and wish them success.
- boringg 5y ago"Patience and long-term partnerships generate exceptional results. For Sequoia, the 10-year fund cycle has become obsolete." Bold Statement.
- rdli 5y agoWith the amount of capital available, no question that many companies that would have IPO'd years ago are electing to stay private (hello, Stripe!). The cynic in me says: this is great marketing, because the best Sequoia fund is the early stage fund (always oversubscribed) and now as an LP you can't invest in just the early stage fund. (But the reality is I bet they forced early stage fund LPs to invest in their growth vehicles anyway, so there is no material change other than marketing. Which is very good.)
- flyinglizard 5y agoThe opposite is also true, many startups have come out of the woodworks during the COVID market craze to go public because the money is there (SPACs are the extreme example).
- someguydave 5y agoI think the political writing on the wall is that the legal barriers are going to be lowered for entering the public market. So Sequoia and others are going to need to market themselves to founders as an alternative to going public.
- papito 5y agoAn SPAC is nothing but a fraud vehicle. Look at the new SPAC driving the new Trump "social network". They didn't have to do any work. No due diligence, no financial disclosures, no business plan, no numbers - nothing. After a few iterations of this and billions sucked up by these conmen, the government will have to step in and clamp down, while the conmen (and probably HN) bleat about "big government", "regulations", and "socialism".
- mbesto 5y agoThe recent (circa ~15 years) stock market boom has driven this. Their LPs are sitting their wondering "ya sure you got us a 100x return on investing in Facebook in 2006, but if you woulda kept your position when it IPO'd, it woulda been a 500x position". The market is driving this decision - there really isn't anything magical or bold about this.
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- hkmurakami 5y agoWouldn’t they do an in kind distribution? In which case it’s on the LPs to keep their positions.
- somethoughts 5y agoAny one know if this would fall under 13F reporting requirements? Asking for a friend :).
- vmception 5y agoAnybody in a VC Private Equity fund: can you tell me how capital calls work? In a hedge fund, limited partners just gives the fund a certain amount of capital and you see what happens. The way capital calls have been described to me is that limited partners just say they have a certain amount of capital available, and at any time the VC PE fund just requests/demands it from your bank account? Which seems a little odd and inconvenient to me.
- joshu 5y agoyes, they send you a note and you wire the money in. eventually they start doing distributions (hopefully). it gets hectic.
- vmception 5y agohmm, that model wouldn't be good for me. I mean I usually stay pretty liquid but I'm liquid in positions I want to see through to a price target! Just getting a random email or message to go indefinitely illiquid because I told them I'd be an LP would be a tough sell for me. I like the hedge fund with a heavy side pocket better. so its kind of cool Sequoia is describing just that. But I am wondering if there is an existing hybrid where the the PE fund has all the capital upfront and just has liquid investments for the cash before finding illiquid investments, where the majority of capital winds up in the illiquid investments anyway. General Partners can 1) keep the current fund open for new limited partners 2) start a new fund for people that want to feel like they are on the ground floor, and allow the GP to get a new headline about how fast they raised a bunch of capital.
- joshu 5y agothey don't call indefinitely, the committed amount is called over a 2-3 year period. they do this because it lets them keep the IRR low (since uncalled capital isn't invested and thus not counted) LPs generally do not want to have them take money and invest it into one thing and then another thing. they want to choose specifically what things they allocate to and nothing else. accounting is much more complicated than closed end fund. so essentially the way the world works means the things you are hoping for will never happen.
- joshu 5y agoas an angel i have invested in a bunch of companies that later IPO'd. they then continued to significantly appreciate. the downside is that the time horizon is very long (ie one that i invested in 2006 IPOd in 2015 and continues to rise) so the absolute return is huge but the IRR drops. so people who benchmark everything by IRR will not see much improvement, even though the TVPI etc are still awesome.
- mbesto 5y agoAppreciate the insight. Curious to get your thought here... I do know that some investors look at TVPI and generally understand why, but isn't IRR the only thing that really matters? Philosophically speaking, you can't change the time variable - we're on a continuum - so at the end of the day the only thing that you are able to compare is how well a single dollar performs over time? I understand this doesn't take into consideration liquidity, but TVPI doesn't really either.
- jacobr1 5y agoI'm not sure how it works in VC, but with real-estate investing, the Cash-On-Cash return, which is basically the same as TVPI is extremely helpful when comparing investments that potentially have very different ways to structure the leverage in the deal.
- joshu 5y agotime is very punishing to IRR as it stretches on, but the returns accumulate. you cannot assume a dollar is fungible as you may not have been able to invest in the same thing at some other point.
- moneywoes 5y agoDo you believe that the IRR is highest in PE for this reason?
- moneywoes 5y agoExiting out of Google early must be the reason behind this
- naveen99 5y agoNow just make the sequoia publicly traded like blackstone.