The Split of Sequoia Capital: Geopolitics, Investment Conflicts, and Future Games

Original Author: Alex Konrad, Forbes

Compiled by: Deep Tide TechFlow

The world's most renowned venture capital firm, Sequoia Capital, is splitting up. Sequoia Capital is known for its early investments in American tech companies such as Airbnb, WhatsApp, and Zoom, as well as its international investments in giants like ByteDance and GoTo through its China and India funds. It will now divide into three completely independent companies.

Sequoia's global leadership confirmed the news in a letter to LPs on Tuesday morning, signed by the leaders of the three companies: Roelof Botha, Neil Shen, and Shailendra Singh. The resulting companies—Sequoia Capital representing the U.S. and Europe, HongShan representing China, and Peak XV Partners representing India and Southeast Asia—plan to complete the separation "no later than" March 2024.

In separate interviews with Forbes, the three investment heads stated that the decision to dissolve the Sequoia global brand was gradual and took several months. They cited factors such as conflicts between the venture portfolios of the funds, brand confusion caused by strategic disagreements, and the increasing complexity of maintaining centralized regulatory compliance—while acknowledging, but trying to downplay, the harsher geopolitical environment.

"It seems things are heading in a direction that's becoming harder rather than easier," Botha said. "This is not surrender—'white flag, we failed.' In a sense, it's a victory because we have these completely independent businesses that can go further."

Founded in 1972 with just $3 million in its fund, Sequoia became a key player in Silicon Valley's tech hub, growing its assets to billions over the decades through early investments in companies like Apple, Cisco, Google, and Nvidia. In the mid-2000s, the firm began establishing funds in China and India, managed by local investment partners. (It later closed its Israel fund established in 1999.) However, unlike the recent outstanding achievements of Sequoia's U.S. business—including Airbnb, DoorDash, Snowflake, WhatsApp, and Zoom—Sequoia China proudly boasts its own long list of investments, including Alibaba, Meituan, and TikTok's parent company, ByteDance; the India and Southeast Asia fund can point to companies like Byju's, GoTo, and Zomato. Sequoia partners ranked highest on Forbes' "Midas List," which is the annual ranking of the world's top venture capitalists, with 10 investors making the list in 2023, led by Shen, who has topped the list for the fourth time. Sequoia investors have held the top honor on the "Midas List" for half of its 22-year history.

From the beginning, Sequoia viewed its regional funds as relatively independent, with decentralized deal processes and portfolio decision-making. Partners in one geographic area would not review potential deals from another region; instead, these funds shared logistical functions, including compliance, finance, investor relations, infrastructure, and online portals for partners. There was overlap among investors in different regions, and partners often made personal investments in each other's funds. However, partners noted that divergences had emerged in certain areas, with investor relations becoming more localized and each fund company building its own software.

In the future, the new companies will establish their own infrastructures, and partners will no longer invest in each other's funds. Any profit-sharing (and logistical functions) will cease to be shared among the different regional funds as of December 31. Sequoia declined to comment on its previous profit-sharing arrangements.

Despite Sequoia's dominance in venture capital over the years, recent headlines have not been particularly friendly to its brand image. Its U.S. and European divisions faced scrutiny over investments in Elon Musk's new Twitter and the failed cryptocurrency exchange FTX. Meanwhile, the U.S. fund adopted a different fundraising model in February 2022 through the Sequoia Capital Fund, which allocated funds from a large, indefinite fund and allowed for longer equity holding periods, but this move occurred before the market correction. According to a report from The Information, it allowed limited partners to waive capital withdrawals in one go. (One insider indicated that this was done to alleviate the needs of those requiring liquidity due to market changes.) As of earlier this year, the fund had over $13 billion in assets.

Meanwhile, Sequoia's business in China continues to grow, even as geopolitical relations between regions, particularly between the U.S. and China, become more strained. According to a Forbes report in May, Sequoia China remains a major shareholder in ByteDance, holding about 10% of the company, potentially worth billions. The Sequoia U.S. fund is also a shareholder in ByteDance, investing globally in emerging portfolio companies through its growth fund established in recent years. Of course, ByteDance is the parent company of TikTok, which has faced numerous controversies and regulatory scrutiny from U.S. lawmakers in recent years. In 2020, the company's former global leader Doug Leone lobbied the Trump administration on behalf of ByteDance for its U.S. and European funds; last year, the fund reportedly hired a consulting firm in Washington, D.C. for assistance.

Neil Shen remains a board member at ByteDance and declined to comment specifically on this investment. However, he generally opposes the view that separating the funds would make it easier for Chinese companies to list in Hong Kong or elsewhere. "These are no longer young companies," he said. "I don't want to overestimate our ability to assist a company with its IPO just because we have substantial ownership."

In their separate interviews, Botha, Shen, and Singh all denied that geopolitical tensions were a specific catalyst for this change. They all stated that conflicts between the increasingly expansive portfolios played a larger role. Well-known companies within each portfolio have previously competed directly, such as Stripe in the U.S. and Airwallex in China, which competes with a company in Sequoia India. However, as Chinese and Indian companies increasingly seek to venture beyond their domestic markets and with the rise of remote work, this situation is becoming more likely, blurring geographic boundaries. Botha recounted a recent complaint from a U.S.-based Sequoia portfolio company, where a competitor supported by the Sequoia team in India told potential customers that it was the company's big bet in that category.

"That's awkward, right?" Botha said. "From a customer's perspective, you're trying to buy technology from what you think is a Sequoia-designated company, which has Sequoia's influence behind it, but now there are two, which is confusing."

Singh pointed out that frustrations can occur in both directions: he recounted a well-known (but unnamed) American tech company complaining to its Sequoia partners in the U.S. that it believed an investment by Sequoia India would be competitive in the future. But Singh noted that his team had written a check over a year ago. Sequoia India has since exited. In the current boom of AI companies, Singh imagined similar conflicts. (Sequoia Capital has invested in OpenAI through its U.S. fund.) "If we are shut out from investing in important companies in our region due to conflicts among AI founders, that would be very destructive," Singh said.

These funds are also diverging in other ways. Although limited partners from the three geographic regions had gathered in one room to review new funds for over a decade, Sequoia India and Southeast Asia and Sequoia China have independently raised their most recent funds—$2.85 billion and $9 billion, respectively. (Shen noted that while some of this money comes from U.S. institutions, it is primarily "foreign capital," with none coming from China itself.) While the U.S. business announced a $195 million seed fund in January this year, focusing on doubling down on early-stage investments, the China business has recently placed more emphasis on non-tech investments, including infrastructure, as well as its hedge fund's public equity practices.

In the U.S. and Europe, the Sequoia named after the famous California tree will continue to retain its name, a name proposed by the late Don Valentine, who expressed a desire for the company's name to outlast him. Sequoia Heritage (a philanthropic family office) and Sequoia Capital Global Equities (a public/private crossover firm) will also continue to exist as independent businesses. The new name for Sequoia India, Peak XV Partners (pronounced "fifteen"), comes from the original name of Mount Everest, Singh said. According to Shen, Sequoia China has been using the Chinese name 红杉, meaning "redwood," and will now adopt the English transliteration "HongShan." "Many Chinese entrepreneurs may not even know how to spell Sequoia," he said.

Shen does not believe that his investor base will see a significant shift due to HongShan. "If investors are not comfortable with China, they won't invest. I don't think choosing a new name will have any impact. But most investors think about issues from the perspective of returns and performance," he said.

Singh's fund is registered in Mauritius, where he said the fund limits each limited partner to fewer than 100, and Peak XV's limited partner base only partially overlaps with other Sequoia regions. He added that this situation will continue. "We love Sequoia, but our brand is built on relationships, and we believe our own brand is strong, which will drive us forward in a good way," Singh said.

As for the post-split Sequoia, Botha scoffed at any comments suggesting that the company would not continue to move forward from a strong position (at least by its own historical standards). He remains confident in his PayPal alumni group and South African compatriot Musk, saying, "Just look at what happens on Twitter," and noted that while FTX was "unfortunate," it was just a small loss for a fund "with multiple other winners." He stated that even if it means the company continues to hold shares in some companies that have gone public and subsequently saw their stock prices decline, he would not regret the shift in Sequoia's fund model. "Can we distribute everything? If you look at the performance of our funds and the companies we support, it's hard to say we're at a disadvantage," he argued.

Looking ahead, Botha expressed hope that the two companies will view each other as cousins with a shared heritage, even if they no longer have any special relationship. "This is a huge success because we ourselves are entrepreneurs who have helped spawn four other great companies, all of which are now their own leaders," he mentioned, referring to companies outside of his own. As for Sequoia Capital: "I haven't felt this excited about tech investments in the U.S. and Europe in a decade," Botha said. "It reminds me of the early days of the internet."