Sequoia Capital’s decision to split three ways has surprised everyone. Separating the US operations from China is an inevitable response to deglobalization as the drumbeats of a tech and trade cold war between Washington and Beijing gets louder, making cross border investments in next generation AI, semiconductors or vaccines a geopolitical casualty. India, which is in neither camp, could have been collateral damage in this messy divorce, perhaps a fallout of an internal power strife between two ace investors, Neil Shen, founder of Sequoia’s China outpost and Roelof Botha, the fund’s senior most steward, based in US. But the timing of the unexpected India and South East Asia carve out is odd since as recently as this February, Botha in an interview to ET said the firm stood firmly behind the local franchise.
What then changed within months that forced such a hand? When one of Silicon Valley’s biggest bankrollers bails out, it can be seen as the biggest vote of no confidence on our home grown venture capital (VC) industry? For the longest time in the LP fraternity, the commitment to Sequoia India was seen as an acceptable tax to be paid to get a haloed entry into the high performing venture and growth funds of US and China. But based on recent actions, what’s baffling is if Sequoia has indeed lost faith in the India opportunity, why raise such a large amount of capital on THEIR name that puts THEIR credibility on the line.
If venture investing is all about part performance and part promise or potential, then the only perceptible change is the new boss has gone through the data and concluded it ain’t working out even after 17 years. $9.2 billion raised for the region and they have distributed $4.5 billion back, to quote a MoneyControl interview dated June 7. For a VC/growth fund of such pedigree, that is not a top 25 percentile performance pan Asia.
The termination of this once highly successful partnership that scoured the consumer internet and tech universe and unearthed multi baggers — Apple, Google, AirBnb, Alibaba, TickTock, Bytedance, JD.com among many others – by this year end, would also mean that other than Accel Partners and Lightspeed Venture which itself is beset with a bleeding India portfolio, none of the top 10 VCs worldwide — Andreessen Horowitz, Dragoneer, Tiger Global, Kleiner Perkins, NEA, Khosla Ventures, Founders Fund, Index Ventures, Greenspring etc — are in India any more. Some never set foot, others cashed their chips out early. American capitalism always been very zero one. They give you a long rope but in the end if it does not work out, they dispassionately cut the chord and move on.
The pullout will further catalyse global limited partners (LPs) who invest their capital in these high risk asset managers to spot the next big idea and opportunities worldwide, to have a serious relook at the Indian startup eco-system yet again. For all the dollars raised for India – the highs of $38.5 billion in 2021 as per consultants Bain & Co. the resilience of the India stack should be analysed across the last 15 years. Within that time span, how many $10 billion companies have the eco-system really spawned? Take out one Flipkart from the equation that was acquired by Walmart for $16 billion, one would struggle to find even half a dozen companies that are valued at $5 billion today. Nykaa, Zomato, PayTm and then we fall off a cliff. With one investor after another marking down or even writing off their punts in several of our high profile tech disruptors, the list of ‘paper’ unicorns have also shrunk dramatically from the triple digit highs to what now looks like half of that number. Unlike public markets, in private companies, valuations are what you make it out to be but in private most VCs would admit with this maths.It would be wrong not to acknowledge some of our trailblazing young entrepreneurs who are rewriting the ways we eat, shop, play, pay or even sleep, but this handful is not enough to support such massive inflows. So it should not come as a surprise if the VC rubber is meeting the exit road, no matter the sarkari pitch of start up India.
Truth is the biggest gets the maximum flack: Ask Softbank about it and I have argued before in this column that Sequoia — one of the biggest beneficiaries of the start-up boom from 2019 to 2022, right through Covid — has been under siege of late with multiple cases of misgovernance, warring founders and former colleagues; portfolio companies blowing up one after the other, supine boards failing to stop or detect brazen corporate malfeasance. It’s endemic to the venture world really. With money on tap, FOMO fuelled gross indiscipline and imprudence is as commonplace as a term sheet. Giving money is the easy part. Making it is a whole different ball game for any money manager.
As if a BharatPe, Zilingo, Trell and GoMechanic or Byju’s legal wrangling were not good enough that a Rahul Yadav had to come out of the woodwork as news of its investor Info Edge initiating a forensic audit hit the headlines also this week.
Coming back to where it all started. Where does the India team – rebranded as Peak XV Partners — go from here? First they need to decide on the core DNA – be an investing firm or a marketing one. Marketing firms measure success by assets under management (AUMs) as opposed to investing firms that are wired only to chase returns. The latter is far more rewarding, has longevity but needs toiling for years. Case in point: Pulak Prasad’s Nalanda Capital.
Irrespective of the legal contortions of the fund raise last June, it was raised on the back of the performance of the mother brand and therefore in this new configuration it will be interesting to watch what pressures the limited partners put on an untested group of fundraisers who will henceforth raise capital on the back of their own track record and India’s elusive venture potential.
Perhaps a clue lies in their alma mater itself. Historically, the moral timer of Sequoia of doing right by their LPs during several periods of bad performance has made them earn trust. Without the parent’s brand equity, voluntarily cutting fee and carry from 2.5% and 20% to the industry norm of 2 &20 would be a good start to soothe nerves.
Views expressed are author’s own