Sequoia’s U.S.-listed portfolio companies last year have lost more than $7.7 billion in market value since their debut, according to Bloomberg’s analysis of public filings. The decline was driven by a $4.2 billion drop in the value of the firm’s IPO stake in a Brazilian digital bank. NU Holdings Ltd..
The fall, which extends to the firm’s funds, is a paper loss for now because Sequoia did not sell its shares. This is in line with his usual strategy whereby he typically holds shares after the initial sale of shares and the post-IPO lockup period before distributing the shares to his own investors. In some cases, Sequoia has bolstered its holdings by purchasing an additional 2.6 million shares of analytics firm Amplitude Inc. in February of this year and an additional 5.5 million shares of software company Freshworks Inc. in March for its growth funds, according to filings.
However, the decline comes at a particularly inconvenient time.
In October, Sequoia announced a new structure, Sequoia Capital Fund, which allows it to invest and hold public shares indefinitely, bypassing the main limitation of venture capital. Roelof Botha, a partner at Sequoia, said the move was in response to the strong performance following the IPOs of some of his portfolio companies, such as Square, now known as Block Inc.
Assets from separate venture capital funds are being moved into the new structure one at a time and at the discretion of the firm’s partners, two people familiar with the matter said, who asked not to be named while discussing a private matter. While the shares are being transferred, not sold, they will still need to be brought to market, so the change will still affect one important metric: the initial return of the VC fund, people say. As the current market is in turmoil compared to the end of last year, partners are facing a blow to their carry, or the returns they receive tied to the performance of the original funds.
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“The long-term focus of the Sequoia Capital Fund allows us to deepen our commitment to the founders and strive to generate superior returns for our LPs by accumulating value that occurs later in the company’s journey,” said Menlo Park, California. based firm said. “This is true regardless of short-term fluctuations.”
The downturn in the market means “this is not an ideal time” to implement the new structure, said Robert Bartlett, a UC Berkeley law professor who specializes in venture capital funding. He did not criticize the firm. “Sequoia, they write their own rulebooks and they’ve been successful,” he said. “I’m not going to doubt Sequoia.”
Even with the recent downturn, the investment is still largely profitable for Sequoia because the firm is getting in so early.
For example, he bought most of his stake in robotics company UiPath Inc. in 2018 financing, paying about $6 per share. Even though UiPath shares fell to $18.19 at the end of the first half, well below the $56 IPO price, Sequoia is still coming out ahead.
Part of the funding was provided by foreign partners. Teams in China and India have led investments in Full Truck Alliance and Freshworks. The companies included in this article are limited to those for which Sequoia shares were available in public documents, so not all post-listing waivers are covered.
Sequoia isn’t the only VC firm that tends to hold stakes long after the lockdown expires and has been affected by the downturn in the market. Applications show
Andreessen Horowitz and Benchmark also suffered.
Publicly, Sequoia says it is oblivious to the impact of market turmoil on its portfolio companies. Eric Newcomer wrote in a June newsletter about some of Sequoia’s demise.
“Sequoia remains bullish on technology,” partner Bill Cafran said at the Global Corporate Venture and Innovation Summit in Monterey, California last month. Then, noting that he speaks for himself, and not on behalf of the company, he found in the minuses and the positive side. “Actually, I’m glad to see rationality returning to the markets.”