The venture capital firm will be led by founder Neil Shen in China, and is one of two global units being separated from its U.S. counterpart to operate independently

Key Takeaways:

  • Venture capital giant Sequoia is separating its US/Europe, China and India/SEA businesses to independent partnerships, with the Chinese company taking the new HongShan name
  • The move might give the newly named HongShan more room to invest in China as well as in other regions

  

By Teri Yu

When you grow up in the wilds of China’s fertile but fast-developing venture capital market, it helps to have a well-rooted brand to nurture you along. But as the Chinese market matures into a top destination for global investment in high-growth startups, there eventually comes a time to stand alone.

That looks like the case with global venture capital giant Sequoia Capital, which on Tuesday announced it will separate into three independent firms. The Silicon Valley-based company’s U.S. and Europe business will retain the Sequoia Capital name, while Sequoia India/SEA will become Peak XV Partners.

The firm’s China business will operate independently as HongShan, the English pronunciation for its Chinese name that also refers to the California redwood or sequoia trees from which it takes its name.

The Chinese name HongShan is already synonymous with private equity investment among Chinese startups and entrepreneurs. Its founding partner Neil Shen, also one the country’s best-known venture capitalists, will continue to lead the HongShan team. The move will give its highly successful China arm, which over the years has nurtured the likes of Meituan (3690.HK) and Pinduoduo (PDD.US), more room to flex its muscles as a standalone company.

The breakup is expected to be complete by the end of March next year.

In an announcement of the move on its Twitter account, Sequoia reiterated that its founder-focused, local-first approach has been key to its success. But it added that running a decentralized global investment business has become increasingly complex, especially since some of its portfolio companies have grown to become global leaders in various markets, leading to potential conflicts.

The move was less surprising to people in the industry, since the various global Sequoia entities were already growing apart based on the unique qualities of their individual markets. Such differences are all the more pronounced in young, fast-developing economies like China and India, where many of the companies nurtured by Sequoia and others are already local market leaders.

For its part, Sequoia China has branched out beyond its original venture capital mandate that tends to focus on early-stage investments. Its current book also includes a wide range of multi-stage private investment funds, tech/consumer and healthcare public market funds, and an infrastructure fund, as well as a buyout business, making it a more diverse investor and asset manager.

Sequoia China is one of the local leaders in its class, which also includes other global players like Softbank’s Vision Fund, CVC Capital and PAG, testifying to how much China’s corporate investment scene has matured in the last two decades.

Venture capital greenfield

Sequoia China’s founder Shen was one of the earliest people to enter a field that was a far less mature greenfield for venture investment when he first set up the firm’s presence in China in 2005. Before that he had co-founded and served as CFO for leading online travel site Ctrip.com, which listed on the Nasdaq in 2003 and later rebranded itself as Trip.com (TCOM.US; 9961.HK).

Riding the exponential growth wave of China’s tech sector, Sequoia China would go on to back local giants including on-demand delivery services provider Meituan, e-commerce company Pinduoduo and TikTok owner Bytedance, to name a few. All said, the firm has invested in over 1,200 companies over its 18 years across China’s consumer, healthcare and technology sectors.

Most recently, Sequoia China raised $9 billion in fresh capital last year from investors around the world, including in the U.S., Europe, Asia and the Middle East, even as some of its rivals had more difficulty fundraising.

Sequoia China’s strong run contrasts with its U.S. affiliate, which has gone through a rocky patch over the past year following better times when it backed names like Apple, Google, PayPal and Instagram. The U.S. company’s $800 million bet on Elon Musk’s Twitter has raised eyebrows, while its disastrous investment in crypto-currency exchange FTX tarnished its reputation and ultimately led to a $200 million write-down, casting doubts on its ability to effectively oversee its investments.

Sequoia U.S. is also overhauling the structure for its U.S. and European funds that will allow it to hold shares in publicly traded companies for longer. Unfortunately, that shift was poorly timed, coming during a turbulent period for global capital markets.

Sequoia’s U.S. arm has lost big money on its investments in names like scooter company Bird Global (BRDS.US), which was once valued at $2.5 billion but is now worth just $30 million after being listed using a special purpose acquisition company (SPAC). Similarly, DoorDash (DASH.US), which was 20.4% owned by Sequoia at the time of its IPO, has seen its stock price fall 75% from its all-time high.

Like other U.S. investment firms, Sequoia might be feeling pressure due to current geopolitical tensions between Washington and Beijing. Even though the breakup might mean HongShan has more flexibility with its investments beyond China, its substantial base of limited partnership (LP) investors from the U.S. means the firm is still subject to strict compliance protocols, which include consulting external experts on potential investments and their industries.

Sequoia has quoted other reasons for the break-up, including adding more agility to its global businesses in making their investment decisions. The shared Sequoia brand has also caused market confusion, leading company founders in search of funding unclear on which Sequoia entity they should engage with. All these factors called for a local-first approach.

The upside

Sequoia China’s new independence should also give it more room to develop its own strategy to leverage market opportunities. An overall conservative approach is likely to continue among such international investors as they have scaled back their local activity since China’s crackdown on the consumer internet industry starting three years ago, and also due to a slowing global economy.

It could become more active in deals beyond China. The company already has investments in South Korea, Australia and Japan, so becoming more active in the Asia Pacific region looks like a logical next step. Such a move could come in tandem with the many Chinese entrepreneurs the firm has backed over the years, who are now increasingly eyeing opportunities abroad.

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