Sequoia Capital's New Structure Seems More Like VC鈥檚 Natural Progression Than A Game Changer

When announced late last month it was changing its fund structure, some viewed the shift as revolutionary鈥攚ith even the firm itself calling the old VC model of 10-year funds 鈥渙bsolete.鈥�

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However, while the change in the tried-and-true method of doing business in the venture world is noteworthy, it also in many ways seems like just the next logical step in the continued growth of an asset class that has become increasingly large and institutionalized.

鈥淚t鈥檚 innovative, but it鈥檚 more evolutionary than revolutionary,鈥� said , managing director at 鈥攊tself an evergreen fund not beholden to time limits.

The main thrust of Sequoia鈥檚 big announcement is that it is doing away with the 10-year fund model and creating the new, open-ended Sequoia Fund. That new main fund will distribute money into close-ended 鈥渟ub funds鈥� such as seed, venture and growth for new investment, with any exits from those funds replenishing the main Sequoia Fund in a type of VC-related symbiotic relationship.

The new fund is expected to close in Q1 of next year, with limited partners being invited to invest in the new sub-funds based on monies allocated into the larger Sequoia Fund.

Sequoia declined to comment publicly on the new fund.

The public market

The catalyst for such a change is the fact firms such as Sequoia鈥攚hose list of investments is a who鈥檚 who of tech giants from and to and 鈥攆eel constrained by the traditional time-limited VC fund model that forces it to sell its stake in successful public companies in order to close the fund. Although the VC firm may be able to take advantage of a successful exit through the IPO, it can lose out on the value created in the years after.

about the impending change, Sequoia partner used the firm鈥檚 investment in as an example. Sequoia invested in Square in early 2011 and had a market capitalization of $2.9 billion when it went public in 2015. By 2020, Square鈥檚 market cap was at $86 billion and now stands at more than $106 billion.

鈥淥ur industry is still beholden to a rigid 10-year fund cycle pioneered in the 1970s,鈥� Botha wrote. 鈥滱s chips shrank and software flew to the cloud, venture capital kept operating on the business equivalent of floppy disks.鈥�

More money, more changes

While the venture world certainly is different than 50 years ago, Sequoia鈥檚 new fund model seems to be a reaction to changes brought upon the industry by many of the large firms themselves for the last decade鈥攊ncluding Sequoia.

The main driver of this change is the simple fact companies are staying private much longer than in the past. went public just three years after being founded. Now, due to bigger rounds at even larger valuations, companies can stay private for a decade before even considering going public, cutting significantly into how long a VC firm can hold its public stake before needing to close what is typically a 10-year fund.

Venture’s significant growth in the last decade-plus have made this change in fund structure for large firms like Sequoia almost inevitable due to the way these firms now operate鈥攎aking the public market not nearly as attractive as the more sheltered private market and the capital now there.

So inevitable, in fact, it has been done before in different ways. In 2018, launched with a $1.35 billion fund to help buy up secondaries of tech companies in its portfolio. This allowed the firm to retire the more traditional NEA funds without forcing exits while also holding onto large tech growth companies as their value increased. NewView now has four funds.

San Francisco-based venture firm has raised about $1 billion this year for a holding company that would hold investments for longer than traditional venture funds.

Even the Sequoia brand itself has become part of the public/private crossover world. In 2009, , which operates independently, was founded. The hedge fund has 鈥渋nvestments spanning from late-stage private companies to public companies鈥� and was created to expand Sequoia Capital鈥檚 technology investing efforts into the public markets, its website reads. SCGE currently manages over $12 billion of assets, according to its website.

Not for everyone

One other thing seems true about the new play by Sequoia鈥攊t likely is not something that can be copied by the majority of the venture world.

The success some of Sequoia鈥檚 portfolio companies have seen in the public market is one of the reasons the firm is looking to move away from time-limited funds. Many venture firms, however, never see a portfolio company exit to the public markets.

Sequoia holds $45 billion in public positions, with $43 billion being gains. In the past 15 years, the firm has distributed more than twice as much to its limited partners鈥�$29 billion鈥攁s it has invested鈥�$12.5 billion.

That type of success is hard to match and likely why we won鈥檛 see the majority of the VC world follow.

That success also is what likely emboldened Sequoia to look at a more enduring fund.