Why Might Sequoia Capital Go Down in History as the Greatest Venture Capital Fund Ever?
An upcoming Forbes article “Inside Sequoia Capital: Silicon Valley’s Innovation Factory” of April 14th, 2014, is a good read, especially for those not familiar with the fabulous venture capital firm, a favorite of the Academic Entrepreneur and arguably the best in the world. There is also an infographic provided of some of the entrepreneur founders the venture capital firm has invested in “The Sequoia Touch”. Included amongst them is Julia Hartz wife of Sequoia limited partner Kevin Hartz and co-founder of portfolio company Eventbrite and Jan Koum from WhatsAp that was recently acquired by Facebook for $19 billion. This has placed Sequoia partner Jim Goetz in First Place on the Forbes Midas list of investors. The firm has a record 9 people on the list this year, including Michael Goguen who made the Netscreen investment, amongst others.
Besides being one of the most exciting venture capital firms in the world, with investments in cool companies such as Apple, Yahoo, Google, YouTube, Eventbrite, LinkedIn, Cisco and more recently Airbnb, Dropbox, FireEye, Palo Alto Networks, Stripe, Square, WhatsApp and Skyscanner, Sequoia Capital has been a top performer in the realm of private equity venture capital. The takeaways from this writing by the Academic Entrepreneur are venture capital fund performance and immigration energy, and the possible correlation between the two. A third element for a future revision is venture capital fund culture and business processes, but this opens a whole new can of worms. Researchers such as Bart Balocki and his work on “Running the Gauntlet” have explored this in depth. Another work is a classic pop ethnography entitled eBoys by Randell E. Stross.
Performance of Sequoia Capital
As a private equity venture capital firm, historically Sequoia Capital has not had to disclose returns to investors in any public forum. However, more recently, universities have begun releasing their returns data on their endowment investments, including those in the venture capital asset class, so we can get a glimpse into their performance. Forbes also had something to say about this in the above referenced article as Sequoia turned $400 million from 40 limited partners into $4 billion for a classic 10X winner that produced the much sought after IRR of 40%+ on limited partner capital :
“Consider Sequoia Venture XI Fund, which in 2003 raised $387 million from about 40 limited partners, chiefly universities and foundations. Eleven years later Venture XI has booked $3.6 billion in gains, or 41% a year, net of fees. Sequoia’s partners stand to collect 30%, or $1.1 billion, while limited partners get 70%, or another $2.5 billion. Look for even more outsize returns from Venture XIII (2010), which is up 88% a year so far, and Venture XIV (2012). The latter two will split the $3 billion or so Sequoia takes home from the WhatsApp deal. Add it up and Sequoia is turning its own partners into billionaires while keeping outside investors purring.
“We’ve hired more than 200 outside money managers since I came here in 1989,” says Notre Dame’s investment chief, Scott Malpass. “Sequoia has been our number one performer by far.””
It seems as if Sequoia’s next fund XIII, a 2010 vintage, might do even better, and XIV, a 2012 vintage, is looking good too. Time will tell as these venture capital funds are 10 years in length, as is standard. However, it does seem that Sequoia is not shy about managing their funds intelligently, even if their return periods need stretching to 16 or 17 years. The Academic Entrepreneur contends that the ideal length of a private equity venture capital fund in a traditional limited partnership structure for optimized management of returns is 20 years. Sequoia Capital seems attuned to that, and no doubt the firm has the trust, and thus the patience of the limited partnership base. In addition, the firm is adept at managing investments as well in terms of holding periods. The Forbes article pointed out both of these performance-driven money management strategies:
“Sequoia is equally stubborn about maximizing gains from its top-performing companies. (Back in 1979 Sequoia sold its Apple stock after holding it for just 18 months, and Sequoia partners aren’t about to make that mistake again.) Unlike other venture firms, which run their limited partners’ investment funds for 10 years, Sequoia often looks for ways to extend its partnerships’ lives for as much as 16 or 17 years. Sequoia held its Google stock for nearly 2 years after that company went public; it held onto Yahoo even longer in the 1990s.
An especially intense test of Sequoia’s willingness to buy and hold involves ServiceNow, a software company providing help-desk services to corporate customers. In July 2011 an unexpected suitor offered to buy the company for $2.5 billion. Sequoia had become a significant investor in late 2009, leading a $41 million investment round, with Leone joining the board. Cashing out at that point would have brought Sequoia about a 10-to-1 return on its investment.
Most of ServiceNow’s directors thought the offer was intriguing. Only Leone regarded it as insulting. Rallying some of his colleagues, he worked up a 12-page analysis arguing that directors would be “giving away the company,” even at a $4 billion valuation. To his eye, even though ServiceNow was early in its growth curve, its participation in the fast-growing software-as-a-service sector made it a company with vastly better potential than outsiders could see.
After some debate ServiceNow’s directors turned down the offer. A year later ServiceNow went public and attracted a $2 billion valuation. Leone’s disdain looked a bit off, until ServiceNow shares took off post-IPO. Current market value: $8.3 billion.”
Thus another $6 billion was made for the firm’s investors. This is just one of many firm-level money management decisions. Granted, such confront venture capital firms all the time, and we can be sure that mistakes have been made even at Sequoia itself. But serendipity seems to be on the firm’s side.
There are other reasons why the firm is successful though. Some of this has to do with the way in which Sequoia Capital generates its deal flow and the type of entrepreneurs it targets.
Immigration and Entrepreneurial Energy harnessed by Sequoia Capital
Doug Leone is now the senior partner with administrative oversight in the firm, the article discusses his humble beginnings as an immigrant to the Unites States of America from Italy, and how the energy from that still pervades his life, and that of the firm’s in some manner, today.
Its a well known fact in the Silicon Valley that 50% of all innovative technology ventures are founded or co-founded by immigrants. Moreover, the creativity, skills and talent that outsiders import to the shores is not taken for granted by technology companies. Thus we see venture capitalists and entrepreneurs such as Mark Zuckerberg trekking to Washington, DC to attempt to influence immigration policy in the United States and open it up. Most fittingly in terms of immigration policy that the Academic Entrepreneur often covers in this publication, Sequoia Capital correlates its success directly to its ability to successfully and competitively harness immigrant entrepreneurial energy:
“Sequoia’s ties to Silicon Valley’s brightest immigrants are hardly an accident. Italian-born Leone rubs shoulders with fellow partners from Wales (Moritz), South Africa (Botha), Taipei (Lin) and old-line parts of the northeastern U.S. who think of themselves as immigrants, too. Native Californians are rare at the firm. Everyone is an outsider, still trying to win acceptance–and success–in a new land.
As a result Sequoia’s partners don’t mind hunting for great new startups in the ratty coffee shops and low-rent offices where such companies often are born. Other venture capitalists let success draw them into Pebble Beach golf tournaments or the rarefied venues of Davos and Aspen gabfests. “We don’t go there,” Leone says. “That’s not where the next founders are.”
-George Anders, Forbes, “Inside Sequoia Capital: Silicon Valley’s Innovation Engine” April 14th, 2014
So the question is as follows: Is there a correlation between superior venture capital fund returns and the practice of investing in immigrant-founded ventures?
I would posit that there is indeed. Some digging in the research on venture capital is called for at this juncture.
Interview with Doug Leone at TechCrunch SF
How Sequoia Capital Stays on Top