When Sequoia Capital China was raising $9bn to invest in the country’s start-ups last year, Helen Huang was among those keen to back the venture capital group.
“China is not going to decouple its markets from global markets,” said the private equity investor at MassPRIM, which manages $100bn in pensions for Massachusetts state employees and teachers.
According to the US pension fund’s board minutes from May last year, provided to the Financial Times through a public record request, Huang recommended that MassPRIM invest $150mn into Sequoia China, lauding the firm’s ability at “deciphering the signals from policymaking and regulations”.
“Superlative. Can I use the word ‘superlative’?” gushed state Treasurer Deborah Goldberg on Huang’s risk assessment. All nine members of the pension’s board present voted for the deal.
Just over a year later, deteriorating trade relations between the US and China have precipitated the break-up of Sequoia, shattering the view that one of the world’s most successful venture capital empires could continue to navigate the tricky geopolitics of investing across the world’s two biggest markets.
The Silicon Valley group said on Tuesday that its US and European operations would be carved away from its China arm, managed by renowned investor Neil Shen who had led early investments in Alibaba and TikTok parent ByteDance.
The Chinese unit will take the name HongShan, a Chinese translation of Sequoia and remain in charge of nearly $56bn in assets under management. Sequoia’s Indian and south-east Asian business would form a third entity. The changes will take place by March next year.
In an interview with the Financial Times, Sequoia Capital boss Roelof Botha lauded the success of the newly separate entities: “When I joined Sequoia in 2003 these businesses [in China and India] did not exist. They are now flourishing businesses in their own categories.”
He said splitting the firm into three was the simplest way to prevent a trio of entities with global ambitions rubbing against one another.
But Botha also drew a telling historical parallel to describe how much investing conditions had changed. “The number of years that have elapsed since we embarked on this is the same as that between World War One and World War Two,” he said.
Investing in China has become increasingly complex for US institutions in general, but the turbocharged growth of Sequoia China over the past decade and its international investor base have left it particularly exposed.
Sequoia China has faced increased political scrutiny in the US for its investments in Chinese companies that Washington alleges pose a national security risk, including the sanctioned drone maker DJI and AI start-up DeepGlint, which has been accused of facilitating surveillance of Uyghurs in Xinjiang.
Sequoia China’s backing of TikTok parent ByteDance has also become problematic, with the US threatening to ban its viral social networking app in the country, and the controversy complicating plans for an initial public offering of the Beijing-based company.
The Biden administration, meanwhile, is considering an investment-screening mechanism to stem the flow of US capital into Chinese groups in sensitive sectors such as semiconductors and artificial intelligence.
Sequoia has always stressed that the US and European, Chinese and Indian entities have operated with “independent ownership and investment decision-making”. But a shared brand that drew global investors to each of the geographical units has more recently become a magnet for critics who link a high-profile US investor to contentious Chinese companies.
“Sequoia is successful in both geographies independently,” said one executive at a Silicon Valley fund. “But you can’t be wining and dining the US president and have investments which could be controlled by the CCP. The geopolitics made it impossible to have that exposure so in the end they cut it off. India, I think, is collateral damage.”
As part of the split, Sequoia will end a profit-sharing arrangement with its Chinese and Indian entities. That arrangement has allowed individual partners at the firms to share in the rewards when companies in another entity’s portfolio are sold or go public.
The split also unwinds a partnership that made Shen a billionaire, while enriching Sequoia’s US partners and investors. That structure was designed to create shared interest in the firm’s global success, but Shen’s huge profits from China appeared to change the dynamic.
Two people close to Shen said he had begun to bristle at what he considered to be China’s outsized contributions to the profit-sharing pool. Shen “was agitating to be independent for a long time,” one of the people said. HongShan said the split was a collective decision that was made recently.
According to a person with direct knowledge of Sequoia’s profit-sharing arrangements, the US and Europe business has accounted for a greater proportion of total distributions to the pool overall.
Sequoia did not provide precise details of its profit-sharing. The firm said the arrangement was always designed so that regional entities would ultimately receive profits in direct proportion to their contribution to the profit pool.
The break-up of the firm will also end a practice of employees in one Sequoia region investing alongside funds in another region — a strategy that has been lucrative for partners who have put personal wealth to work overseas.
Shen, for example, brought Sequoia’s global growth fund into rising ecommerce group Pinduoduo in an early funding round. Filings show former Sequoia US leader Doug Leone has already cashed out about $8mn of Pinduoduo shares.
Sequoia’s challenges have escalated as Beijing led a crackdown on consumer internet groups, and left Chinese venture capitalists chasing sensitive sectors aligned with government priorities at the heart of the US-China rivalry.
“Over the past couple of years Sequoia has faced a lot of pressure from the US side on its China business,” said one consultant to LPs in China. “The split means Neil can now find the right deals and invest without worrying about political pressure from the US.”
HongShan called the remark “completely baseless” and said that with a substantial base of limited partners from the US, it would continue to adhere to strict compliance protocols.
A changing of the guard at Sequoia — with former “senior steward” Leone being replaced by Botha at the top of the firm last year — may have edged Sequoia closer to decoupling, according to two venture capitalists who have invested alongside the firm.
Leone was a leading proponent of the close relationship with China as “the guy who pushed it”, according to one of the investors. Botha, he added, “doesn’t have much interest”.
Sequoia said the decision to split the firm was made by five current leaders of the firm, including Botha and Shen, who “collectively decided that the benefits no longer outweighed the costs”.
Shen’s HongShan will now be left standing on its own as it approaches institutions for new funding in a few years’ time. To prepare for this test Shen’s team has taken over managing relationships with limited partners and brought fundraising activities in-house.
When Sequoia China raised $9bn last year, about half of that came from US investors such as MassPRIM, University of Texas Investment Management Company and the University of Washington endowment, according to PitchBook.
To appease its American investors, Sequoia China has begun consulting outside policy experts before agreeing to sensitive investments. The group has also slowed the pace at which it is investing the newly raised $9bn, one person familiar with its activities said.
Sequoia’s move has led other US VCs to consider their own exposure to China. “Is this a harbinger of things to come?,” asked a partner at a rival venture firm. “Funds which had global ambitions, do they change their strategy?”