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Over the past year, the investment giant has made substantial adjustments to its operational scale and portfolio. These include cutting the size of the firm and two of its funds, as well as starting to distance itself from its international entities in China and India. These strategic changes, though not necessarily interconnected, indicate a significant shift within the VC landscape.
The Wall Street Journal reported last week that in March, Sequoia reduced its fund of funds by half and its cryptocurrency fund by almost two-thirds. Sequoia's representative explained these adjustments as an effort to enhance the firm's focus on seed-stage opportunities and to offer liquidity to their limited partners. In the past decade, the company has "distributed more than we've called in capital," the spokesperson noted.
Sequoia is altering its strategy to concentrate more on the formation of new companies in the crypto fund. The fund will supplement investments from its seed, venture, growth, and expansion funds as the invested companies grow. This development showcases how drastically the venture capital landscape has transformed.
Revisions in the size of the fund also mean redefining management fees and returning money to limited partners. Earlier this year, a Sequoia partner confirmed that the firm had already cut management fees on the two resized funds, making LPs pay fees based on deployed capital rather than managed assets.
These moves are not typical in the venture capital or private equity landscape, with few firms willing to downsize their funds. However, we have seen similar trends in the past, such as during the 2008 financial crisis, when some firms moved money into "side pockets" to give themselves more time to use the capital without imposing extra charges on their LPs.
EDHEC affiliate professor and author of Asset Allocation and Private Markets, Cyril Demaria, suggests that Sequoia's fund reductions could be interpreted as a responsible response to the changing market. This strategy may win the favor of limited partners, even though some investors express criticism towards firms that refund money to LPs.
Furthermore, Sequoia offered its LPs an opportunity to break their two-year lockup rule in March, allowing them to withdraw capital earlier to alleviate their liquidity issues.
The contrast to 2021 is stark, as venture capital firms are struggling to raise funds in 2023, unlike the previous ease of attracting billions in fresh capital. Compounding Sequoia's challenges are the turbulence at its high-profile portfolio company, crypto exchange FTX, and the departure of industry veteran Mike Moritz.
Despite these hurdles, Demaria assures that Sequoia will recover and still attract significant capital. In his words, "if they raise money, there will still be a queue in front of the door."
Meanwhile, the venture capital market is far from stagnant. Notable recent developments include a $30 million Series B extension funding for Octave Bioscience, a debt prevention platform SuperFi raising $1 million in pre-seed funding, and Goodwater's $1 billion fundraising across two funds. Not to mention the significant M&A activity involving TopBuild, Biogen, and OAG, among others.
Sequoia's adjustments and the continuous flow of deals underline that the venture capital market is very much alive, albeit adapting to new realities.
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