Sequoia’s shake-up may be a VC turning point
Turnover of leaders shows how hard it can be to ride out the vicious financial and tech cycles
In venture capital, success is self-perpetuating. Startups struggling for attention are drawn to the investors with the best track records: winning the right financial backers acts as a strong signal for young companies with little else to validate their claims of future greatness. That means the most successful VC firms usually get first option on the smartest founders and the best deals.
Fall off that curve, though, and it is hard to climb back on. That makes the internal ructions at Sequoia Capital, which can point to the longest success record among today’s top-tier VC firms, a potentially significant event in the world of start-up investing.
Perhaps because it has excelled in backing some of the world’s most disruptive businesses, Sequoia has been intent on painting itself as the ultimate stable financial partner, a bastion of calm and continuity. So anything that disturbs the mystique it has succeeded in weaving around itself is significant. When lead partner Roelof Botha said this week he was stepping aside barely three years after he took over as what the firm calls its “senior steward”, it felt little short of an upheaval.
The turnover at the top shows how hard it can be to ride out the vicious financial and tech cycles that characterise the tech start-up world, while navigating geopolitical stresses and the egos of both fellow partners and company founders. The huge concentrations of wealth already created by the artificial intelligence boom have greatly added to the stakes, promising to reshape not only the tech world, but Silicon Valley’s start-up financing landscape.
The full story of Botha’s departure has yet to be written, but he has had plenty to deal with. Sequoia was forced to split from its highly successful China arm, and his tenure has seen tensions and high-profile departures among partners erupt into the public domain. Had Sequoia under his leadership been surfing the crest of the AI wave, though, it is unlikely it would now be going through a change at the top.
Sequoia can point to a substantial role in some of today’s most valuable private companies, including SpaceX and payments company Stripe. It was also able to make significant cash returns to its limited partners from the last wave of tech success stories to go public, including Airbnb and DoorDash. But it has not led the way on AI.
If OpenAI comes anywhere close to justifying the expectations it has stirred up in Silicon Valley, it stands to be an era-defining company. It isn’t alone: fellow model-builder Anthropic may operate in OpenAI’s shadow, but at its last funding round it was judged to be worth $183bn — more than Alibaba when it went public in 2014, the highest market cap recorded by a tech company at the time of its IPO.
Despite backing Sam Altman’s first start-up, Loopt, Sequoia wasn’t early to OpenAI — the time when the most significant venture returns are made — though it has taken a small stake in later funding rounds. Instead, its main exposure to AI has come through application companies, including legal service Harvey and business AI concern Sierra.
The booming valuations of the model-builders may turn out to be a bubble, and VC returns from tech’s AI may end up being far more evenly distributed. But the extreme concentration is a reminder, if any were needed, that there are only two things that matter for the limited partners who supply venture capital’s cash: getting into the right funds, and making sure money is put to work at the right moments in the tech cycle. With AI, those strictures have taken on outsized importance.
For many years, long-run venture capital returns reported by Cambridge Associates reflected the huge profits from the dotcom boom of the late 1990s, a time when the average VC fund returned more than 20 per cent a year.
Last year, though, those funds finally faded into history. Cambridge’s 25-year view now only catches funds raised — and invested — as the 90s boom turned into a bubble. These showed an annualised return of only 8 per cent. For every other period measured by Cambridge since then, VC returns fall below returns from investing in companies trading on Nasdaq. These are averages, and the profits in VC have always been heavily skewed to a handful of successful firms, making it essential to get exposure to the right funds.
It is far too soon to determine the VC winners and losers from AI. But for Silicon Valley’s premier start-up investor, missing out on the early leaders feels like a humbling experience.