Sequoia’s portfolio companies that listed in the US last year have lost more than $7.7 billion of market value since their debuts, according to a Bloomberg analysis of public filings. The declines were led by a $4.2 billion drop in the value of the firm’s IPO stake in Brazilian digital bank NU Holdings Ltd.
The declines, which are spread across the firm’s funds, for now amount to paper losses because Sequoia has not sold its shares. That’s in line with its normal strategy, where it typically hangs on to stock well past the initial share sale and the post-IPO lockup period before distributing shares to its own investors. In some instances, Sequoia bolstered its holdings, buying an additional 2.6 million shares in data analytics firm Amplitude Inc. in February this year and an additional 5.5 million shares in software company Freshworks Inc. in March for its growth funds, according to filings.
Nevertheless, the declines are coming at a particularly inconvenient time.
In October Sequoia announced a new structure, the Sequoia Capital Fund, which allows it to invest in and hold public stocks indefinitely, bypassing a basic constraint of venture capital. Roelof Botha, a partner at Sequoia, has said the move was a response to the strong post-IPO performance of some of its portfolio companies, such as Square, now known as Block Inc.
Assets are moved from individual venture funds into the new structure one by one and at the discretion of the firm’s partners, said two people familiar with the matter who asked not to be named discussing a private matter. Though stock is being transferred rather than sold, it will still have to be marked to market, so the changes will still affect one important number: the original venture fund’s return, the people said. Since the current market is in turmoil compared to the end of last year, partners face a hit to their “carry,” or returns they receive tied to the performance of the original funds.
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“The Sequoia Capital Fund’s long-term focus allows us to deepen our commitment to founders and to seek to generate superior returns for our LPs by capturing the compounding value that comes later in a company’s journey,” a spokeswoman for the Menlo Park, California-based firm said. “This is true regardless of short-term fluctuations.”
The market downturn means “this is not an ideal time” to be implementing the new structure, said Robert Bartlett, a professor of law at the University of California, Berkeley, specializing in venture capital finance. He stopped short of criticizing the firm. “Sequoia, they write their own rulebook, and they’ve been successful,” he said. “I’m not going to second guess Sequoia.”
Even with the recent declines the investments are largely still profitable for Sequoia because the firm gets in so early.
For example, it bought the bulk of its stake in robotics company UiPath Inc. in a 2018 financing, paying about $6 a share. Even though UiPath stock fell to $18.19 at the end of the first half, far below its IPO price of $56, Sequoia is still coming out ahead.
Some of the financings were spearheaded by partners based overseas. Teams in China and India led the investments in Full Truck Alliance and Freshworks. Companies included in this article are limited to those for which information on Sequoia’s stakes was available in public filings, so not all post-listing declines are captured.
Sequoia is not the only venture firm that tends to hold onto stakes long after lockup periods expire and that has been affected by the market’s downturn. Filings show
, Andreessen Horowitz and Benchmark are among those that have also taken a hit.
Publicly, Sequoia says it’s looking past the impact of the market turmoil on its portfolio companies. Eric Newcomer wrote about some Sequoia declines in a June newsletter.
“Sequoia continues to be long-term bullish on tech,” partner Bill Coughran said at the Global Corporate Venturing & Innovation Summit in Monterey, California, last month. Then, noting he was speaking personally rather than for the firm, he found a bright side to the declines. “I’m actually glad to see some rationality returning to markets.”
