Talk of the VC world : Sequoia Is Splitting Into Three VC Firms

Sequoia Capital, the renowned venture capital firm, has made a significant announcement that has sent shockwaves through the investment community. The firm has decided to split into three independent entities:

Sequoia Capital US

HongShan (which will cover China)

Peak XV Partners (which will focus on Southeast Asia and India).

This unexpected move has left many wondering about the reasons behind this decision and what it means for the future of the venture capital industry.

One of the factors that may have influenced this split is the recent string of fraud cases that Sequoia India has faced. While Sequoia Capital is known for its integrity and high-trust approach to investing, the frauds in some of its portfolio companies have tarnished its reputation. Venture capital is a business built on trust, where VCs invest substantial sums of money in startups based on limited information and trust in the founders. The fraud cases have not only affected Sequoia India's performance but have also made it challenging for the firm to justify its investment thesis and fund management practices to its investors.

Additionally, the Indian public markets have proven competitive and brutal, with startup IPOs underperforming and many big startups delaying their IPO plans. This has limited the options for major VCs to generate returns on their investments in India. The combination of these challenges, including the fraud cases and the tough Indian market, may have led Sequoia Capital to reevaluate its strategy and consider splitting its operations to protect its iconic brand and navigate the changing landscape.

The split of Sequoia Capital into three separate entities also indicates the broader trend of a multi-polar world emerging in the venture capital industry. This move recognizes the drastic acceleration of entrepreneurial activities in Southeast Asia and India, which have grown in importance and require their dedicated focus. It reflects the recognition that these regions have their unique narratives and potential for significant growth, prompting the need for specialized entities like Peak XV Partners to cater to their specific markets.

The decision to split Sequoia Capital may also have been driven by conflicts arising from broadening portfolios and overlapping investments. In a world where remote work has blurred geographical boundaries, Chinese and Indian companies are increasingly targeting global markets and capitalizing on cost advantages. This has led to instances where portfolio companies from different regions compete with each other, creating awkward situations and potential clashes in the future. By separating into independent entities, Sequoia Capital aims to mitigate these conflicts and provide greater focus and support to startups within each region.

Furthermore, the fundraising efforts for the latest funds in India, Southeast Asia, and China were largely independent, and the strategies of these funds are beginning to diverge. The US arm of Sequoia Capital has doubled down on early-stage investing, while China has prioritized non-tech investments, including infrastructure and public equities. These divergent strategies may have influenced the decision to split, allowing each entity to tailor its approach and investment focus to the specific market dynamics and opportunities within its region.

How this split will impact Sequoia Capital and the broader venture capital landscape remains to be seen. The move may catalyse for other global firms to re-evaluate their strategies and consider similar splits to adapt to the industry's evolving dynamics. As the story unfolds, financial journalists and industry observers will be closely watching for further insights into the reasons behind this decision and its implications for the future of venture capital.

"The split of Sequoia Capital into three independent entities signifies the seismic shifts reshaping the venture capital landscape, reminding us that adaptability and trust are the pillars of sustained success in a rapidly evolving industry."  - Ritesh Jain