Sequoia Capital is raising two funds, one US-based and one global growth fund, according to its new filings with the US Securities Exchange Commission (SEC).
Sequoia Capital last raised a US growth fund in 2014, prior to raising a $950-million US growth fund in 2012. A report from PE Hub, citing Thomson Reuters data, stated that Sequoia Capital raised its first global growth fund in 2012 with a capital of $700 million.
It is likely, based on the latest comments coming from senior members of Sequoia Capital’s management, that Sequoia may focus its investments on growth-stage firms abroad.
In a recent opinion piece published in The Financial Times, Michael Moritz, the chairman of Sequoia Capital and an early investor in Google, YouTube, Yahoo!, expressed concerns regarding valuations of firms in the technology space.
Moritz observed that chronically low interest rates have driven more and more money into venture capital investment, pushing valuations higher and higher. In an interaction with Bloomberg, when asked to comment on the development of a bubble, Moritz opined: “To me, it’s a more rational time than 1999, because I don’t think there’s a sort of universal feeling that every company is going to be a massive success. People are more discriminating.”
He also noted that with the rise of unicorns and decacorns, late-stage investments were “…disguised forms of debt” that were protected because of terms put in by investors, in terms of “…the ratchets, the liquidation preferences.”
The consumer healthcare venture Theranos, which raised $88.4 million to date across five funding rounds, was singled out as an example by Moritz of the current distortion in private valuations. This is a significant distortion in private capital markets that is likely to see significant correction in the near future.
This is reflected in industry sentiments, which are backed by data coming from New York-based venture capital analytics firm CB Insights. In an October brief, they noted that despite a lack of exits among technology ventures, investors continued to infuse capital into them. However, until October 2015, less value was created via exits than money invested.
The aftermath of this bubble collapsing are likely to impact major startup ecosystems worldwide, though the greater effect will be seen in Silicon Valley and the connected US startup ecosystems that have emerged in New York and Boston. With this in mind, Sequoia Capital seems intent on increasing its exposure to Asia Pacific (APAC) growth markets.
Sequoia’s APAC prospects
The APAC has large growth engines like China and India rise to prominence in recent years, alongside Southeast Asia, which is seeing a significant infusion of Japanese capital.
Sequoia Capital is already leveraging on this narrative of growth, when it jointly established a private equity fund with Huatai Securities in June this year. With exposure to the larger middle market segment of venture investment through this fund, the latest VC funds it is raising are targeted at growing its exposure to APAC VC-class assets.
Huatai Securities is China’s fourth largest securities firm, in terms of total and net assets as of the end of 2014. It is engaged in brokerage and wealth management, investment banking, asset management, as well as investment and trading. It also floated its shares in Hong Kong earlier this year in June, with its initial public offering (IPO) raising $4.5 billion in funds.
The Wall Street Journal noted that this was the second largest IPO for 2015. Prior to Huatai’s IPO closing, Hong Kong was the fourth-largest IPO venue globally, maintaining listing volumes at $7.2 billion. It was overshadowed by New York where $9 billion was raised.
According to Asia Asset Management, the two firms established a PE fund aimed at raising $1.6 billion to invest in China’s healthcare, consumption, telecommunication, media and technology (TMT), and high-end manufacturing sectors. This joint fund would “…focus on opportunities related to red-chip stocks”, a reference to mainland Chinese firms incorporated outside of the mainland and listed in Hong Kong.
It would also target investments in firms seeking to list in the restricted A-shares market and mainland Chinese enterprises acquiring foreign businesses as part of their growth strategies.
The large demographic shifts occurring in the APAC region, as well as the emergence of larger middle classes with greater purchasing power driving consumption are coupled with significant increases in Internet user populations, smartphone penetration and the rise of hyperlocal e-commerce platforms. This is creating a wealth of opportunities that Sequoia Capital can capitalise on.
Additionally, with the revelation that Sequoia Capital and other VC majors maintain networks of scouts – consisting of a cadre of entrepreneurs and academics – in Silicon Valley to select and invest in startups, this model is likely to be replicated and applied to the much larger communities of startup ventures and related businesses to be found in the Asia Pacific.
Sequoia Capital is hoping to replicate its template for success, refined in the US, in APAC markets. This retargeting of their venture activity reflects a shift by US VCs towards a more international perspective, given the lucrative exits occurring beyond the US. For instance, PE Hub reported that Sequoia’s deal volume in China through early August outpaced venture investing in the US.
According to PE Hub, which cited sources close to the VC firm, the push into APAC markets by Sequoia Capital is built on the assumption that economic developments here will mirror the trends witnessed with Western economies. In Western economies, online services underwent rapid, large-scale adoption, and this is reflected in the Sequoia dealbook, with the majority of transactions involving a digital marketplace or online services.
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