Sequoia Capital looks to play fair game as it doubles down on seed-stage investing

Photo: DEALSTREETASIA

Sequoia Surge, as Sequoia’s seed programme is called, has been operational in Southeast Asia and India since 2019. So far, it has backed 69 startups across four cohorts, and closed two $195-million funds to support founders across the region.

But almost three years on, Sequoia Surge’s impact on the Southeast Asian ecosystem continues to be met with mixed responses of praise, caution, and even envy.

Some early-stage venture funds accuse Sequoia of leveraging “unfairly” on Surge’s deal flow to support its growing family of funds, pointing to at least two Series A rounds that Sequoia has led in Surge companies.

Surge founders heap glowing reviews about its global founder network, while seed-to-Series A investors sit firmly on the fence. More seed funding — Sequoia or not — is always welcome, they say.

Plugging the seed gap

Sequoia has long held that Southeast Asia lacks sufficient seed funding. The data suggests that this is an accurate assessment. 

A recent report by DealStreetAsia found that the number of seed investors and seed-stage capital entering the region has not kept pace with investments in Series A and beyond.

This applies particularly to the pre-seed cheque size of sub-$1 million, which fledgling founders struggle to hit. For others in sectors like deep tech, fundraising takes longer and is way more challenging, simply because of how few investors there have the expertise needed to assess such niche sectors.

“We learned that there was a significant gap at the seed stage in Southeast Asia…That’s why we decided to double down. We raised our [$195 million] seed fund in 2019, and now again our second fund of the same size,” said Rajan Anandan, managing director of Sequoia Surge.

Yet, unlike most Southeast Asian VC funds — Vertex Ventures, Jungle Ventures, and others — which have sought to write larger cheques and raise subsequently larger fund vehicles over the years, Sequoia Capital India has trended downwards to seed, which begs the question — why? 

“If Sequoia is who they say they are, why would you come down and invest in seed?” opined a long-time venture investor based in Singapore. “If I were to wager a guess, it would be because Series A has become too competitive.”  

Source: DealStreetAsia

The proliferation of Series A+ funds in Southeast Asia, as reported by DealStreetAsia last year, has already begun to drive investor interest into the seed stage, as investors seek to snap up founders early and cheaply. Apart from Sequoia, Eduardo Saverin’s Singapore- and US-based B Capital, which started off as a growth-stage fund, recently expanded into the earlier stages with a $126 million seed-to-Series A fund in March this year.

Critics point to several discrepancies that arise out of managing – what is now – a multi-stage fund at Sequoia Capital India.

These include apparent overlaps in decision-making powers between Sequoia Surge and Sequoia Capital India’s fund investment committees. The fund has also led Series A rounds in at least two Surge companies, which critics say flags potential issues around market signalling. 

What’s happening inside Sequoia? 

A number of Sequoia Capital India’s key personnel appear to straddle roles across its core and Surge seed funds. 

Rajan Anandan himself is listed on Linkedin as the managing director of Sequoia Capital India and Sequoia Surge. Similarly, Pieter Kemps, a long-time Sequoia executive, is also listed as principal across both funds. 

Source: Rajan Anandan and Pieter Kemp’s Linkedin profiles.

Industry stakeholders DealStreetAsia spoke to, who have either received investment from Sequoia or worked with them through their portfolio companies, were largely uncertain about whether Sequoia maintains two distinct teams for Surge and early-stage investments.

Sequoia was also seen to have led at least two Series A rounds from Surge companies — Indonesia’s BukuKas and Bangladesh’s ShopUp — suggesting that the early-stage fund does get to cherry-pick from Sequoia Surge’s deal flow. Leading these rounds also means that Sequoia has a direct hand in determining its valuations, as most lead investors do when negotiating a fundraise.

In January this year, Sequoia Capital India led a $10 million Series A round in Indonesian fintech platform BukuKas, which graduated from Surge Batch 3. Last October, Sequoia Capital India co-led a $22.5 million Series A in Bangladesh B2B e-commerce platform ShopUp, which was a cohort member of Surge Batch 1.  

Anandan declined to provide details on its agreements with its limited partners (LPs), adding that “a multi-stage investment strategy is advantageous to founders”, with many venture capital firms following a similar model worldwide.

He added that “the Surge team is a part of the overall Sequoia India team”, with the broader Sequoia India team organised into four investment teams: India Growth, India Venture, Southeast Asia and Surge.

“I am focused entirely on Surge and Pieter, who was on the Southeast Asia venture team, has now transitioned fully to the Surge team,” shared Anandan in an email comment to DealStreetAsia.

Anandan firmly rejected any notion that Sequoia’s investment team gets “first dibs” on Surge deal flow, explaining that the programme was deliberately designed to be in an “open architecture” format, offering all venture capital funds the same level of access to Surge startups as Sequoia has.

“The intent at Surge is to collaborate with the wider ecosystem. We go out of our way to make room for other investors and give them all the access they need to Surge startups: we announce the cohort early instead of after the programme, and we invite VCs to meet founders at UpSurge at the end of each Surge programme. At this event, we help set up one-on-one meetings so they can get to know the startups well,” shared Anandan. 

According to Sequoia Surge, over 76 unique investors have attended over 1,250 individual meetings with Surge founders over the last four UpSurge events. Thirty of the 52 startups from Surge’s first three cohorts have also gone on to raise $390 million in follow-on capital after the programme, they added.

In response to DealStreetAsia’s queries on Sequoia leading Series A rounds in BukuKas and ShopUp, Anandan re-emphasised that “the Surge programme is open architecture and that the majority of Series A rounds in Surge companies are led by external investors.”

Surge explained that prior to BukuKas’s Series A, it had conducted a $9 million pre-Series A round which was conducted with external investors, while Sequoia’s round in ShopUp was co-led with Flourish Ventures. 

The Sequoia effect

The single, undeniable legacy of Sequoia Capital, however, remains the strength of its alumni and direct access to some of the industry’s top names through its 16-week Surge programme. Both investors and founders have overwhelmingly lauded Sequoia for the positive impact this has left on founders.

“Having that firsthand experience where you hear from everyone is super helpful. Many of these mentors have built multi-billion-dollar companies, and there’s a lot that we can learn from them,” said Navneet Kaur, chief executive and co-founder of Yours, a Singapore-based skincare company from Surge’s second cohort. 

In the last two years, Surge has invested over 640 hours of company-building workshops and masterclasses, connecting more than 150 global founders and mentors, including Doug Leone of Sequoia Capital US, Patrick Collison of Stripe, Binny Bansal of Flipkart, and Nadiem Makarim of Gojek. 

The Sequoia tag does come at a premium though.

According to one Singapore-based seed founder, Surge typically tends to look at $1.2-1.8 million in exchange for roughly 20% equity in its companies. He added that it is not atypical for Surge founders to be gearing for $20-30 million at $1 million annual recurring revenue (ARR), and price-to-earnings (PE) ratio of 10-20x for a software product with Sequoia “branding”.

“Some Surge founders face challenges raising their Series A because their valuations are so high. Not every VC is willing to stomach those numbers. There are VCs who find Surge graduates expensive,” he shared on condition of anonymity. 

Investors were split on whether these valuations are justified.

“Sequoia tends to be a favourite target by the industry, but there’s a reason why Sequoia is Sequoia,” said seed-stage investor Lim Tiang Foo, who acknowledged that his investments in the insutech firm Qoala and proptech firm Rukita saw significant valuation jumps post-Surge. 

“I have found their voice in the boardroom to be very additive. They have an exceptionally strong network of founders not just here in Southeast Asia but globally, so it’s hard to deny the impact they have on founders,” explained Lim. 

Another Southeast Asian early-stage investor disagreed. 

“I think Surge startups are overpriced,” said the managing partner of the Temasek-backed venture fund. “Surge is inflating valuations according to the minimum amount they want to invest per company. Not everyone can use that amount in a short time and use it effectively to drive growth.”

Expensive or not, others say this doesn’t matter as much in the larger scheme of things and that a lot of it still comes down to the founders, who make the final call.

Julian Artrope, CEO and founder of the dental cosmetics startup Zenyum, said that his discussions around company valuations and key performance indicators (KPIs) while at Surge had always been open — no one had ever tried to shove figures down his throat. 

“[However] there is definitely the expectation at Surge that you are going to build a very large company, but I personally love that. They help you dream bigger,” mused Artope. 

“When you go meet them [Surge] and present your plan, one of their first questions is — how can we put 50% on top of that? How can we get there? I have never felt pressured by that. In fact, I personally found it quite liberating,” he shared. 

He, however, acknowledged that while the Surge programme worked excellently for him, it may not necessarily be the right fit for all founders. “I don’t think every company needs to take VC money. There are other fundraising options out there. As a founder, I still think the onus is on you to assess all aspects of what’s good or not for your business,” he added.

Haoyu Luo contributed to this story.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.