I am somewhat surprised that I haven’t seen more commentary on Sequoia Capital’s apparent decision to diversify away from its venture-capital heritage with an endowment-type fund that would see the company raise and manage a much larger pool of capital than heretofore.
Of course, as Rebecca Buckman of the Wall Street Journal points out, Sequoia presumably would generate more revenue and profit from having more assets under management. More to the point, by shape shifting into a diversified asset manager, Sequoia would be jumping out of the fetid, stagnant VC pool, a foul swamp that once was a raging river of swashbuckling adventure.
In recent years , however — ever since the burst bubble of 2000 and 2001, actually — the VC business model seems irrevocably broken. The evidence is there for all to see, as Buckman notes:
Sequoia’s move would represent a notable shift in direction for a venture-capital firm at the top of its game. The firm, now led by partners Michael Moritz and Doug Leone, has aggressively invested in Internet companies over the past few years, some of which have gone on to become hits. The firm has also created so-called growth funds for larger investments and planted flags overseas, introducing funds in China, India and Israel.
Lately, however, it has gotten tougher to make money in venture capital. For one thing, the lackluster stock market has made it hard for start-ups to go public, and some firms have been forced to pump money for longer periods into their portfolio companies.
There are risks inherent in Sequoia’s mid-life reinvention. In assuming the form of an asset manager, Sequoia could be perceived as a competitor to many of its current investors, who might shun it. That would mean Sequoia would have to tap new investors at the same time it is trying to raise funds of unprecedented size.
There’s no question that the torpid IPO market, as well as the general dearth of big-ticket exits for private companies in which Sequoia and other VC firms have invested, played a significant role in convincing Sequoia that the risks of this move were outweighed by the potential rewards.