The Sequoia Fund: Patient capital for building enduring companies | Hacker News Reader

The Sequoia Fund: Patient capital for building enduring companies

medium.com

188 pointsZhenya79 comments

The recent (circa ~15 years) stock market boom has driven this. Their LPs are sitting their wondering "ya sure you got us a 100x return on investing in Facebook in 2006, but if you woulda kept your position when it IPO'd, it woulda been a 500x position".

The market is driving this decision - there really isn't anything magical or bold about this.

Wouldn’t they do an in kind distribution? In which case it’s on the LPs to keep their positions.

a16z, Accel, and now Sequoia have become hedge funds. And Tiger and other hedge funds have started doing VC investments. Interesting bundling and unbundling of the industry.

Exactly. “This is a fundamental disruption to the venture capital model.” should be read as "We are now a hedge fund like Tiger, Coatue, et al."

Right. the VC arbitrage is disappearing. However the gate keepers are still there. This just impose search and transaction cost on founders with no benefits to the company . I envision the next steps to be:

1. Startup ETF for pre exit companies. 2. Stock exchange for startups.

I'm sure people would want to have an ETF for pre exit companies in the same way that they'd like to have a NYSE without SEC oversight.

I'm pretty sure there are rules which involve "looks like a duck, quacks like a duck, legally it's now a duck" which make it hard to trade pre-exit companies with any kind of useful liquidity.

Sohail Prasad (YCS12) is building a publicly traded for privately held startups! https://www.wsj.com/articles/fund-to-let-retail-investors-be...

Stock Exchange for private companies already exists[1] but it doesn't look very useful for people outside. What I think would be revolutionary is something between angel investment and stock market clients.

[1] https://cartax.com/

Good op-ed in The Information about this exact topic: https://www.theinformation.com/articles/the-end-of-venture-c...

I don't think what a16z is doing, a crypto hedge fund, is similar to what Sequoia is doing here with its Sequoia Fund, a mutual fund of post-IPO portfolio companies.

Indeed, I don't see this as a hedge fund, a limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of realizing large capital gains. Generally hedge funds are private investments. Sequoia Fund is an open-ended liquid portfolio made up of public positions in a selection of our enduring companies. They even calls themselves a mutual fund.

  Sequoia Fund is a mutual fund that has been advised by Ruane, Cunniff & Goldfarb L.P. since its inception on July 15, 1970.

Mutual, not hedge.

Hedge funds aren't really private investments, you're probably thinking of Private Equity firms. Hedge funds more often than not invest in the public markets and hold large positions, the difference between a mutual fund and a hedge fund is more regulatory and legal than investment process.

AFAIK hedge funds are basically anything you want them to be. You could be hedging public equities, shorting them all, going long on them all, or investing in crypto. I could be wrong but its basically a catch-all term now.

Yup, you're right. Nowadays a "hedge" fund is simply some entity that manages money and dabbles in the dark arts to generate outlandish returns (or collapses in a spectacular fashion). I was just refuting the initial assertion that hedge funds make private investments, since most of the traditional "hedge funds" don't touch private markets, and work in public markets.

The parent is responding to the grandparent comment

> Generally hedge funds are private investments.

I take your point that HFs come in many flavors. And, "private investments" is ambiguous.

Though, in "general", the parent is right to say the claim (above) is not accurate. I think of HFs as "generally" playing with securitized, public assets, regardless of investment mandate.

Not the same sequoia

Sequoiacap.com

Sequoiafund.com

Same Sequoia. The article doesn't really make it clear (well, the green color scheme does) but Sequoia Fund is a part of Sequoia. The author is a VC for Sequoia

https://www.sequoiacap.com/people/roelof-botha/

Maybe this is clearer.

https://www.axios.com/sequoia-capital-fund-venture-capital-m...

Incorrect. Those are literally two different entities with no relationship whatsoever.

https://www.sequoiafund.com/home -> is run by people who have nothing to do with Sequouia Venture Capital or the newly minted "The Sequoia Fund". As you can see this is a mutual fund that invests in public equities: https://www.sequoiafund.com/Performance

EDIT: here it is: https://fundresearch.fidelity.com/mutual-funds/summary/81741...

Surprisingly they can’t beat the index

This may end up being a trademark dispute :)

"Venture Capitalists are just hedge fund managers who can quote the Tibetan Book Of The Dead." — Taylor Mason, Billions, Season 3: Flaw in the Death Star.

a16z hedge fund? Please explain.

a16z restructured themselves into an RIA and is no longer a VC fund according to the SEC. By giving up the VC fund exemption, they have to follow the regulatory rules for hedge funds including background checks for employees, many more disclosures, 13F filings, etc.

They did it because the change lets them to invest in public company stock, buy secondaries, buy crypto tokens, etc.

So all the 'Crypto Funds' they've been raising recently are not for investing in crypto companies, but to trade tokens?

Most crypto funds are not structured as VC funds for exactly this reason.

Basically a crypto hedge fund.

With the amount of capital available, no question that many companies that would have IPO'd years ago are electing to stay private (hello, Stripe!).

The cynic in me says: this is great marketing, because the best Sequoia fund is the early stage fund (always oversubscribed) and now as an LP you can't invest in just the early stage fund. (But the reality is I bet they forced early stage fund LPs to invest in their growth vehicles anyway, so there is no material change other than marketing. Which is very good.)

The opposite is also true, many startups have come out of the woodworks during the COVID market craze to go public because the money is there (SPACs are the extreme example).

I think the political writing on the wall is that the legal barriers are going to be lowered for entering the public market. So Sequoia and others are going to need to market themselves to founders as an alternative to going public.

An SPAC is nothing but a fraud vehicle. Look at the new SPAC driving the new Trump "social network". They didn't have to do any work. No due diligence, no financial disclosures, no business plan, no numbers - nothing.

After a few iterations of this and billions sucked up by these conmen, the government will have to step in and clamp down, while the conmen (and probably HN) bleat about "big government", "regulations", and "socialism".

as an angel i have invested in a bunch of companies that later IPO'd. they then continued to significantly appreciate.

the downside is that the time horizon is very long (ie one that i invested in 2006 IPOd in 2015 and continues to rise) so the absolute return is huge but the IRR drops. so people who benchmark everything by IRR will not see much improvement, even though the TVPI etc are still awesome.

Appreciate the insight. Curious to get your thought here...

I do know that some investors look at TVPI and generally understand why, but isn't IRR the only thing that really matters? Philosophically speaking, you can't change the time variable - we're on a continuum - so at the end of the day the only thing that you are able to compare is how well a single dollar performs over time? I understand this doesn't take into consideration liquidity, but TVPI doesn't really either.

I'm not sure how it works in VC, but with real-estate investing, the Cash-On-Cash return, which is basically the same as TVPI is extremely helpful when comparing investments that potentially have very different ways to structure the leverage in the deal.

time is very punishing to IRR as it stretches on, but the returns accumulate. you cannot assume a dollar is fungible as you may not have been able to invest in the same thing at some other point.

Do you believe that the IRR is highest in PE for this reason?

Does this even mean anything in practice?

When to distribute to LP's is a controversial question for VC's, Some do immediately after IPO & some continue to hold. Seems like Sequoia is just being explicit about potentially holding long term stakes in public companies (with VC Fees?).

In practice it does make a difference because the terms between LPs and Sequoia are now more in-line with the outlook Sequoia has towards the companies it funds; whereas previously, due to the rigid 10-year structure, it wasn't.

first thoughts:

pro: may remove some pressure to follow growth-at-all-costs business strategy

con: may cause employees to have to wait even longer to ever realize any gains from stock options

Having a permanent capital structure may allow employees with equity in portfolio companies to tender their shares for shares in the Sequoia Fund itself. Presumably those would be much more liquid.

Good luck trying to get Sequoia to accept common shares from employees in exchange for diluting their own capital, when they already get preferred shares in a different class through their investments in individual companies.

When Sequoia expands their AUM they make more money because they have more assets to collect fees on. This mechanism expands their AUM every time they tender shares.

Sure common stock has a discount to preferred stock, but it's not an infinite discount, and it's mostly applicable in the pessimistic scenario. If employees are exercising their options, it's usually because the portfolio company in question has performed well.

Sequoia would most likely be happy to acquire shares in those companies at reasonable discounts to preferred, which would make both parties happy. With a permanent capital structure, the most logical thing to do is for them to keep levering up positions in their winning positions.

Plus, if those employees get Fund shares and sell them back to Sequoia for cash, that opens up room for more investors to enter the Fund without any dilution. I can imagine some closed growth funds might have a hard time finding sellers.

I have never observed this level of optimism in the wild before.

I think the SEC would have something to say about this unless the exercised options made the individual an accredited investor ipso facto.

Edit: But maybe that doesn't apply to selling shares on the private market, only buying? Also if it's written into the initial option grant, perhaps that's a way out too.

I don’t think you need to be an accredited investor to sell, only buy.

pro: might be a good signal to potential employees that the private-illiquid-stock timeframe will be long (not a quick flip) and best to discount face value of stock

Has all the makings of a great move. This should hopefully, let founders focus on the business instead of devoting all efforts towards securing an exit for the investors as the fund nears its cycle end. Particularly, if an investment is made later in the cycle.

Anybody in a VC Private Equity fund: can you tell me how capital calls work?

In a hedge fund, limited partners just gives the fund a certain amount of capital and you see what happens.

The way capital calls have been described to me is that limited partners just say they have a certain amount of capital available, and at any time the VC PE fund just requests/demands it from your bank account? Which seems a little odd and inconvenient to me.

> The way capital calls have been described to me is that limited partners just say they have a certain amount of capital available, and at any time the VC PE fund just requests/demands it from your bank account? Which seems a little odd and inconvenient to me.

This is essentially how it works. The alternative is the following:

Let's say you raise a $1B fund and everyone gives you cash up front. That $1B is effectively going down in the value if it just sits there in cash.

I like the hedge fund + side pocket model way more then

About time that these big VCs are catching up to it

The side pocket is a private equity fund, and limited partners can always create additional subscriptions if they want to invest more into the main fund as long as they meet the minimums

I don't disagree but this is really only possible with sources of cheap capital. Rolling funds are not easy to maintain and very risky on the GP side of things.

Restrictions and limitations on redemptions from the liquid fund already solve this.

And money in the side pocket can be kept forever in long term positions. Even to an LP that previously did a full redemption, the liquidity events from the side pocket can result in an infinitely long redemption.

yes, they send you a note and you wire the money in. eventually they start doing distributions (hopefully). it gets hectic.

hmm, that model wouldn't be good for me. I mean I usually stay pretty liquid but I'm liquid in positions I want to see through to a price target! Just getting a random email or message to go indefinitely illiquid because I told them I'd be an LP would be a tough sell for me.

I like the hedge fund with a heavy side pocket better. so its kind of cool Sequoia is describing just that. But I am wondering if there is an existing hybrid where the the PE fund has all the capital upfront and just has liquid investments for the cash before finding illiquid investments, where the majority of capital winds up in the illiquid investments anyway.

General Partners can

1) keep the current fund open for new limited partners

2) start a new fund for people that want to feel like they are on the ground floor, and allow the GP to get a new headline about how fast they raised a bunch of capital.

they don't call indefinitely, the committed amount is called over a 2-3 year period. they do this because it lets them keep the IRR low (since uncalled capital isn't invested and thus not counted)

LPs generally do not want to have them take money and invest it into one thing and then another thing. they want to choose specifically what things they allocate to and nothing else.

accounting is much more complicated than closed end fund.

so essentially the way the world works means the things you are hoping for will never happen.

You have pledged that money, there is nothing inconvenient about it. You can place it in a seperate bank account of your own awaiting investment if it breaks your brain less.

Nope still “breaks my brain”, someone else wrote that this structure is because it would be just sitting in their bank account if they collected it all up front, its not different if its just in mine, unless its invested in liquid assets but if its in liquid assets then it could decline in value in which case I wouldnt have that much to invest.

How do people really deal with this model? I wonder what GPs have seen from their LPs.

Any initiative capable of making projects viable is always welcome. I'm working on a solution for a 3d image display in space, based entirely on electronics [electron scattering] and it hasn't been easy to find funding. I salute Sequoia Funds and wish them success.

I would like to see this as a formalization of the fact that companies of the following type need more time if they are to grow ethically

companies like Uber, Amazon etc - that subsidize services at the expense of service providers (e.g. drivers, warehouse workers)

> that subsidize services at the expense of service providers (e.g. drivers, warehouse workers)

In the case of Uber/Lyft, it appears from the economics that they're subsidizing services more so at the expense of investors.

In other words, the bulk of the financial burden is in the form of burning through VC/Debt $$$ they've raised. Sure, they also have been known to try to shaft the gig workers here and there, but they're by no means the ones shouldering the bulk of the burden for the subsidizing.

Otherwise, there would be little incentive for gig workers to ever join that platform to begin with.

Fair points, I don't have data refuting them.

But FWIW - in India many drivers have been lured into taking a car loan with the promise of high returns, so as to boost supply, which results in net negative income at the end of the day/week/month, despite having worked like a machine

> lured into taking a car loan with the promise of high returns

Sounds like college in the US :)

Is there evidence that Amazon treats warehouse workers worse than other warehouse/fulfillment companies do? All the anecdotal evidence I've heard is that Amazon treats people about the same, but pays better than the competition.

Amazon is the biggest and Bezos has too fancy yacht, thats why they get all the attention. Fair assumption is that amazon is not that different, maybe it is even a bit above average because they get so much attention.

Is there any evidence that companies like Uber and Amazon would be able to grow "ethically" to the extent they have if they just had more time?

We probably have not heard about their ethical competitors which returned -100% to the investors.

This raises many questions about how ethics are defined if it is flat out impossible under all market conditions.

Any one know if this would fall under 13F reporting requirements? Asking for a friend :).

I just want everyone here to know that Sequoia is funded by university endowments, and yet still does not have the confidence to invest in bleeding edge technology, picking instead to invest largely in "moat oriented" software. Nothing overtly wrong with it, but I just don't trust them when they claim to finally care more about slower growth companies.

https://www.wsj.com/articles/university-endowments-mint-bill...

I don't think you understand how University endowment funds work. To put it short they diversify into asset classes - one being top tier VC (Sequoia, a16z, USV, etc.).

In other words, endowment funds are investors in virtually every type of company possible - public entities, lending, credit, cash, hedge funds, startups, etc. - they simply don't care what the vehicle is as long as it meets their risk adjusted return goals.

Depends on the university. Stanford got much more aggressive with investments in the 1990s. They spun off the endowment as the Stanford Management Company, headquarters on Sand Hill Road out by the VCs. They did very well - part ownership of Google, Cisco, Yahoo, etc. 12.2% average return per year over 30 years. It was starting to look like SMC was the tail that wagged the dog - a VC fund that ran a school as a side project for the tax break. They had their own CEO. So they were pulled back to the main campus, made a department of the university, and made somewhat less independent.

> I just don't trust them when they claim to finally care more about slower growth companies.

Slower growth companies? The piece is about wanting to hold their stake in portfolio companies like Square, Zoom and Snowflake post-IPO.

So basically the Michael Dell equivalent for VC.

Might make sense

Whats the MD model?

I think the reference is MSD partners, the family office (private investment company) of Michael Dell's fortune. They have been described as "patient capital" informally. I can't seem to find any articles using that phrase in reference to MSD Partners, but I've hard it thrown around a lot in discussions of their overall investment approach.

Him taking Dell public then private then public again post a merger I believe

Now just make the sequoia publicly traded like blackstone.

Exiting out of Google early must be the reason behind this

"Patience and long-term partnerships generate exceptional results. For Sequoia, the 10-year fund cycle has become obsolete."

Bold Statement.

“I think the issue begins in our high schools, and where women particularly in America and also in Europe, tend to elect not to study the sciences when they’re 11 or 12. So suddenly the hiring pool is much smaller.”

https://www.vox.com/2015/12/3/11621140/venerated-vc-michael-...

Reply on news.ycombinator.com