Sequoia Capital is looking to turn around its recent misfortunes by aggressively targeting AI startups, per The Information. So far this year, the firm has already backed 10 AI startups, including Harvey and LangChain. Sequoia partners Sonya Huang, Konstantine Buhler, and Pat Grady are actively looking for AI startups to invest in.
Roelof Botha took over the "senior steward," or CEO role, at Sequoia over a year ago. However, his first year at the top role was laden with "unprecedented levels of tumult," per The Information. The firm's losses have compounded due to "poorly timed" changes to its fund's structure. Last year, the Menlo Park-based VC firm became a registered investment advisor (RIA), allowing it to invest more capital into crypto assets and secondary stocks, following in the footsteps of peers Andreessen Horowitz and General Catalyst. The move would allow it to also hold stakes in portfolio companies even after their public market debuts. Sequoia reorganized the fund structure in such a way that the firm's seed, venture, and growth funds would sit below its main singular permanent fund, dubbed The Sequoia Fund. The main fund would serve as the sole limited partner for future sub-funds. The proceeds from liquidating assets under the sub-funds would be returned to the main fund.
The new structure was put in place to allow limited partners of Sequoia more exposure to top-performing public companies. However, the firm's new structure coincided with a dip in equity markets, wiping "billions in value from Sequoia's public portfolio." By mid-2022, Sequoia had missed out on a potential $7B in returns after holding onto stocks of Unity and DoorDash. Sequoia also holds public stocks of Snowflake, Robinhood, and UiPath.
Sequoia's losses were further aggravated by the valuation markdowns and write-offs in private markets. The firm is facing markdowns on its investments in Stripe, Twitter, and ByteDance. Its $800M investment into Twitter is less than half its original value. Plus, its 10% stake in ByteDance — valued at $22B — is endangered due to the rising probability of a U.S. ban on the social media platform TikTok. Last year, Sequoia wrote down its entire $210M investment into FTX to zero after the crypto exchange filed for bankruptcy.
Shortly after its FTX write-down, the firm lowered its management fees on two of its recently launched funds in a bid to pacify LPs. With the change, Sequoia intends to charge LPs management fees only on the capital deployed rather than the entire capital under management.
At the start of last year, the firm's U.S. division had nearly $85B in assets under management. The slump in public markets and the changing macroeconomic conditions have resulted in a 38% drop in AUM to $53.2B at the end of March 2023. A filing from early February 2023, seen by TechCrunch, shows that the firm has nearly $13.6B in capital available for deployment.
Sequoia's focus on AI startups indicates a likely change in its investment thesis, which was tipping toward the fintech sector last year, when capital markets, payments, and payroll startups accounted for 25% of its investments.