Sequoia China Stands Tall on Its Own as ‘HongShan’

The enterprise capital agency might be led by founder Neil Shen in China, and is one in all two international models being separated from its U.S. counterpart to function independently

Key Takeaways:

• Venture capital large Sequoia is separating its US/Europe, China and India/SEA companies to unbiased partnerships, with the Chinese firm taking the brand new HongShan title
• The transfer may give the newly named HongShan extra room to put money into China as effectively as in different areas

When you develop up within the wilds of China’s fertile however fast-developing enterprise capital market, it helps to have a well-rooted model to nurture you alongside. But as the Chinese market matures right into a prime vacation spot for international funding in high-growth startups, there ultimately comes a time to face alone.

That appears to be like just like the case with international enterprise capital large Sequoia Capital, which on Tuesday introduced it should separate into three unbiased corporations. The Silicon Valley-based firm’s U.S. and Europe enterprise will retain the Sequoia Capital title, whereas Sequoia India/SEA will grow to be Peak XV Partners.

The agency’s China enterprise will function independently as HongShan, the English pronunciation for its Chinese title that additionally refers back to the California redwood or sequoia timber from which it takes its title.

The Chinese title HongShan is already synonymous with personal fairness funding amongst Chinese startups and entrepreneurs. Its founding accomplice Neil Shen, additionally one the nation’s best-known enterprise capitalists, will proceed to steer the HongShan workforce. The transfer will give its extremely profitable China arm, which through the years has nurtured the likes of Meituan (3690.HK) and Pinduoduo(PDD.US), extra room to flex its muscle groups as a standalone firm.

The breakup is anticipated to be full by the tip of March subsequent 12 months.

In an announcement of the transfer on its Twitter account, Sequoia reiterated that its founder-focused, local-first method has been key to its success. But it added that operating a decentralized international funding enterprise has grow to be more and more complicated, particularly since a few of its portfolio firms have grown to grow to be international leaders in numerous markets, resulting in potential conflicts.

The transfer was much less shocking to folks within the business, for the reason that numerous international Sequoia entities have been already rising aside primarily based on the distinctive qualities of their particular person markets. Such variations are all of the extra pronounced in younger, fast-developing economies like China and India, the place lots of the firms nurtured by Sequoia and others are already native market leaders.

For its half, Sequoia China has branched out past its unique enterprise capital mandate that tends to focus on early-stage investments. Its present e-book additionally consists of a variety of multi-stage personal funding funds, tech/client and healthcare public market funds, and an infrastructure fund, as effectively as a buyout enterprise, making it a extra various investor and asset supervisor.

Sequoia China is likely one of the native leaders in its class, which additionally consists of different international gamers like Softbank’s Vision Fund, CVC Capital and PAG, testifying to how a lot China’s company funding scene has matured within the final twenty years.

Venture capital greenfield

Sequoia China’s founder Shen was one of many earliest folks to enter a area that was a far much less mature greenfield for enterprise funding when he first arrange the agency’s presence in China in 2005. Before that he had co-founded and served as CFO for main on-line journey web site Ctrip.com, which listed on the Nasdaq in 2003 and later rebranded itself as Trip.com (TCOM.US; 9961.HK).

Riding the exponential development wave of China’s tech sector, Sequoia China would go on to again native giants together with on-demand supply providers supplier Meituan, e-commerce firm Pinduoduo and TikTok proprietor Bytedance, to call a number of. All mentioned, the agency has invested in over 1,200 firms over its 18 years throughout China’s client, healthcare and know-how sectors.

Most not too long ago, Sequoia China raised $9 billion in recent capital final 12 months from buyers around the globe, together with within the U.S., Europe, Asia and the Middle East, even as a few of its rivals had extra problem fundraising.

Sequoia China’s sturdy run contrasts with its U.S. affiliate, which has gone by a rocky patch over the previous 12 months following higher occasions when it backed names like Apple, Google, PayPal and Instagram. The U.S. firm’s $800 million guess on Elon Musk’s Twitter has raised eyebrows, whereas its disastrous funding in crypto-currency change FTX tarnished its repute and in the end led to a $200 million write-down, casting doubts on its capability to successfully oversee its investments.

Sequoia U.S. can be overhauling the construction for its U.S. and European funds that may enable it to carry shares in publicly traded firms for longer. Unfortunately, that shift was poorly timed, coming throughout a turbulent interval for international capital markets.

Sequoia’s U.S. arm has misplaced large cash on its investments in names like scooter firm Bird Global (BRDS.US), which was as soon as valued at $2.5 billion however is now price simply $30 million after being listed utilizing a particular objective acquisition firm (SPAC). Similarly, DoorDash (DASH.US), which was 20.4% owned by Sequoia on the time of its IPO, has seen its inventory value fall 75% from its all-time excessive.

Like different U.S. funding corporations, Sequoia is likely to be feeling strain resulting from present geopolitical tensions between Washington and Beijing. Even although the breakup may imply HongShan has extra flexibility with its investments past China, its substantial base of restricted partnership (LP) buyers from the U.S. means the agency remains to be topic to strict compliance protocols, which embody consulting exterior consultants on potential investments and their industries.

Sequoia has quoted different causes for the break-up, together with including extra agility to its international companies in making their funding selections. The shared Sequoia model has additionally brought on market confusion, main firm founders searching for funding unclear on which Sequoia entity they need to have interaction with. All these elements known as for a local-first method.

The upside

Sequoia China’s new independence also needs to give it extra room to develop its personal technique to leverage market alternatives. An general conservative method is more likely to proceed amongst such worldwide buyers as they’ve scaled again their native exercise since China’s crackdown on the buyer web business beginning three years in the past, and in addition resulting from a slowing international economic system.

It might grow to be extra energetic in offers past China. The firm already has investments in South Korea, Australia and Japan, so turning into extra energetic within the Asia Pacific area appears to be like like a logical subsequent step. Such a transfer might are available in tandem with the various Chinese entrepreneurs the agency has backed through the years, who are actually more and more eyeing alternatives overseas.