Understanding Sequoia's high-profile split from China

Sequoia Capital's rupture from its China and India businesses has the tech world talking, but few close watchers of the firm were surprised by the dramatic change.

The leaders of the three units—Roelof Botha, Neil Shen and Shailendra Singh—told their limited partners that the breakup was in large part a result of conflicts that arose when different geographies invested in companies that could potentially compete with each other.  

But many observers I spoke to are doubtful that what the firm described in a letter to its LPs as "growing market confusion due to the shared Sequoia brand" is the main reason for the separation.

Rising geopolitical tension between the US and China is an obvious catalyst for Sequoia's high-profile decoupling. But the rift between Washington and Beijing is likely not the only impetus for the storied firm's geographical dissolution.

This rupture was seen by some as inevitable. Other US venture firms with Chinese funds—such as Redpoint China Ventures, Lightspeed China Partners and Matrix Partners China—retained their original parents' names, but they don't share profits or any other functions. Sequoia's hierarchy had grown murky
In 2021, Sequoia Capital changed its structure to flow up to an open-ended portfolio of publicly traded companies, but it didn't include Sequoia China and Sequoia India in the new master fund. The three units were set up to run independently from the start, and that move signaled that they had no intentions of growing closer together.

Then in April 2022, the firm named US-based Botha to succeed Doug Leone as Sequoia's global leader. In doing so, the firm made it clear that the Chinese arm would remain controlled by Shen, arguably the most successful investor in the firm.

Sequoia helped Shen get started in 2005, but he has since backed a parade of some of the most successful Chinese tech companies, from TikTok parent ByteDance to fast fashion retailer Shein and food delivery company Meituan, which earned him the status of a celebrity investor in China.

This article appeared as part of The Weekend Pitch newsletter. Subscribe to the newsletter here.

It also happened that Botha and Shen had a clash of personalities for many years, according to a person who has known Botha well for about two decades, leading some to speculate that Shen would eventually splinter from Sequoia's mothership.

In many ways, Sequoia China has outgrown the fame and name recognition of its illustrious parent. HongShan means "Sequoia" in Chinese, but the firm is much more associated with Shen than the US leadership.

"From a branding perspective, there is going to be no disruption at all," said Rui Ma, founder of Tech Buzz China, a newsletter about Chinese tech companies and trends.

"Many Chinese entrepreneurs probably don't even know how to spell Sequoia," Shen told Forbes in an article published this week. The US-China dispute at the center of tech's biggest opportunity After several years of weighing the pros and cons of running a global investment firm, the discussions about splitting the firm in three have intensified over the last several months, Sequoia's leaders told Forbes.

That timing coincides with two major developments.

The Biden administration reportedly plans to issue an executive order restricting investments in China in certain sensitive technologies such as advanced semiconductors, AI and quantum computing. China already restricts foreign investment into sensitive industries.

Many venture capital investors have also come to recognize generative AI as the most significant technological paradigm shift in over a decade and refocused their investment efforts to AI companies.

One big advantage of separating from each other is that each region can invest in generative AI unabated—minimizing the risk of government meddling by either the US or Chinese governments.

Criticism of Sequoia and other firms investing in China has grown louder over the last several months. For example, The Information reported that Sequoia China has backed an AI company created by Yang Zhilin, an assistant professor at a top Chinese university who was previously a researcher at Meta and Google's AI labs.

A year ago, Sequoia China raised $9 billion, a remarkable feat in the midst of a VC downturn in China. That war chest has set it up well to invest in a tech landscape that has quickly changed, giving Shen an opportunity to prove he can succeed without Sequoia's support.

As for Sequoia Capital, its official relationship with its Chinese counterpart is over. But it can still reap financial rewards once the companies it backed, including ByteDance, finally have an exit.

Correction: An earlier version of this article misspelled HongShan, the name of Sequoia's Chinese arm. (June 12, 2023).

This article has been updated to reflect that Rui Ma is the founder of Tech Buzz China. (June 12, 2023).

Featured image by Jenna O’Malley/PitchBook News

This article originally appeared on PitchBook News