Sequoia’s intention to become a registered investment advisor (RIA) and transition to a “single, permanent organization,” as it put it, made waves in the US venture capital sector. However, it may not have caused as much controversy as it did. Sequoia was neither the first venture capital firm located in the United States to seek RIA status, nor was it the first firm tracked by The Exchange to shift to a more permanent funding model. Although the combination of joining an RIA and transferring to a capital pool without artificial return windows is unique to the United States, we have seen it done abroad.
The Exchange contacted out a number of publicly-traded venture capital firms in the United Kingdom to learn more about Sequoia’s plans: Richard Matthews, COO of Augmentum Fintech, Vinoth Jayakumar, partner of Molten Ventures, and Nic Brisbourne, Managing Partner of Forward Partners, spoke with us. We have spoken with them before, when we looked at the benefits and drawbacks of VCs going public.
The businesses lauded the potential to invest over a longer time horizon and enable widespread access to venture financing. The Sequoia change, according to the investors, is comparable to their own model in that it allows for more return-timing flexibility — potentially allowing for better return maximization — but it favors different people.
On a recent podcast, Sequoia partner Roelof Botha discussed his firm’s model shift, giving us a relatively long-form explanation of what is going on. During the event, he mentioned that Sequoia reminds, “Founders that the IPO is a milestone” for a firm, rather than the end line. So, why “should the IPO be a destination for the investor,” he pondered rhetorically?
The VC’s ability to keep equities over a lengthy time horizon is required by the comment, which goes to the heart of what Sequoia wants to achieve with its new model: hold investments longer. Venture capital guidelines requiring RIAs to hold 80 percent of their assets in private enterprises and no more than 20% in other assets are not applicable to them. As a result, if a venture capitalist has a major victory with a business that goes public, there will almost certainly be pressure to liquidate part of the VC’s stock.
This can result in earlier-than-desired exits in terms of returns, as VCs are forced to return stock or cash to their LPs before the investment has had a full chance to create profit — and hence returns for both venture fund backers (LPs) and venture fund managers (GPs). In addition, if there is one thing you can count on from venture capitalists, it is that they want to be paid.
Sequoia “realized” that the finest venture bets “continue to compound, and the majority of the value accrues after the IPO,” Botha stated in the same podcast. The balance has shifted, as private enterprises have remained private for longer. However, it is true that in certain circumstances, the best gains come after the IPO. To choose one, Shopify is an apparent illustration of how money can produce by making a public offering.
Salesforce’s worth has increased 210 times since its 2004 IPO, according to a new research from OpenView. Shopify’s stock has risen 143 times since its IPO, according to the venture capital firm. ServiceNow has grown 60 times in the last year. Holding some assets post-debut might result in big gains — and, as a result, massive checks for GPs.