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Sequoia Branches Too Far

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					     TECH OLOGY
                                         DISCOVER.   DECIPHER.   DISRUPT.




                                                                            VENTURING OUT

                                                                            Sequoia
                                                                            Branches
                                                                            Too Far
                                                                            A storied financier of startups
                                                                            expands-but     its new busi-
                                                                            nesses have yet to take root.
                                                                            By Adam Lashinsky


                                                                                         YEAR   AGO, when ven-




                                                                            A            ture capital firm Se-
                                                                                         quoia Capital ordered
                                                                                         its portfolio companies
                                                                            to slash costs in the face of a sick
                                                                            economy, even healthy businesses,
                                                                            such as LinkedIn and Zappos.com,
                                                                            complied. As word of the edict
                                                                            spread, many non-Sequoia startups
                                                                            also trimmed their budgets-a testa-
                                                                            ment to the venture firm's influence
                                                                            in Silicon Valley and beyond. In its
                                                                            35 years in business Sequoia had


ILLUSTRATION BY NATIONAL FOREST DESIGN                                          November 9, 2009 FORTUNE 39
                                                       TECHNOLOGY

                                                                       OUT OF THE WOODS WHY
                                                                          DID GENERAL PARTNER
                                                                         MORITZ GUIDE SEQUOIA
                                                                              INTO NEW ARENAS?

nurtured the likes of Atari, Apple, Cisco, tain their initial high-profile employees.
Yahoo,and Google. If it was bracing for the        More ominously, a nagging question
worst, the situation must be serious.           lurks behind Sequoia's entrepreneurial as-
   But just as Sequoia was commanding           pirations: What does it say about Sequoia's
its upstarts to contract, the firm was plot- commitment to the venture capital indus-
ting an ambitious expansion of its own.         try it helped invent if its partners are busy
Throughout 2008 and into this year Se- plotting entry into two corners of the fi-
quoia tried entering entirely new busi-         nancial services world in which Sequoia
nesses, hiring professional                                      hasn't the slightest bit of
investors to build a hedge             SEQUOIA'S                 experience? In short, do
fund, as well as an asset-            EXPANSION                  Sequoia's imperial ambi-
management group that                  COINCmED                  tions confirm the venture
would mimic the wealth-                 WITH THE                 world's worst fears, thatits
preservation approach                  FINANCIAL                 best days are behind it?
popularized by major uni-             MELTDOWN.                     Sequoia is hardly the
versity endowments.                                              only VC firm that is stray-
   Sequoia has said little                                       ing from its roots. Kleiner
publicly about these new                                         Perkins, which success-
initiatives. Its preeminent partner, Mi- fully seeded the public-private investment
chael Moritz, wouldn't comment. He has firm Integral Capital Partners nearly 20
good reason to remain mum: Both the             years ago, has been busily focusing on
hedge fund and endowment-like offering "growth" and alternative-energy funds.
are off to exceedingly slow starts. The new New Enterprise Associates, a firm based in
initiatives have failed to attract a sufficient California and Baltimore, manages so many
number of outside investors or even re- billions of dollars that it can't possibly be



DIRE WARNINGS
Get Real or Go Home
Ayear ago Sequoia told companies to cut spending-or                  else. Was that the right call?

                                                                        A TOMBSTONEwith the words         too gloomy? The tech IPO
  DEATH SPIRAL
                                                                        ·'R.I.P.Good Times" on it is      market hasn't exactly been
                                                                        not the way most business         moribund. IPO research firm
                                                                        presentations start, but that's   Renaissance Capital says 11
                                                                        how Sequoia Capital launched      tech companies have gone
                                                                        a slide show for its portfolio    public this year, and the
                                                                        companies in October 2008.        average overall return has
                                                                        The content was indeed omi-       been 24%.
                                                                        nous. One slide was simply           Of course, the companies
                                                                        labeled "Death Spiral" (see       that have gone public this
                                                                        left). Another predicted a        year are generally bigger
                                                                        decrease in acquisitions and      and healthier than their
                                                                        public offerings. The mes-        boom-year predecessors.
                                                                        sage: Cut costs because the       Who knows if they would
                                                                        economy is bad or, as yet         have made it to the public
                                                                        another slide put it, "Get real   markets if they hadn't. to use
                                                                        orgohome."                        Sequoia's language. "gotten
PREDICTION FIRMS THAT STAY FAT ARE HEADED DOWN. DOWN. DOWN.                But was Sequoia's outlook      real"? -Stephanie N. Mehta



40 FORTUNE      November 9,2009
                                                                                     TECHNOLOGY



considered merely a VCoperation anymore. Sequoia needed to do more if it was to                                                            product, dubbed the Heritage Fund.
Sequoia itself had already broadened its of- survive well into the future. Venture had                                                        Sequoia's timing couldn't have been
ferings geographically with funds in Israel, passed through a golden age of relatively                                                     worse. Its expansion coincided with the
India, and China.                            easy "exits" in the form of ubiquitous pub-                                                   worldwide financial meltdown-not            a
   What's unique about Sequoia's latest      lic offerings or sales to major tech com-                                                     great time for a VC-turned-money-man-
foray is the aggressiveness with which it panies. What's more, the partners had                                                            agement-firm to raise funds. Without funds
has been expanding beyond the strategy       accumulated immense wealth and weren't                                                        to manage, Beckwith and Upin left, the
that made it great. Sequoia began business satisfied with the various professionals                                                        former back to his old firm and the latter to
in 1972 as a spinoff of Capital Group, the   offering to manage their money.                                                               Makena Capital, an existing multibillion-
legendary fund management group in Los          In 2008 Sequoia made its move. It                                                          dollar fund pursuing precisely the wealth-
Angeles. And for almost                                        hired Michael Beckwith,                                                     preservation strategy Sequoia coveted.
three decades Sequoia                  MORITZ                  a seasoned hedge fund                                                          Sequoia hasn't given up on its dreams,
stuck mainly with ven-          RECENTLY TOLD                  manager from Maverick                                                       say people close to the firm. But it has
ture investments. Even as        INVESTORS HE                  Capital, a Dallas-based                                                     scaled back its ambitions. Earlier in the
its renown grew, Sequoia        REMAINS KEEN                   money management                                                            year the firm abandoned swank office
remained relatively small       ON RISKY TECH                  firm, and Eric Upin, the                                                    space in downtown San Francisco that




                                                                         -
and focused. It put money           STARTUPS.                  chief investment officer                                                    was intended to house the Heritage staff,
into small, risky tech com-                                    of Stanford's endowment.                                                    subletting the offices to a law firm.
panies, and the size of its                                    The plan was to raise two                                                      The performance of Sequoia's core busi-
venture funds remained                                         new pools of capital from                                                   ness is a mixed bag. It has had some nice
in the $400 million range, far below what    Sequoia's network-endowment           inves-                                                  exits: Battery maker A123 Systems went
competing firms raised. But this approach    tors in Sequoia's venture funds, entrepre-                                                    public in September and is now worth more
limited the fees Sequoia partners could      neurs whom Sequoia had helped become                                                          than $2 billion. Earlier this year Zappos
earn-and the firm's profit potential.        rich, and Sequoia's partners themselves.                                                      .com agreed to sell to Amazon.com, and
   A few years ago, according to people      Its pitch? Sequoia's existing funds would                                                     Cisco last year bought videocamera maker
in the know, Sequoia's partners-chiefly      benefit from increased exposure to public-                                                    Pure Digital for $590 million. A potential
Moritz and the other most senior active      securities investments and the new cli-                                                       home run is LinkedIn, whose investors have
partner, Doug Leone-became convinced         ents recruited by the asset-management                                                        assigned it a billion-dollar valuation.
                                                                                                                                              Yetin its most recent venture fund there
                                                                                                                                           isn't one investment with the trademark
                                                                                                                                           Sequoia buzz. Some look promising, like
Venture Capital's Wild Ride                                                                                                                mobile ad firm AdMob and Sugar Publish-
Performance since the 'net bubble burst has been especially weak.                                                                          ing, a producer of web content for women.
                                                                                                                                           Others are duds, including online media
u.s. venture capital
quarterly returns" (percentage)                                                                                                            companies Imeem and Joost. Sequoia no-
80%                                                                                                                                        tably isn't invested in the hottest Internet
                                                                                                                                           companies of the moment, Facebook and
                                                                                                                                           Twitter, both of which seem, for now, to be
60%
                                                                                                                                           gushers for their early venture backers.
                                                                                                                                              True to form, Sequoia isn't panicking. In
4()'J(,
                                                                                                                                           September it gathered a group of friendly
                                                                                                                                           entrepreneurs and investing partners to
2()'J(,                                                                                                                                    update them on the firm's progress. Moritz
                                                                                                                                           told the group that Sequoia remains com-
                                                                                                                                           mitted to financing small, risky technol-
                                                                                                                                           ogy companies, with nary a mention of
          1'"1''''''''' .,.",.", .. ,.",.           I     , .. , ... ,    '1·","',"'1·","·,"',"',"',"',"·,"·,"'1"',"·,"                ,
                                                                                                                                           the new funds. Who would have thought
     1981                  ·85                  '90                            ·95          2000                 ·05                 ·09   Sequoia's chanciest venture would have
'to limited    partners.   net of fees. expenses.       and earned       Interest.                     SOURCE: CAMBRtOGEASSOClATES         been its own? III

				
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