DISCOVER. DECIPHER. DISRUPT.
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
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
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
·'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
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
gushers for their early venture backers.
True to form, Sequoia isn't panicking. In
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