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Sequoia is fundamentally overhauling its fund structure, the most significant sign yet of the venture industry's move from a model that increasingly looks outdated in today's private markets.

Traditional venture capital dominance of startup investing is under assault as new strategies keep cropping up, from the rise of solo GPs and equity crowdfunding to hedge funds' rush into late-stage rounds. Moreover, the rise of giant tech companies with lofty valuations in the public markets has shown that the 50-year-old VC model of entering and exiting companies within a decade risks missing out on future gains.

"Innovations in venture capital haven't kept pace with the companies we serve," Sequoia partner Roelof Botha wrote in a blog post on Tuesday announcing the firm's historic shift. "As chips shrank and software flew to the cloud, venture capital kept operating on the business equivalent of floppy disks."

Sequoia's new approach takes a page from the largest investment firms' playbook and attempts to free both LPs and portfolio companies from self-imposed time limits.
   



In recent years, the IPO market has produced exits for high-flying tech companies, notably with recent Sequoia-backed hits like Snowflake, DoorDash and Robinhood—each with an exit value of roughly $30 billion. Snowflake's market cap has since swelled to over $102 billion, and DoorDash's to more than $73 billion.

The new fund structure consists of two interconnected parts. The first, dubbed the Sequoia Fund, is an open-ended portfolio of publicly-traded companies. The second is a group of sub-funds, each of which is aimed at strategies such as seed, venture and growth.

Sequoia sees the main fund and the sub-funds as symbiotic. The Silicon Valley firm will sell positions in public companies and use the proceeds to invest in the sub-funds. In turn, proceeds from the sub-funds will finance the Sequoia Fund.

The firm says the structure stands to give Sequoia, its LPs and its portfolio companies a few key advantages. Sequoia can be a true crossover investor The evergreen fund structure makes it more like hedge funds and asset managers, but Sequoia will differ in that new assets come from a pipeline of sub-fund investments.

This change positions Sequoia to contend with crossover investors, which invest in both public and private companies. In many ways, Sequoia is already a member of this group: The value of its public company holdings has grown to $45 billion.

"They are setting themselves up to be even more long-term investors for companies," said Kyle Stanford, a senior analyst at PitchBook. "Whereas crossover investors normally take the baton from VCs, Sequoia is now saying they are going to be set up to be long-term investors after the company's IPO."

Sequoia is also broadening its scope by becoming a registered investment adviser, following in the footsteps of rivals like Andreessen Horowitz and General Catalyst. That status gives firms flexibility to invest in crypto, IPOs, secondaries markets and seed investing programs—all strategies of interest that Botha called out in Tuesday's announcement. LPs get more flexibility By shedding the traditional 10-year fund life, the new structure allows LPs to enter and leave the fund with greater ease. LPs will be subject to a two-year lockup after the new structure launches. After that, they'll be able to request funds twice annually.

"The added redemption ability is a huge gain for LPs," Stanford said.

Investors in the Sequoia Fund will also be able to define an allocation to the sub-funds—roughly similar in concept to a commingled fund.

Another possible benefit of the new structure is the potential to lock in the firm's existing favorable tax treatment in advance of the Biden administration's proposed tax increases on carried interest.

"Tax likely has a role here, but I don't think it is a fundamental one," said Lindsay Karas Stencel, a fund-formation lawyer with Thompson Hine. "I think this has mainly to do with antiquated ways of doing venture and that 10-year fund periods no longer match how long it takes to effectively and properly grow a business and maximize returns."

By moving to an evergreen structure, Sequoia can hold onto companies that it believes will continue to pay off in the future and also keep a seat on their boards.

In addition to aiming for better returns, the firm hopes that will set up portfolio companies for long-term growth.

"I think the timeframes that were put on venture funds prior to this shift by Sequoia caused some undue stress and pressure on entrepreneurs," Karas Stencel said. Additionally, the firm missed out on strong returns when it had to sell positions in still quickly growing companies.

Featured image of Roelof Botha by Brian Ach/Getty Images