As Sequoia changes its model, other permanent-capital VCs weigh in

The decision by Sequoia to become a registered investment adviser (RIA) and move to a “singular, permanent structure,” in its own words, landed with a splash in the U.S. venture capital market. But perhaps it shouldn’t have made quite as many waves as it did.

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Sequoia was not the first United States-based venture capitalist to opt for RIA status, and it was also not the first venture capitalist that The Exchange tracks that moved to a more permanent-capital model. The combination of becoming an RIA and moving to a capital pool that isn’t beset with artificial return windows may be notable in the United States, but we’ve seen examples of this elsewhere.

To better understand what Sequoia is up to, The Exchange reached out to a number of publicly listed venture capital groups from the United Kingdom: We chatted with Augmentum Fintech COO Richard Matthews, Molten Ventures partner Vinoth Jayakumar and Forward Partners Managing Partner Nic Brisbourne. We’ve spoken to them before, when we previously explored the advantages and costs of VCs moving to listed status.

The firms extolled the ability to have a longer investment horizon and provide more general access to the venture capital asset class. The Sequoia shift, the investors told us, is similar to their own setup in its ability to provide more returns-timing flexibility — possibly allowing for greater return maximization — but different in whom it benefits.

Let’s talk about it.

The Sequoia shift

Sequoia partner Roelof Botha spoke about his firm’s model shift on a podcast the other day, giving us a somewhat long-form explanation of what it’s up to. During the show, he noted that Sequoia tells “founders that the IPO is a milestone” — not the finish line — for a company. So, he rhetorically asked, why “should the IPO be a destination for the investor”?

The comment gets at the crux of what Sequoia would like to do with its new model: hold investments longer, requiring the VC to be able to hold stocks over a long time horizon. RIAs are not beholden to venture capital rules requiring them to hold 80% of their assets in private companies, loosely, and no more than 20% in other assets. This means that if a venture capitalist scores a big win with a startup that goes public, there will likely be pressure to liquidate some of the VC’s position as a result.

This can lead to earlier-than-desirable exits in terms of returns, i.e., VCs have to return stock or cash to their LPs before the investment in question has had its full chance to generate profit — and, therefore, returns for both venture fund backers (LPs) and venture fund managers (GPs).

And if there is one thing that is true about venture investors, it’s that they want to get paid.

In the same podcast, Botha said that Sequoia “realized” that the best venture bets “continue to compound, and the majority of the value accrues after the IPO.” The balance has changed, we’d note, as private companies stay private longer. But, yes, it’s true that in some cases, big returns largely land post-IPO. Shopify is an obvious example of how money can be made holding through a public offering, to pick one.

A recent report from OpenView makes this point well, noting that since Salesforce’s 2004 IPO, it has grown its valuation 210x. Shopify, the venture group noted, is up 143x from its IPO price. ServiceNow is up 60x. There are simply massive returns to be made — and therefore huge checks for GPs — in holding certain investments post-debut.