The Onset Of Sequoia India As India’s Largest VC Investors After Detaching Itself From Its Parent Sequoia Capital.
Nobody was shocked when Sequoia announced that it was terminating its China operations due to increased geopolitical competition and growing distrust between the two global heavyweights.
The news hasn’t been forgotten after one of the most momentous events in the Indian VC (venture capital) market. With the renaming of Sequoia India & Southeast Asia to Peak XV earlier in June, the country’s most prominent VC investor split from its famed parent Sequoia Capital and became an independent business. To be sure, Sequoia India has raised dedicated money for itself and has enjoyed functional autonomy within Sequoia’s globally dispersed and loosely united entity. However, Sequoia, being the global umbrella company, delivered its benefits to its regional franchises. The most appealing aspect was its unique status in VC history and its participation in forming a galaxy of innovative businesses.
The strong link with the world’s most legendary VC company, which bankrolled Google, Apple, Cisco, Instagram, Airbnb, and others, gave Sequoia India power and status. That’s history in a single stroke. In the lack of a non-compete agreement with the big daddy, Peak XV faces the prospect of competing with its former parent Sequoia Capital in the future. It is no longer what it was yesterday, says one early-stage investor.
Nobody was shocked when Sequoia announced that it was terminating its China operations due to increased geopolitical competition and growing distrust between the two global heavyweights. On the other hand, the three-way split involving the India unit raised many concerns.
According to Sequoia’s official statement, the main cause for the split was clashing portfolios across regions. However, this does not fit well with the bigger VC community. Sequoia has long been known to sponsor anyone it believes would earn money no matter how hard they compete. This is true for India also. In the edtech sector, for example, it has invested in Byju’s, Unacademy, Eruditus, and Cuemath, all of whose product delivers overlap in several sub-segments.
Following the news, there was strong conjecture that the split had anything to do with the governance concerns that beset several Sequoia India portfolio businesses. Another thing to notice is that it is an unavoidable case of abundance. Sequoia India, with a portfolio 2X as vast as its immediate counterparts, was the potential to bear the brunt of the startup ecosystem’s woes.
Sequoia was in far more consequential peril in the United States. The FTX disaster alone cost drastically more capital loss and reputational risk than its India franchise has recently endured. Sequoia Capital alone has infused USD 225 million in the Bitcoin exchange. Its total investment in Zilingo, BharatPe, GoMechanic, Trell, and the most recent blow-up, Mojocare — all of which have experienced volatile internal disagreements and mayhem — would be around USD198 million. It still has a chance to make a fair bye from BharatPe, which infused USD 75 million. It is not a complete washout, unlike FTX.
What triggered the split if Sequoia did not have to work around India’s geopolitical concept, and its competing portfolio rationale needs to be more persuasive?
This focuses attention on Sequoia’s India performance during the last 17 years. However, Roelof Botha, CEO of Sequoia Capital, strongly supported the India franchise’s performance. Indeed, Sequoia India, now Peak XV, is the country’s most active and prominent VC firm in a myriad of ways.
A portfolio of 400 entities, 50 unicorns, USD 9.2 billion in assets under management, a 100-member staff, two booming geographies, and substantial unique funds for investing in seed, early, and growth phases. Sequoia India is sufficiently ahead of its competitors.
Regarding the number of unicorns, portfolio size, money under management, team strength, and complexity of operations, Sequoia India & Southeast Asia has been the country’s most prominent VC firm. Botha stated that operating independently will boost the company’s market leadership position. But the genuine concern is if Sequoia India (Peak XV) can sustain its leadership in terms of returns — possibly the only metric that matters for a VC company.
Peak XV’s scorecard openly stated that it had generated USD 4.5 billion in actual returns in India. For a company investing in the country for over two decades, it is just less than half (0.48x) of the total USD 9.2 billion raised. Unrealized gains from an active portfolio of about 45 unicorns are estimated to be roughly USD 11.5 billion. Sequoia India’s total unrealized earnings from all active investments are estimated to be over USD17 billion, including USD1.6 billion in public market positions. Its overall gains — realized and unrealized — might be in the 2.5x range.
Peak XV’s overall profits are now hovering around 3.2x compared to invested money. Their real return on investment would be 0.67x. Let us compare these figures to those of Elevation Capital (earlier SAIF Partners), probably India’s best-performing fund in terms of returns. Elevation has already repaid around 1.3x of the USD 2.1 bn cash raised. Its overall profits, including the value of its current assets, are expected to be around 6x. Both statistics are quite higher than Peak XV’s.
Sceptics saw Sequoia’s departure from its India franchise as evidence of foreign funders’ growing dissatisfaction with the Indian startup story. A partner at another VC firm with an India franchise vehemently opposed these discussions. Bejul Somaia, the founder of Lightspeed India Partners, released his figures to counteract alarming claims. Lightspeed repaid USD1 billion on the USD1.6 billion it invested and now has assets worth USD3.4 billion. Again, little better than Peak XV.
It highlights the franchise of another US-based VC company, Accel Partners. A USD1 billion departure from Flipkart plus 30-40 smaller exits should have resulted in 0.8x-0.9x actual returns on the USD2.26 billion raised across funds. Regarding the value of its assets, Accel is in a good position. Despite a reduced market valuation of USD5 billion, Accel’s stake in publicly traded Freshworks is worth USD1.4 billion. It still owns 1% of Flipkart. Accel’s unrealized and realized gains may be equivalent to Elevation’s.
Nexus Venture Partners, another VC company with over USD 2 billion in total capital, has a substantial portfolio of corporate IT/SaaS firms with stable cash flow. A few of them have already been listed in the United States and are producing good returns. These prominent VC firms, each committed less than a third of what Sequoia India did, look to be in a more solid position regarding returns. Sequoia’s late-stage investments include Razorpay, Go Digit, and Chargebee, where the upside potential is lower than that of an early-stage VC.
Some of these estimates may differ from the actual figures due to limited data access. Furthermore, unrealized gains may vary considerably. For example, these estimations were based on the values of the investee startups at the time of their most recent share transaction. However, values have diminished from their high in the last 15 months.
Peak XV also has many problems on this front. It would suffer the burden of the IT crash more than any other fund due to the size of its holdings. Its key stakes, including Byju‘s, Oyo, and Meesho, were marked down by current investors. Blackrock reduced Byju’s valuation by 62% to USD 8.4 billion, while SoftBank allegedly reduced Oyo’s valuation by less than a third to USD 2.7 billion. Byju is grappling with a debt repayment dilemma, whilst BharatPe has gone through a turbulent period of founder departures and leadership changes, resulting in severe value depreciation. Mamaearth swiftly abandoned its intentions for a public listing.
In the last year, at least one-third of Peak XV’s unicorns in India had laid off staff. Despite such efforts, some of them struggle to keep expenditures under control. As reported, many of their unicorns, including Byju’s, BharatPe, Cred, Eruditus, MPL, and Unacademy, have substantial cash burn, putting them in jeopardy during the financing winter. Peak XV aims to ensure that its big investee corporations navigate safety while guaranteeing expressive outcomes. And this is crucial in establishing its track record.
The causes of the regional divide.
According to some industry experts, this split has been in the works for quite some time. In hindsight, the decision to keep India and China out when Sequoia moved to a permanent capital structure was the first signal, says Arun Natarajan, founder of analytics platform Venture Intelligence.
Be it portfolio conflict or brand misunderstanding, as Sequoia indicated as causes, this regional divide presents Peak XV with new issues. On a tactical level, the most critical factor will be Sequoia’s global network becoming increasingly unavailable. This may influence the go-to-market strategy of the portfolio’s numerous cross-border businesses.
Sequoia India has been actively establishing a SaaS portfolio, with four to five unicorns already in place. Its portfolio includes 100 businesses with international ambitions. One of the first things the business did following the separation was open a US office to assist these early-stage enterprises with their international development.
Due to this transition, VCs typically believe that the dynamics of Peak XV’s relationship with LPs will change. While other venture capital firms followed the 2/20 norm (2% management fee and 20% profit), Sequoia’s exceptional track record has allowed them to negotiate a 3/30 fee and profit-sharing structure. According to a VC, it is unclear if the fresh new Peak XV may ask LPs to maintain the contracts. Peak XV’s commander, Shailendra Singh, has stated in many interviews that the connection would not alter.
With an agreement to draw pledged cash, general partners of VC companies have an ongoing connection with their limited partners. According to a reliable source, senior Peak XV partners Shailendra Singh, Mohit Bhatnagar, and GV Ravishankar travelled to the United States a few days ago to meet with LPs and update them on the latest developments. The LPs came from Sequoia’s global network.
Peak XV does not face an imminent capital crisis with USD 2.5 billion in uninvested money and a long investment cycle. Meanwhile, the VC industry is waiting to see if it can replicate the same success level with the next funding round.
