By Ben Bergman and Darius Rafieyan- March 8, 2023
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The University of California’s massive $28 billion endowment, a limited partner in 20 Sequoia Capital funds since 2018, is underwater on half those investments, according to documents obtained by Insider. Sequoia’s massive 2018 $8 billion Global Growth Fund that backed the beleaguered crypto exchange FTX has failed to return meaningful amounts of capital, the filings also showed.

Menlo Park-based Sequoia, founded in 1972, is widely considered to be one of the most successful venture firms of all time, making early bets on Apple, Cisco Systems, PayPal and YouTube. But the data Insider reviewed shows at least so far, investors have lost money in many recent Sequoia funds.

Insider accessed the Sequoia returns through a public-records request filed with UC Investments, the office that manages the University of California’s various investment funds. Since 2018 UC Investments has deployed over $800 million into Sequoia’s funds and received only $43 million in cash distributions. Meanwhile ten of the Sequoia funds that UC Investments has invested in have been marked down in value on paper.

These returns provide a rare look at information that is normally a closely guarded secret in the highly opaque world of venture. Unlike many other financial institutions, VC funds are not required to show their returns on investments in startups.

Sequoia and UC Investments declined a request for comment.

The data is current as of June 30, 2022, meaning the actual markdowns are now likely considerably worse, given how much private tech markets deteriorated in the second half of last year. Funds revalue their holdings as companies have to raise at far lower valuations than they did in 2020 and 2021.

“The blood bath really hasn’t begun at the earlier stages,” said Steve Brotman, managing partner at Alpha Group and strategic advisor to the Pritzker Group’s venture arm, speaking about venture markdowns in general and not Sequoia specifically. “I’ve heard 60% to 70% markdowns are coming.”

Underwater funds across a range

The ten funds that investors are underwater on include three funds from 2020 focusing on China at both the growth and seed stage. Sequoia 2020 US Growth IX Fund was marked down in value by 5%.

Sequoia’s 2018 China seed fund has been marked down in value by 9% and has not returned any capital.

For the 2021 vintage, the Sequoia Capital US fund was marked down 10%. The 2022 Sequoia Capital Fund was already marked down more than 15% by June and had already deployed 63% of its war chest.

Sequoia’s success in early stage investing in undeniable but the data from the filings suggest that the firm’s expansion into later stage and public companies may have a more spotty track record. Limited partners have long grumbled privately that in order to access to Sequoia’s coveted early funds they are also required to back much less desirable ones, according to multiple venture investors who were not authorized to speak publicly.

One of UC Investment’s largest commitments to Sequoia is $232 million earmarked for the 2022 Sequoia Capital Fund. The $13.6 billion fund represents a departure from the traditional venture capital model, in which investors put money into multiple individual funds that run for a set number of years. By contrast, Sequoia says investors will now invest into a single, open-ended fund.

According to the documents, as of June, 2022, UC Investments had already deployed $147 million of its $232 million commitment and that stake had already been marked down in value by more than 15% just six months into its first year.

The long game

Poor returns now don’t mean funds can’t be wildly successful in the future. Venture is a long game where it can take more than a decade for early startup bets to pay off, something Sequoia partners have always emphasized in their public remarks.

“We’re investors for the long run,” partner Alfred Lin told TechCrunch earlier this year after being questioned if he would do anything differently if he could go back to the peak of the market in 2021 and unwind stakes in companies like Airbnb and Doordash. He added that the “only question we ask is whether [we] think these companies are going to be worth more 10 years from now than today — not any short term three-month, one-month or one-year period.”

Still, by holding onto stakes for so long, Sequoia could have missed a window that might not be open for some time to return capital to investors. For instance, as of the middle of last year it distributed just 12% of what investors paid-in to its massive $8 billion 2018 Global Growth III Fund, which doubled down on mature Sequoia holdings. On paper that fund has grown 60% despite its relatively small distributions.

For UC Investments, that means it deployed $306 million in the fund in 2018 and had received less than $38 million back by last year. UC’s holding was marked up to $491 million in value, an amount that is likely lower as valuations have tumbled in the eight months since.

The Global Growth III Fund backed Freshworks, which has tumbled more than 60% since it went public in 2021 and Snowflake, which is down nearly 40% since it went public in 2020. The fund still owned 12% of Freshworks as of 2022 and 2.4% of Snowflake as of the end of 2021, according to SEC documents.

Most infamously, it funded FTX, which Sequoia marked down to zero in November. (The firm told investors FTX represented just 3% of its Global Growth III Fund, which it said had more than $7.5 billion in realized and unrealized gains.)

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