Sequoia Capital certainly made headlines Tuesday by breaking up with China. But VC firms had already been growing wary of China as funding levels continue to fall.
On Tuesday Sequoia announced in a letter to their limited partners that the firm is going to break off its China and India units into separate entities—with the China entity, launched in 2005, taking on the name HongShan in English and India and Southeast Asia together becoming Peak XV Partners. The U.S. and Europe will remain under Sequoia Capital, but the three will become different brands by March of 2024 at the latest; profit sharing and centralized back-office functions, meanwhile, will cease by the end of this year, a person familiar with the plans confirmed. Sequoia declared the big catalysts for the move included conflicts between portfolio companies among the different entities and difficulties with centralized back-office functions.
Sequoia’s shift brings the firm in line with how some other VCs are already set up, with separate China arms, like Redpoint Ventures.
It’s a big move for Sequoia, but it’s not necessarily going to prompt other VCs to follow suit and ditch their China offices or funds. Instead, it’s “another domino” amid VCs and their growing skittishness over investing in China as tensions between the U.S. and China escalate, according to PitchBook senior venture analyst Kyle Stanford.
“We’ve heard over the past six months that everyone is taking a much more cautious eye toward China. …[This is] another reason for investors to slow their deployment to China, to rethink their strategy,” he told me. Over the last year, the value of deals in China with non-Chinese investor participation has plummeted, down nearly 70% in 2022 from 2021; the figures are tracking even lower so far in 2023, per PitchBook data.
Sequoia says their China and India arms were already largely independent with local investors making decisions. The firm’s China and India units also weren’t part of Sequoia’s big firm remodel in 2021 when it reorganized its structure to hold all U.S. and European investments under one big, open-ended fund, which included holding public stocks longer. Those exemptions likely indicate that the breakup was only a matter of time, no doubt sped up by the recent iciness with China, Stanford argues.
But that geopolitical backdrop is key. Amid rising tensions, the Biden administration has been preparing an executive order to restrict U.S. investors’ ability to invest in Chinese companies (it will focus on artificial intelligence, semiconductors, and quantum computing). Meanwhile, VC firms have increasingly been under pressure to divest from China, while Sequoia has reportedly been consulting outside national security experts this year regarding prospective investments in China. Sequoia’s highest-profile China bet is its stake in TikTok owner ByteDance, which, in addition to being the world’s most valuable private company—most recently valued at around $220 billion—has drawn the ire of the U.S. government.
Those like PitchBook’s Stanford predict U.S. investment into China will slow, especially if and when an executive order comes into play. But the big outstanding question is, what does this all mean for LPs? Fellow PitchBook analyst Kaidi Gao suggests that LPs likely won’t pull back from investing in China because of Sequoia’s move, but “there are going to be a host of other reasons that may or may not make them concerned,” including the geopolitical worries, and “we can see that from several of the largest Canadian pensions” pulling back, she added. Sequoia China has LPs in the U.S.
The upshot is that Sequoia’s big moves—including their unusual 2021 restructuring—are often pretty Sequoia-specific. What’s not is the increasing complexity, and risk, of investing in China.
See you tomorrow,
Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.
VENTURE DEALS
– Digibee, a Weston, Fla.-based, integration platform as a service company, raised $60 million in Series B funding. Goldman Sachs led the round and was joined by Leadwind, a growth fund at K Fund, Vivo Ventures, Kinea, and G2D.
– Curri, a Ventura, Calif.-based logistics platform for construction and industrial industries, raised $42 million in Series B funding. Bessemer Venture Partners led the round and as joined by Initialized Capital, Brick & Mortar Ventures, Rainfall Ventures, and others.
– OXCCU, a London-based company converting carbon dioxide and hydrogen into industrial and consumer products, raised $22.7 million in Series A funding. Clean Energy Ventures led the round and was joined by Aramco Ventures, Eni Next, United Airlines Ventures Sustainable Flight FundSM, and others.
– Sourcemap, a New York-based supply chain mapping company, raised $20 million in Series B funding co-led by Energize Ventures and E14 Fund.
– Icelandic Provisions, a New York-based yogurt brand, raised $18 million in Series C funding from Kvika Corporate Finance and Hamrar Capital Partners.
– Keeta, a Santa Monica, Calif.-based payments platform, raised $17 million in seed funding from investors including Eric Schmidt.
– Mend, a New York-based life sciences and digital health company, raised $15 million in Series A funding. S2G Ventures led the round and was joined by iSelect Fund, Touchdown Ventures, Colorcon Ventures, Keen Growth Capital, and others.
– MyForest Foods, a Green Island, N.Y.-based meatless food company, raised $15 million in Series A-2 funding led by Ecovative Design.
– Payrails, a Berlin-based payment operating system for global platforms, raised $14.4 million in seed extension funding. EQT Ventures led the round and was joined by General Catalyst, Andreessen Horowitz, and HV Capital.
– Maza, a Los Angeles-based financial platform providing immigrants with financial identities, raised $8 million in seed funding. Andreessen Horowitz led the round and was joined by SV Angel, Box Group, Restive Ventures, Global Founders Capital, and others.
– Nori, a Seattle-based carbon removal marketplace, raised an additional $6.25 million co-led by M13, Toyota Ventures, Placeholder, and Cargill.
– Builder Prime, a Staten Island, N.Y.-based software platform for residential contractors, raised $6 million in Series A funding led by Blueprint Equity.
– 2045, a New York-based network for professionals of color, raised $4.2 million in pre-seed funding. Benchstrength led the round and was joined by NBA athlete CJ McCollum, Miguel McKelvey, AAF, CT Innovations, and others.
– Keep Aware, an Austin-based browser security company, raised $2.4 million in funding. LiveOak Venture Partners led the round and was joined by Runtime Ventures and other angels.
– Dew Drops, a Lexington, Mass.-based direct-to-consumer platform that shares digital collectibles via SMS, raised $1.5 million in pre-seed funding. Dream Ventures led the round and was joined by VaynerFund, Polygon Technology Fund, Ruttenberg Gordon Investments, and Slow Ventures.
– Oamo, a Montreal-based decentralized data broker, raised $1.25 million in pre-seed funding from White Star Capital.
PRIVATE EQUITY
– CES Power, backed by Allied Industrial Partners, acquired Immedia Event Productions, a Cherry Valley, Mass.-based events services provider. Financial terms were not disclosed.
– Duke’s Root Control, a Comvest portfolio company, acquired Underground Infrastructure Services, a Livonia, Mich.-based wastewater and gas-focused inspection, diagnostics, and remediation services provider. Financial terms were not disclosed.
– Monomoy Capital Partners acquired Japs-Olson Company, a St. Louis Park, Minn.-based direct mail marketing solutions company. Financial terms were not disclosed.
OTHER
– Cetera Holdings acquired The Retirement Planning Group, a Leawood, Kansas-based investment advisory firm. Financial terms were not disclosed.
– Green Check Verified acquired Komplyd, a San Jose-based cannabis compliance company. Financial terms were not disclosed.
– Neobrain acquired Flashbrand, a San Francisco-based HR performance platform. Financial terms were not disclosed.
– Origin acquired Finny, a Burlingame, Calif.-based financial education company. Financial terms were not disclosed.
– Printful acquired Snow Commerce, a Cincinnati-based managed service provider for designing and operating e-commerce platforms. Financial terms were not disclosed.
– UKG acquired Immedis, a Dublin-based payroll provider. Financial terms were not disclosed.
IPOS
– Fat Brands plans to spin off its Addison, Texas-based sports bar restaurant Twin Peaks for an initial public offering.
