Sequoia’s India arm says it is now free to make U.S. deals

The three-way split of the Sequoia venture capital firm will free its Indian and Southeast Asian arm to pursue U.S. software deals in hot sectors such as artificial intelligence that were once off-limits, the managing director of the Bengaluru-based business told Nikkei Asia.

Sequoia Capital -- early backers of Apple, Google and Airbnb in the U.S., ByteDance in China, Zomato and Byju's in India, and GoTo in Indonesia -- said last week that its Chinese and Indian/Southeast Asian entities would separate from their U.S. parent and operate as HongShan and Peak XV Partners, respectively.

The end of Sequoia's investing alliance in China has been blamed on rising political tensions between Washington and Beijing. But there has been considerable debate about why Sequoia would want to distance itself from India at a time when global firms like Insight Partners, GSV Ventures, General Catalyst and Mary Meeker's Bond Capital have begun backing startups in the country.

In an interview, Peak XV Managing Director Shailendra Singh highlighted the commercial motivations for the split, saying his team has been missing out on desirable investments due to potential conflicts with companies that were already part of the sprawling Sequoia ecosystem.

The challenge was particularly pronounced in an area like AI, where multiple companies could end up building competing products. But there were other examples, as well, Singh said.

Sequoia stayed out of the first two funding rounds at Indian financial services startup Razorpay amid possible competition with an "important U.S. portfolio company," he said. Other missed opportunities came in robotic process automation, where Sequoia was blocked by its investment in UiPath, and in so-called no-code or low-code startups.

Freed from the old constraints, Singh said Peak XV Partners would step up investments in "cross-border" software companies, essentially U.S.-based startups "where one of the co-founders is in India or Southeast Asia, or they have engineering teams there." He said Peak XV would set up a team in the U.S. to help its portfolio companies.

"I expect that in the next five to 10 years there will a parallel ecosystem where in every category, there will be an American company and an Indian company [competing]," Singh said. "But founders won't even come to us if they feel we have a conflict, and our LPs [limited partners] will not be well-served if we don't pick the best companies of our region."

The firm's emphasis in India will be on software deals that straddle AI, cloud infrastructure and cybersecurity, he said, as well as on financial technologies and consumer companies. Peak XV will continue backing consumer and financial services startups in Southeast Asia, as well as looking for software deals in Singapore and Australia.

Before the split, Sequoia reportedly managed $53 billion in the U.S. and Europe, $56 billion in China and $9 billion in India and Southeast Asia. As part of Sequoia, Peak XV raised $2.8 billion last year -- including $2bn earmarked for India, the largest amount ever for an India-focused fund.

Singh declined to comment on Peak XV's fundraising plans in Asia, but said the practice of one Sequoia partner investing in the fund of another would end.

Sequoia began operating in India in 2006 through a partnership with local private equity firm Westbridge Capital. Top management, however, quit in 2011 to relaunch Westbridge, while the current leaders of Peak XV stayed on to run Sequoia's Indian business. The firm underwent another shake-up in late 2017, when three more senior executives left to launch a separate fund.

Peak XV says its current portfolio spans more than 400 companies, over 50 of them unicorns -- startups valued north of $1 billion. It has returned about $4.5 billion to its limited partners and holds shares worth $1.6 billion in portfolio companies that went public.

Exiting investments through initial public offerings could prove tricky for Peak XV. More than 10 Indian firms paused IPOs last year amid a "global rout on public tech listings," said Bain & Co, which estimates the value of VC exits in India plunged to $3.9 billion in 2022 from $9.6 billion the year before.

At the same time, investors such as BlackRock, Neuberger Berman and Fidelity Investments have marked down their valuations of several high-profile Indian startups, setting the stage for so-called down rounds, which could either amplify losses or delay exit plans. These companies include some key Peak XV portfolio companies such as Byju's, Pine Labs and Meesho.

"We encourage companies to reset valuations whenever it makes sense. Public company valuations change every day," said Singh. "It is not sensible that private companies stick to unreasonably high valuations if those are no longer representative of the market, and we encourage founders to be courageous and embrace a reset."

The breakup of Sequoia also comes as some of its high-profile portfolio companies face questions about their corporate governance. The most notorious example has been FTX, whose founder Sam Bankman-Fried faces federal charges that he stole billions of dollars from the cryptocurrency exchange.

Closer to home, the chief executive of one of Peak XV's marquee bets, Singapore-based fashion supply chain startup Zilingo, was sacked after allegations of financial irregularities. Another portfolio company, Byju's, has been locked in a legal wrangle with its lenders.

"Downstream portfolio issues are not unique to us, or to our region," said Singh. "We can't guarantee that nobody in the world will do bad things. But what we can do is to take action. We can focus on our actions to serve our LPs in a great manner."

(asia.nikkei.com)