📶 Sequoia shakes things up

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Good morning 👋

Clay here. I almost got my head taken off surfing this morning.

Guy came out of nowhere, tried to snake me, and his fin came six inches from my neck after he flew off.

But here we are: writing a newsletter.

Switching gears.

We have some Sequoia news, macro VC fundraising lessons, our takeaways from starting an outbound sales process for sponsor sales, plus some of our favorite resources from the past week.

If you like, love, or hate this piece, let us know in the comment section.

This Week in Venture

Sequoia cuts staff and reduces focus 💀

Last week, Sequoia announced three big moves: the group is cutting it’s crypto fund by >60%, it’s ecosystem fund by ~50%, and it has let go seven employees as part of its restructuring plan.

Why it matters: Fund downsizings are usually a leading indicator of future problems. We’ll break down why in three parts.

First, let’s cover the reduction in the size of their crypto fund.

Unless you’ve been living under a rock, you know by now that investing in crypto and blockchain startups is BRUTAL right now. Long-term HODLers have gone through crypto winters before, but the sentiment in VC world is bad, and a lot of the long-term optimism has died down.

The fund invested in liquid crypto investments (ie. tokens). Those haven’t done well, and now that some time has passed, it’s clear that a huge percentage of these tokens were Ponzi schemes run by people with different incentives than those of the fund.

Bad actors, negative publicity (Sequoia was notoriously involved in the FTX saga), and poor returns have turned many LPs into non-believers, and the end result is a significant reduction in fund size.

Next up: the ecosystem fund.

For those that don’t know, Sequoia’s ecosystem fund is essentially a fund of funds where they back Sequoia scouts, funds formed by Sequoia alums, and also some other emerging managers. Sequoia helps these people get their fund up and running, and they get deal flow and information in return.

The first fund was a massive vehicle ($900 million), so this reduction could be more of a reaction to the state of fundraising more so than a reaction based on track record of the fund.

Fund of funds returns follow a much longer J-curve than that of a typical fund, and many FoFs will model out distributed returns over a 12-15 year period.

The new fund still has plenty of capital to deploy ($450 million), but there are far less compelling opportunities than there were a year and a half ago when the last fund was raised. Speaking from experience, if Sequoia was raise another $900 million fund and forced to deploy it over the next 18-24 months, they would not be able to find enough opportunities that meet their bar.

Fewer opportunities + a reduction in average fund size (no more $100 million first funds) = less LP demand for this type of investment vehicle.

Lastly, the staff cuts.

It’s rare for venture funds to make layoffs publicly. It’s more common for employee churn to occur more quietly whenever a new fund is raised.

It’s ultra rare for a tier one fund like Sequoia to cut staff, and it could provide some clues to what happens next.

What happens next: On the fundraising side, there are two main takeaways:

1. The crypto winter is here to stay. The LPs have spoken, and they are not interested right now.

2. Securing LP capital for first and second time managers isn’t getting easier any time soon. Raising a first fund is tough, and not all LPs are interested or even allowed to touch fund managers without an institutional track record. These types of managers are reliant mainly on HNWIs, fund of funds, and ecosystem funds like this one to lock in LPs dollars. These types of vehicles (excluding HNWIs) are responsible for raising their own LP dollars before investing into GPs. If they continue to have troubles raising their target fund size, it means less available dollars for the GPs they invest in.

On the talent side, there are also two main takeaways:

• The downside to being a sector specialist is you put your career at risk whenever there is a market correction. We think the investment world is too big to truly be knowledgeable beyond a few specific sectors; if you want better returns, you have to niche down. The problem is that if you choose the wrong niche, your entire career is in jeopardy.

• Operational roles are most at-risk for funds. Over the past few years, funds hired roles in order to compete on platform and the ability to provide value after the check. We’ve written in the past in more detail why they did that. Now that funds are force-correcting and accepting smaller funds, they have lower management fees. This means they now can’t support all roles they originally hired for. Unfortunately, it’s looking like some of the first roles to get cut are those on the talent or operations side.

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- Clay and Tyler