Last month, one of the world’s most prominent venture capital (VC) firms, Sequoia Capital, made a bold move that shocked the financial industry.
In a blog post published on October 26th, Sequoia announced that it would be ditching the traditional VC business model that it has employed since the early 1970s and embracing a more flexible hedge fund-style model. Instead of operating a rigid 10-year VC fund cycle — where it’s forced to liquidate investments in early-stage technology companies after a set time period — the firm will create a new structure that provides more flexibility in terms of investment options, and allows it to hold on to innovative tech companies for the long term.
The digital revolution has changed technology investing
Why is Sequoia overhauling its fund structure? Well, while the traditional VC model has delivered incredible results for the firm and its investors since its inception in 1972, the company believes that this model is now out of date due to the fact that technology companies can continue to generate tremendous growth long after they go public.
By adopting this more flexible model, Sequoia — which in the past has funded the likes of Alphabet, PayPal, and Nvidia — will be able to hold on to top technology companies for much longer than it could in the past. Instead of investing in top tech businesses for a few years, it will now be able to help companies realise their potential over the course of decades.
“The best founders want to make a lasting impact in the world. Their ambition isn’t confined to a 10-year period. Neither is ours” — Sequoia Capital Partner Roelof Botha
This new approach makes a lot of sense as history shows that in the past, the firm has cashed out of high-growth companies way too early. For example, had the firm continued to invest in chip maker Nvidia – with which it partnered back in 1993 — post Initial Public Offering (IPO) in 1999, it would have made over 1,000 times its money1.
Sequoia believes this new approach will help it generate high returns for its investors over the long run. If a company goes public and goes on to achieve a $1 trillion+ valuation — like Alphabet has — the firm could potentially still own a large portion of its stock.
It’s worth noting that as part of its restructuring, Sequoia will become a “Registered Investment Adviser.” This will further enhance its flexibility and allow it to support its portfolio companies through various financing events, such as secondary offerings and IPOs. This setup will also enable the firm to increase its investments in emerging asset classes such as cryptocurrencies.
What retail investors can learn from Sequoia Capital’s move
For retail investors, there are several takeaways from this move by Sequoia Capital.
The most obvious takeaway is that the technology sector is throwing up a lot of long-term investment opportunities today. Right now, we are in the midst of a technological revolution that is fundamentally altering the way we live, work, travel, and communicate. Made possible by the emergence of advanced technologies such as cloud computing, 5G networks, and artificial intelligence, this revolution is unlike anything the world has ever experienced before and it’s still in its early stages.
Investors can capitalise on this digital revolution by investing in technology companies that trade publicly on the world’s stock markets. One easy way to do this is by investing in TBanque’s Smart Portfolios. These are diversified investment portfolios that provide exposure to a range of dominant technological themes and have been designed to help investors capitalise on the long-term opportunities in the capital markets.
Another key takeaway is that when tech companies come to the public markets, they are often still very much in their infancy. In the past, IPOs were sometimes viewed as a mechanism for insiders to offload ex-growth companies at sky-high valuations. It was often thought that all the big money was made pre-IPO in the private markets. However, this is no longer the case as these days, many technology companies are going on to deliver enormous returns for investors after their IPOs. Some examples here include:
- Square. Since its IPO in 2015, Square’s share price has risen from $9 to $236, generating a gain of around 2,520% for investors. This stock can be found in TBanque’s MobilePayments Smart Portfolio, which is focused on innovative payments businesses.
- Hubspot. Since its IPO in 2016, Hubspot’s share price has risen from $25 to $815, generating a return of around 3,160% for investors. This stock can be found in TBanque’s RemoteWork Smart Portfolio, which has been designed to help investors capitalise on the shift to more flexible working arrangements.
- Okta. Since its IPO in 2017, Okta’s share price has risen from $17 to around $250, delivering a return of around 1,370% for investors. This stock can be found in TBanque’s CyberSecurity Smart Portfolio, which has been designed to help investors capitalise on the growth of the cybersecurity industry.
- Zoom Video Communications. Since its IPO in 2019, Zoom’s share price has climbed from $36 to $280, delivering a return of around 675% for investors. This stock can also be found in TBanque’s RemoteWork Smart Portfolio.
- Airbnb. Since its IPO in December 2020, Airbnb’s share price has risen from $68 to $200, generating a return of around 195% in less than a year. This stock can be found in TBanque’s TravelKit Smart Portfolio, which offers broad exposure to the travel, leisure, and tourism sectors.
A third takeaway from Sequoia Capital’s move is that new asset classes such as crypto can play a role in long-term investors’ portfolios. These assets can enhance portfolio returns while lowering overall risk due to their low correlations to traditional assets such as stocks and bonds.
Last year, analysts at Fidelity compared the performance of a standard 60/40 equity/bonds portfolio with the performance of some 60/40 portfolios that contained a small amount of Bitcoin (1% to 3%). The analysts found that the portfolios with Bitcoin exposure generated substantially higher returns over the long term without a significantly higher level of risk. Interestingly, the Sharpe Ratio — which measures a portfolio’s risk-adjusted return — was much higher for the portfolios with Bitcoin exposure. This suggests that incorporating cryptoassets into a traditional portfolio can pay off. You can find out more about this here.
Opportunities in the public markets
Ultimately, the move by Sequoia Capital shows that there are plenty of exciting opportunities for investors in the public markets today. By allocating capital across a number of dominant digital trends, investors can position their portfolios for strong long-term returns.
Sources
- https://www.wsj.com/articles/SB917224371262043000
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Smart Portfolios should not be considered as exchange-traded funds, nor as hedge funds.
Cryptoasset investing is unregulated in some EU countries and the UK. No consumer protection.
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Cryptoassets are unregulated in some EU countries and the UK. No consumer protection.
