US venture capital giant Sequoia to split off China business

The venture capital giant Sequoia Capital is splitting its China business into a separate entity amid rising tensions between Washington and Beijing.

The renowned Silicon Valley group, which made bets on fast-growing tech companies such as TikTok parent ByteDance and Alibaba, said on Tuesday it would run its Chinese business as a “completely independent” entity from its US operation.

The Chinese arm will give up the Sequoia name and instead be called HongShan, a romanisation of its Chinese name, which means redwood.

The VC group will also separate its Indian and south-east Asian business into a third entity, it said, adding that the changes would take place by March next year.

Roelof Botha, managing partner of Sequoia Capital, said in an interview that a decision to break up was taken in the past few months. “It really was a very complicated decision. Over the years, we have reassessed the cost-benefit trade-off of this arrangement and whether it was the right structure for the firm. We realised it was time for this.”

Neil Shen, the billionaire founder of Sequoia China, told the Financial Times: “There’s much less in common now” between the different Sequoia entities. He said conversations about splitting the businesses “have been evolving over the last two to three years”.

The split marks an end to one of the most successful US-China investing alliances. It has reaped rewards for the American mother ship and seeded generations of Chinese tech companies since Shen launched Sequoia China in 2005 as an arm of Sequoia Capital.

Shen has raised billions of dollars from US investors as recently as last year and has been confronted with the delicate task of investing in Beijing’s priority areas such as semiconductors and artificial intelligence, while staying on the right side of Washington’s push to introduce controls on exporting sensitive technologies to China.

Sequoia’s China and India arms are run independently but share some of their profits among the global group. That will no longer be the case after the separation, and Sequoia Capital will no longer invest alongside the China and India funds in future. Sequoia Capital will retain its relationship with its long-term capital fund called Heritage and its hedge fund unit called Global Equities.

The investment group has been buffeted by a tech downturn on both sides of the Pacific. Beijing’s campaign to rein in its largest tech companies has tamed many of the internet groups Sequoia China funded and profited from, while Sequoia US last year apologised to its fund investors over its disastrous investment in failed crypto exchange FTX.

“It has become increasingly complex to run a decentralised global investment business,” the group told investors on Tuesday. “We will move to completely independent partnerships and become distinct firms with separate brands no later than March 31 2024.”

Shen said: “We shared a brand — and now we are saying no brand sharing and no centralised back office.”

Sequoia Capital China raised $9bn across several funds last year, from investors including California’s Calpers, the biggest US public pension fund, as well as Massachusetts Pension Reserves Investment Trust and Canada’s CDPQ and CPP Investments, according to the data provider PitchBook. 

The funds were raised from investors independently of the US team. Half of the capital came from US investors, while the rest came from global pension funds and other institutional investors, according to a person involved.

Sequoia China’s large US investor base has made the company more cautious in backing fledgling Chinese groups in sensitive sectors such as semiconductors. Last year, the group began consulting with outside policy experts before making such investments and people close to it said it would continue to do so after the split.

The geopolitical tensions and close association with the US have put Shen in a tough position domestically. In a speech and proposals to China’s top political consultative body last year, Shen said that Beijing had to prioritise developing robotics and green energy, which many interpreted as trying to align Sequoia China with Beijing’s priorities.

But this year, he was not appointed to a second term in the Chinese People’s Political Consultative Conference, an advisory body full of political heavyweights.

Internet groups Sequoia China has backed have also faced challenges from Beijing’s tech crackdown. Meituan was hit with a large antitrust fine, while ride-hailing group Didi was forced to delist from the New York Stock Exchange. China has also installed an official to oversee ByteDance’s main Chinese entity.

The largest blow for Sequoia China came with Beijing’s clampdown on online education companies in 2021 when officials overnight moved to make illegal the business models of many up-and-coming start-ups. The rules have dented its large investments in groups such as Zuoyebang and VIPKID.