Dividing the China Business among Rising Tensions
As tensions between China and Washington rise, Sequoia Capital has announced that it will operate its China business as a separate and “completely independent” entity from its US operations. The Chinese arm will drop the Sequoia name and operate under the name HongShan, while the VC firm will also separate its India and Southeast Asian businesses into a third entity by March next year. Sequoia’s founder, Neil Shen, has confirmed that “there’s a lot less in common” between different Sequoia entities now, and discussions around dividing assets “have evolved over the past two or three years.”
The End of a Successful US-China Investment Alliance
Sequoia China was launched in 2005 as an arm of Sequoia Capital and became one of the most successful US-China investment alliances. It has reaped rewards for the American mothership and seeded generations of Chinese tech companies. Sequoia China has independently operated from the US business but shared some of its profits with the global group. However, Beijing’s crackdown on its biggest tech companies has had a profound impact on Sequoia’s investments. The internet groups that Sequoia had supported, including Alibaba and Meituan, faced significant antitrust fines, and Didi was forced to delist from the New York Stock Exchange.
China’s crackdown on online education companies in 2021 was the biggest blow to Sequoia China. Officials moved overnight to outlaw the business models of many emerging startups, a rule that dented the company’s big investments in groups like Zuoyebang and VIPKID. Despite these setbacks, Sequoia China raised $9 billion in various funds last year, independently of the US team, from investors including California’s Calpers, Massachusetts Pension Reserves Investment Trust, Canada’s CDPQ, and CPP Investments. Half of the capital came from US investors, with the rest coming from global pension funds and institutional investors.
Sequoia’s Move Indicates Tougher Cross-Border Investment Climate
Sequoia’s move to operate its China business as an independent entity indicates a changing cross-border investment climate. The US-China tensions and Beijing’s emphasis on staying technologically self-sufficient have made global businesses wary. Concurrently, increased scrutiny on tech companies has also led some investors to tread cautiously. Sequoia’s decision also highlights the difficulty in running a decentralized global investment business, a challenge that other global companies are facing as well.
Another significant factor is the regulatory framework in China, which has become increasingly complex and more challenging for foreign companies. There are new rules on data privacy, cross-border data transfers, antitrust regulation, and security reviews, among other things. In such an environment, it is not surprising that Sequoia has made this move.
The China Tech Market Still Offers Opportunities
Despite regulatory challenges, China’s tech market still offers numerous opportunities. The digital transformation of Chinese businesses opens up new markets for tech companies, while the country’s massive consumer market provides access to a potentially huge customer base. The push for self-sufficiency in technology and innovation also leads to a greater emphasis on research and development and creates an environment conducive to innovation.
Sequoia’s decision to operate its China business independently may insulate it from some of the regulatory risks but comes with additional operational costs. Sequoia will need to develop a separate brand and marketing strategy to bring in a new set of investors for its China entity.
Summary:
Sequoia Capital has announced that it will operate its China business as a separate and “completely independent” entity from its US operations amid rising tensions between China and Washington. The China arm will operate as HongShan, and the India and Southeast Asian businesses will be separated into a third entity by March 2022. Sequoia China raised $9 billion in various funds independently of the US team last year and will be able to invest the funds similarly. This move signals the changing cross-border investment climate and the challenges foreign companies face in navigating China’s complex regulatory framework. Despite these challenges, China’s tech market still offers opportunities, including access to a massive consumer market. Sequoia’s move may insulate it from regulatory risks, but it comes with additional operational costs.
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Venture capital giant Sequoia Capital is dividing its China business into a separate entity amid rising tensions between Washington and Beijing.
The renowned Silicon Valley firm, which has been betting on fast-growing tech companies like ByteDance and Alibaba, parent company of TikTok, said on Tuesday it would operate its China business as an “completely independent” entity from its U.S. operations .
The Chinese arm will drop the Sequoia name and instead be called HongShan, a romanization of its Chinese name.
The VC firm will also separate its India and Southeast Asian businesses into a third entity, it said, adding that the changes would happen by March next year.
“Now there’s a lot less in common” between different Sequoia entities, Neil Shen, the billionaire founder of Sequoia China, told the Financial Times. He said conversations about dividing assets “have evolved over the past two or three years.”
The split marks the end of one of the most successful US-China investment alliances. It has reaped rewards for the American mothership and seeded generations of Chinese tech companies since Shen launched Sequoia China in 2005 as an arm of Sequoia Capital.
But Beijing’s campaign to curb its biggest tech companies it has domesticated many of the Internet groups Sequoia China funded and profited.
Currently, Sequoia China is independently operated from the US business, but shares some of its profits with the global group. That won’t be the case after the split, according to the person close to the matter.
“It has become increasingly complex to run a decentralized global investment business,” the group told investors.
“We will transition to fully independent partnerships and become distinct companies with separate brands by March 31, 2024.”
Sequoia Capital China raised $9 billion in various funds last year, from investors including California’s Calpers, the largest public pension fund in the United States, as well as Massachusetts Pension Reserves Investment Trust and Canada’s CDPQ and CPP Investments, according to the PitchBook data provider.
Funds were raised by investors independently of the US team. Half of the capital came from US investors, with the rest coming from global pension funds and other institutional investors, according to one person involved.
The split won’t affect how the funds are invested, a person familiar with the matter said.
Shen said in a speech to China’s top political advisory body last year that Beijing needed to prioritize industries like artificial intelligence, robotics and green energy.
Some venture capital executives saw it as a sign that it was willing to align its investment themes with Beijing’s “common prosperity” agenda.
Among the previous setbacks for the company, internet groups that Sequoia had backed, including Alibaba and Meituan, were hit with huge antitrust fines, while ride-hailing group Didi was forced to delist from the New York Stock Exchange. China has also installed an official to oversee the main Chinese entity of ByteDance.
The biggest blow to Sequoia China came with Beijing’s crackdown on online education companies in 2021, as officials moved overnight to outlaw the business models of many emerging startups. The rules have dented the company’s big investments in groups like Zuoyebang and VIPKID.
https://www.ft.com/content/9467a0f9-7618-490e-aa80-cc5881ba3ecf
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