You won’t believe how US-China tensions ruined Sequoia’s venture capital empire!

When Sequoia Capital China was raising $9 billion to invest in the country’s startups last year, Helen Huang was among those eager to back the venture capital group.

“China will not separate its markets from global markets,” said the private equity investor in MassPRIM, which manages $100 billion in pensions for Massachusetts state employees and teachers.

According to US pension fund board minutes from May last year, provided to the Financial Times via a public filing request, Huang recommended MassPRIM invest $150 million in Sequoia China, lauding the company’s ability to “deciphering signals from policies and regulations”.

“Superlative. Can I use the word “superlative”?” State Treasurer Deborah Goldberg said on Huang’s risk assessment. All nine pension board members present voted in favor of the deal.

Just over a year later, the deterioration of trade relations between the United States and China they hastened the breakup of Sequoia, shattering the notion that one of the world’s most successful venture capital empires could continue to navigate the deceptive geopolitics of investing in the world’s two largest markets.

The Silicon Valley group She said on Tuesday that its US and European operations would be separated from its Chinese arm, run by celebrity investor Neil Shen who spearheaded early investments in Alibaba and TikTok’s parent company, ByteDance.

The Chinese unit will be named HongShan, a Chinese translation of Sequoia, and will retain responsibility for nearly $56 billion in assets under management. Sequoia’s Indian and Southeast Asian business would form a third entity. The changes will take place by March next year.

In an interview with the Financial Times, Sequoia Capital chief Roelof Botha praised the success of the new separate entities: “When I joined Sequoia in 2003, these companies [in China and India] it didn’t exist. They are now thriving businesses in their own categories.

He said splitting the company into three was the easiest way to keep a trio of entities with global ambitions from rubbing against each other.

But Botha also drew a significant historical parallel to describe how much investment conditions had changed. “The number of years since we embarked on this is the same as between World War I and World War II,” he said.

Investing in China has become increasingly challenging for US institutions in general, but Sequoia China’s turbocharged growth over the past decade and its international investor base have left it particularly exposed.

Sequoia China has faced increased political scrutiny in the United States over its investments in Chinese companies that Washington says pose a national security risk, including licensed drone maker DJI and artificial intelligence start-up DeepGlint, which is been accused of facilitating surveillance of Uyghurs in Xinjiang.

Sequoia China’s backing of TikTok’s parent ByteDance has also become problematic, with the US threatening to ban its viral social networking app in the country and the controversy complicating plans for an initial public offering of the company with based in Beijing.

Meanwhile, the Biden administration is evaluating an investment screening mechanism to stem the flow of US capital into Chinese groups in sensitive sectors such as semiconductors and artificial intelligence.

Sequoia has always emphasized that the US and European, Chinese and Indian entities have operated with “independent ownership and investment decision-making.” But a co-brand that has attracted global investors in each of the geographic units has recently become a magnet for critics linking a high-profile US investor to controversial Chinese companies.

“Sequoia is independently successful in both geographies,” said a Silicon Valley fund executive. “But you can’t fool the US president and have investments that could be controlled by the CCP. Geopolitics made it impossible to have that exposure, so they eventually cut it off. India, I think, is collateral damage.

As part of the split, Sequoia will terminate a profit sharing arrangement with its Chinese and Indian entities. That arrangement allowed the firms’ individual partners to share premiums when companies in other entities’ portfolios are sold or go public.

The split also dissolves a partnership that made Shen a billionaire, enriching Sequoia’s US partners and investors. That facility was designed to create a shared interest in the company’s global success, but Shen’s huge profits from China seemed to change the dynamic.

Two people close to Shen said he had begun to resent what he saw as China’s outsized contributions to the profit-sharing pool. Shen “was struggling to be independent for a long time,” one of the people said. HongShan said the split was a recent collective decision.

According to a person with direct knowledge of Sequoia’s profit-sharing arrangements, assets in the United States and Europe accounted for a larger percentage of total distributions to the pool overall.

Sequoia did not provide precise details about its profit sharing. The firm said the deal was always designed so that the regional entities would ultimately receive profits in direct proportion to their contribution to the profit pool.

The company’s dissolution will also end the practice of employees in one region of Sequoia investing alongside funds in another region, a strategy that has been lucrative for partners who invest their personal wealth overseas.

Shen, for example, brought Sequoia’s global growth fund to fledgling e-commerce group Pinduoduo in a first round of funding. The documents show that former US Sequoia leader Doug Leone has already cashed in about $8 million worth of Pinduoduo stock.

Sequoia’s challenges intensified as Beijing cracked down on consumer Internet groups and left Chinese venture capitalists chasing sensitive sectors aligned with government priorities at the heart of the US-China rivalry.

“Sequoia has faced a lot of pressure from the United States on its business in China over the past two years,” said a consultant to LP in China. “The split means Neil can now find the right business and invest without worrying about political pressure from the United States.”

HongShan called the remark “completely baseless” and said that with a substantial base of limited partners from the United States, it will continue to adhere to strict compliance protocols.

A changing of the guard at Sequoia — with former “senior steward” Leone replaced by Botha at the company’s top management last year — may have brought Sequoia closer to decoupling, according to two venture capitalists who have invested alongside the firm.

Leone has been a major proponent of the close relationship with China as “the guy who pushed it,” according to one of the investors. Botha, he added, “doesn’t have much interest.”

Sequoia said the decision to split the company was made by five current company leaders, including Botha and Shen, who “collectively agreed that the benefits no longer outweighed the costs.”

Shen’s HongShan will now be left standing on its own as it approaches institutions for new funding in a few years. To prepare for this test, Shen’s team assumed limited partner relationship management and brought fundraising activities in-house.

When Sequoia China raised $9 billion last year, about half of it came from U.S. investors like MassPRIM, the University of Texas Investment Management Company, and the University of Washington endowment, according to PitchBook.

To appease its American investors, Sequoia China has begun consulting outside political experts before accepting sensible investments. The group has also slowed the pace at which it is investing the $9 billion it just raised, said a person familiar with its activities.

Sequoia’s move has led other US VCs to consider their exposure to China. “Is this a harbinger of things to come?” asked a partner at a rival venture capital firm. “Funds that had global ambitions, are they changing their strategy?”