Sequoia's Permanent-Fund Experiment: An Open-Ended Parent and Closed-End Sub-Funds

The VC industry itself is pursuing change. Who says the fund industry lacks innovation? Sequoia has created a fund that lasts forever. Sequoia is striving to overturn the notion that funds themselves lack innovation. On October 26, Sequoia Capital published an open letter announcing a single, permanent fund, the Sequoia Fund, for the United States and Europe. It would change the traditional organizational model and have no fixed life. A fund's finite life has long hung over it like the sword of Damocles. History offers many examples of early exits that missed the best timing. This is even more pronounced in the new business era: many new companies' steepest growth curves occur after an IPO. Yet most investment firms, unable to escape their funds' fixed lives, cannot hold shares long after a portfolio company lists and therefore miss the greater value created afterward. Sequoia's move challenges this persistent flaw in the fund industry. Unlike traditional closed-end VC funds, the Sequoia Fund will be an open-ended fund with a liquid portfolio of public-market positions in selected enduring companies. It will allocate capital to a series of closed-end sub-funds, which will invest in startups in the private market at every stage from founding to listing. In some respects, this closely resembles an evergreen fund, also called a perpetual fund. A family-capital firm's founder told 36Kr, “Perhaps only a few firms with Sequoia's clout can reshape their fund structures this way.” But the founder also identified challenges: whether LPs will accept it, and whether an economic crisis could trigger a run. For many in investing, having this kind of fund is a lifelong dream. Removing the Sword of a Fixed Fund Life “For Sequoia Capital, the ten-year fund cycle is obsolete,” partner Roelof Botha explains. “It creates an odd dynamic with founders. On the eve of an IPO, they ask whether we will leave the board and quickly distribute shares. Why should that be the default, especially when so much value is created afterward?” He goes straight to the point: “Our industry is still constrained by the rigid ten-year fund cycle pioneered in the 1970s. Innovation in venture capital has not kept pace with the companies we serve.” For example, Sequoia invested in US software company Square in 2011 and joined its board. At its 2015 IPO, Square's market capitalization was only $2.9 billion. Five years later it had grown to $86 billion, and today it exceeds $117 billion. “It is hard to imagine what Sequoia would have missed without a long-term relationship.” Roelof is pointing to one of the industry's most awkward, seemingly inescapable problems: however optimistic you remain about a company's long-term prospects, you will probably have to exit when the fund expires. The Sequoia Fund aims to solve that long-standing problem. In a sense, it is closer to a “liquid fund of funds.” Its portfolio consists of public-market positions in enduring companies selected by Sequoia. It allocates capital to a series of closed-end sub-funds for VC investing at every stage from founding through an initial public offering (IPO). Returns from those investments flow back into the Sequoia Fund in a continuous feedback loop, so investments no longer have an “expiration date.” The mechanics, as described in Sequoia's open letter, are as follows: limited partners (LPs) retain accounts in the Sequoia Fund with annual redemption rights and request allocations to sub-funds from their balances. Sub-funds retain Sequoia's premium fee structure, including 30% carried interest. The Sequoia Fund's management fee is below 1%, and its long-term performance fee is below the previously rumored “high hurdle” standard. Sequoia employees contribute at least 5% of its capital. Sequoia also says the structure eliminates artificial time limits, allowing it to join portfolio-company boards and help companies realize their potential over decades. It can continue holding public shares long after an IPO and seek the best long-term returns for LPs, “most of which go to nonprofits and endowments.” The appeal of evergreen funds ultimately lies in the breathing room provided by their exceptionally long lives. Compared with traditional funds, evergreen funds have a distinctive capital structure. LPs are mainly entrepreneurs and philanthropists focused on long-term value investing, while GP teams contribute a relatively high share—about 8% of the capital base, compared with the usual 1–2%. This makes funding more stable and long-term. Most importantly, there is no fixed life, greatly reducing fundraising pressure on GPs and eliminating exit deadlines. There are countless fund managers, but few evergreen funds. One well-known example is General Atlantic, founded in 1980, whose deep expertise and distinctive capital structure make it a focused, patient long-term investor. Sutter Hill Ventures (SHV), the established VC firm brought to prominence by Snowflake's blockbuster 2020 IPO, is another evergreen fund. Sequoia the Change Maker As Roelof Botha writes, venture capital invests in technological innovation yet rarely innovates itself. Since the 1970s, VC firms have adhered to ten-year fund lives: “As chips shrank and software moved to the cloud, venture capital kept operating with a model as old as floppy disks.” Founded in 1972 by Don Valentine, Sequoia Capital has long been an investment legend, one of the world's most successful VC funds, and the “king of Silicon Valley venture capital.” The 49-year-old firm backs many of the world's leading technology companies. In the United States, it invested in Apple, Cisco, Google, LinkedIn, WhatsApp, and Zoom. In China, it is an important backer of ByteDance, Meituan, and Pinduoduo. Beyond conventional success, its innovations in its own evolution may deserve greater attention. Departing from the small-and-focused model once common in US VC, it took a different path from Benchmark: continuously increasing its scale and expanding from a single stage to investing across the entire life cycle. Benchmark champions the small-and-focused approach, keeping each fundraise below $500 million since 2004. In 2018, Sequoia raised an $8 billion fund, then described as the largest single fund in US history, and is setting another record this year. Its newly announced fund will become the world's first true cross-stage fund covering fundraising, investing, management, and exits, from seed-stage startups to public companies. These innovations have also generated enormous returns. According to reported figures, Sequoia holds $45 billion in public-company shares in the United States and Europe, at a cost of roughly $2 billion. Most will enter the Sequoia Fund, including shares in prominent companies such as Airbnb. As for possible challenges, foreign media report that Sequoia's US team began discussing the idea with some LPs a year earlier and earned their trust and support. LPs believe it saves them the trouble of establishing public-market teams to sell distributed shares. More importantly, nearly 50 years of working with Sequoia have built deep trust: “Sequoia has never disappointed us.”