Eight months on, the new age tech economy is grappling with a funding drought that has roiled valuations across public and private markets, even as questions on VC accountability and tightening governance processes at venture-backed companies gets louder.
Shailendra Singh, managing director at Sequoia Capital India and SEA, sat down with ET’s Samidha Sharma in a two-hour-long interview to discuss, for the first time, how the fund has been affected by the constant scrutiny, what it’s doing to address the governance issues, and its investing strategy in the current climate after having raised a huge pool of capital. Edited excerpts:
Let’s start with how the last year unfolded for Sequoia amid back-to-back news of financial irregularities at some of your portfolio firms. What has been the impact on the domestic startup ecosystem?
There’s a market narrative around these things, we’ve seen enough cycles. In a bear cycle, anything I tell you will be dealt with scepticism; it will be easy to create a pessimistic narrative. In a bull market, people need an excuse to be bullish.
As for us, these three or four companies form around 1% of our portfolio … There are more than 30 investors in them… Not only are these equity investors, but also debt funds who do more detailed due diligence than equity investors because they check cash flows and company’s ability to pay back debt.
Discover the stories of your interest
Equity investors deploy risk capital… Governance is meant for people to work collectively to uphold the interest of multiple stakeholders…
Also read | How GoMechanic unravelled after SoftBank-Khazanah funding round collapsed
Have Sequoia and you, particularly, needed to answer more questions compared to others as you are seen as being the most influential and closest to founders?
This is not just a Sequoia issue; in every single case it is collective action being taken by the board acting on behalf of shareholders whose interests may have been compromised by such actions. It’s not a Sequoia dynamic at play, it’s a collective shareholder dynamic.
For the past one or two years, we have heard bizarre rumours that we keep having to say no to… but that’s not on governance issues, it is related to other topics.
It’s hard for us to know whether it’s a vindictive action of a few people. As for being made answerable for governance topics, out of the four, two of the companies and founders (the ones where financial irregularities were found), I have not even met on a one-on-one basis. I don’t actually know the specifics of these situations.
Also read | Sequoia India grapples with fallout from governance snafus
What is Sequoia US telling you after these episodes?
The US has been very strongly supportive. In June last year, Doug ( Leone) did a Zoom call with me and all our founders, because he was trying to reinforce and show his strong support for Sequoia India and Southeast Asia and for the strong work that we have done.
ETtechWhat should VCs do to address such issues?
One thing that the VC industry can collectively do a lot better is aligning amongst themselves. What happens on the US boards is that a board meeting has an open session, the management team and observers attend. Then they have a closed session which only the voting members of the board attend, where they pass the resolutions.
After that, you normally have an executive session where the CEO is not present and only shareholders participate, that is, shareholder board members. I think that we or any one firm or two firms cannot actually force governance even if we may own 8%, 14% or 16% of a company.
If we say – please institute four more kinds of governance because we say so, other people are going to say that maybe this is not stage appropriate, or founders may push back. But if multiple VCs act together, then we will be able to persuade founders to somehow change some of these practices…
Has anything been done as we speak?
We are trying to bring this up with the Indian Private Equity and Venture Capital Association and with other VCs in the ecosystem. The truth is that the ownership in all these companies is highly fragmented – one of the repercussions of a bull market.
But we cannot burden 99% honest and high-integrity founders with unreasonable processes… We have to build a pragmatic governance process and for that we need to collaborate with other shareholders. We have to also work with experts who focus on conducting diligence, audits. Our job is to bring together as many of the best folks as possible to address this.
Will the processes be the same for all?
I believe we have to pursue pragmatic governance, with greater governance for bigger companies. If you are pre-IPO, $50 million plus revenue, you should have more independent people, internal and external auditors.
You should have more disclosures around related party transactions.. And then there are companies that are very small, with two people just building their product and surviving, trying to find Product Market Fit, you probably want to do much lighter governance.
Where is the VC accountability in all of this? It cannot just be blamed on ‘founder malfeasance’ since there is a board in place, there are audits…
We have executed 740 diligences in the last four or five years. At Sequoia India, Southeast Asia, we have 475 active companies, and 600 companies which the fund has invested in 17 years of being here.
The first thing is a very big macro picture of how many diligences we run, what percentage of the diligence this represents and so on. In the past, when we did very small seed cheques, with two people who have just put together their company four months ago and have spent a total of Rs 10 lakh or Rs 15 lakh, we don’t do financial due diligence, but we still do background checks on the founders.
Also read | Sequoia considers auditing South Asia investments as lapses rise
You raised $2.85 billion in June, but by that time the tech world was already faltering… Did you overestimate the India market? Won’t it be hard to return the fund because of its size?
In the long term, we are all underestimating the market. We have 49 unicorns, 40 companies with over $100 million in revenues currently, another 38 are $50-100 million. But the more interesting thing is five, six years ago, the $100 million plus revenue company number was only four or five companies.
The way we think about our businesses is, when a company is in the triple digit million revenue, it has scaled to be a public company, so call it Rs 800 crore revenue run rate. Beyond that you’re approaching Rs 1,000 – Rs 1,200 – Rs 1,500 crore, and then you can have exits. In the last two years, we had 10 IPOs.
ETtechWhat have the cash distributions been for Sequoia to Limited Partners over more than 15 years of being in India?
Realised exits (including Fair Market Value of current public holdings) are at $6 billion. It moves every day…All of this is from funds that have matured investments.
Will you buy stocks of tech companies in the public markets like Sequoia US?
I would be surprised if we did a public market purchase…we could if we wanted to if we found a very special situation. We are open minded about it, but I think it’s a low probability that we will do public investments.
How are you looking at capital allocation now? Is there a sense of redrawing your strategies and how you think about deployment in today’s climate versus 2021?
A lot of seed rounds were happening at $20-30 million valuation, they’re back to happening at $7-15 million in that range. Also we changed our strategy a little bit to do zero to $3 million, so that we have a wider aperture of companies we can invite. Our seed is our most active product line at this time.
And then even in venture series A, you’ll keep seeing announcements, we’re actually pretty active. And especially in the second half of last year, we approved several seed investments, maybe 10 in the second half of last year and early this year. With the exception that there are fewer Series A’s happening in general and markets are less competitive, prices are a little bit more rational.
In some cases, sizes are slightly smaller. It’s true of every cycle and especially this cycle, that a Series A of today is a little bit more developed than the Series A of 2021. So Series A of 2021 there’s maybe nothing in there, like you know, just started and six weeks into launch.
Also your seed company today may have 600k or $1 – $2 million of Annual Recurring Revenue, or ARR and sometimes they’re still raising a Series A, such a company might have raised a Series B in the 2021 market environment.
ETtechWhat about growth investing, what’s your strategy there?
While I don’t think something has fundamentally changed in the early- stage market, the growth market has changed a lot more. We wrote slightly smaller cheques for growth because the market was super frothy. What would happen is a very small company would be getting valued very highly and we didn’t want to have concentrated exposure, where we felt that we were forced to pay very high prices.
We didn’t want to be inactive, we wanted to remain active before and we want to remain active now. But I think the difference in our growth strategy is that we are probably now looking for a lot more concentration. Like this growth fund, which is $1.25 billion out of $2 billion committed to India, we would like to have more concentrated positions, versus more fragmented positions.
The other thing that changes in such markets is a lot of global funds, which also invest in India tend to not invest in new regions at this time. So dedicated funds are the ones to still continue investing. We are seeing that again in the cycle across all stages, including in growth.
What happens to overvalued companies with very small revenues and still burning cash; a bunch of them are in your portfolio?
In the venture business, we make investments at very early stages and, from our standpoint, even if you overpay in Series A round, absolute valuations are very low, so it doesn’t actually hurt you as a funder. The best companies will generate 20 to 50 times returns. That’s the strategy that most VC firms employ there.
For our growth business, we don’t write $100- $500 million cheques, but a vast majority of our investments are between $30-$50 million. We did change our strategy in 2021.We did not make follow-on investments in any of our unicorns that wanted a lot of money in the last cycle. We have been very transparent with founders about this for many years.
We believe in capital efficiency and our growth investing strategies have focused on proven unit economics. It’s not like we got everything right, but we built a more diversified growth portfolio versus a concentrated growth portfolio. These two things protect our growth funds a lot.
Do you see a series of down rounds coming this year?
Founders are better off doing a down round (raising capital at a lower valuation compared to previous round). I always tell founders, if you were a public company, your stock would be worth lesser, so it’s just reflective of reality, why not embrace it? But some founders argue saying it brings about negative publicity and that it’s better to hold on to their previous valuation as it would be bad for the company. This is because in the last cycle, companies which raised money in a down round received negative publicity.
But if companies have a lot of money and that will last three to four years, there is no reason to fundraise at any price.. So only those companies will take a down round if they really need capital. If they don’t need capital and their businesses become profitable or their businesses are going to sustain for the next 20 years, they’ll keep holding on.