What Sequoia Capital intends to do with its $2.85B funding boost

Despite speculation that Sequoia India would further delay the closing date of its fundraise due to the controversies surrounding its portfolio companies—Zilingo and BharatPe—the venture capital fund announced that it has collectively raised $2.85 billion across a set of funds, including its India venture and growth funds. This includes a dedicated $850 million Southeast Asian fund.

This has been an interesting year for Sequoia Capital India. While the US-based VC firm has been in the eye of the storm with some of its portfolio companies embroiled in alleged financial irregularities and corporate misgovernance, it continues to grow and do well as a fund.

So far this year, Sequoia India has already seen over $1 billion in exits, according to a well-placed source in the market.

This person added that the firm has had over $4 billion in exits over the past year through the IPOs of its portfolio companies, including Zomato and Freshworks.

Sectors in focus

With $2 billion earmarked for Indian startups and $850 million for Southeast Asian startups, Sequoia Capital will continue to be bullish on India. To get an indication on the kind of sectors and segments the fund would be focussed on, one has to look closely at its early-stage funding segment—Surge.

“For close to two years now, around 50 percent of the Surge companies are global," said the person mentioned earlier. "The founders are building product-led growth companies, global SME, SAS software, developer tools, infrastructure security, DevOps, modern data stack, cloud infrastructure, etc. These are technology startups that are building for global developers, global engineers, and so on.”

Sequoia also has made nearly 50 seed investments in SaaS companies over the last two years—a trend expected to continue.

While the fund has also been significantly bullish on Web 3, investments in the space have been in the lower ranges. The focus has been more towards software-driven companies with a thrust on decentralisation.

“The fund is being cautious with Web3 as some seem to be dubious,” says another source familiar with the developments. "It has already invested about 8 percent of the seed funding, and this will grow between five and 15 percent for startups in the space. Many of these will become public soon."

The current market scenario

The market has been significantly hard. Japanese conglomerate SoftBank’s two Vision Funds lost a massive $26.1 billion, pushing it into an annual loss of over $13 billion.

In an earnings call, SoftBank’s Masayoshi Son said he liked to be on the offensive, but it was now time to play defence. “When it rains, you open an umbrella,” he had said.

Many investors are already taking a cautious approach. But what does the recent influx of dry powder mean for Sequoia Capital?

“Honestly, it is hard for anyone to predict what sectors and segments will work and what won’t," said a third source. "For example, during the pandemic, SMEs and SaaS emerged as a significant trend. Now, the impact of the pandemic is reversing and travel is coming back with a boom. The idea is to focus on high gross margin businesses that can be capital efficient and have network effects or strong moats."

The main sectors will remain to be consumer internet, edtech, fintech, SaaS, and Web 3, this person added.

For now, Sequoia will continue to focus on niche sectors such as agritech, electric vehicles and battery technology, and spacetech. These are ‘frontier sectors’ that could possibly be about 20 percent of the current fund, according to the sources.

While Sequoia may be riddled in controversy, it is looking at its India investments as strongly as it has always done.