Sequoia has closely guarded its return figures for 15 years. The backer of Google, YouTube, Apple, WhatsApp and other internet blockbusters went to great lengths to keep its returns secret, kicking investors out of its funds and holding back information from limited partners.
But in its quest to raise a mega-fund, that is all about to change.
Sequoia’s battle to keep its internal rates of return secret dates back to July 2003, when a California court ordered the University of California Regents to disclose fund-level IRRs. As a result, Sequoia and a handful of other venture firms, including Kleiner Perkins Caulfield & Byers and Accel Partners, tried to stop their performance being disclosed by pension plan LPs.
The University of California and the University of Michigan were asked to leave Sequoia’s 11th fund, with minutes of a California Regents meeting at the time labelling their departure a “removal”. But the Regents continued to invest with Sequoia. The University of California has commitments to three of its funds, although Private Equity International understands Sequoia doesn’t send performance information to the plan for fear of it being made public. On the California Regents website Sequoia returns are listed up to March 2003, but IRR information on the more recent vehicles – 2010, 2011 and 2012-vintages – has been replaced with ‘N/A’, the only ones where this is the case. The Regents did not respond to requests for comment.
One multibillion European fund investor told PEI that not submitting returns to LPs is “a very questionable practice. [It means as an investor] you are effectively running blind.” Another industry source defended the practice: “Public disclosure is the difference between a company that can go from a billion-dollar valuation to zero, if competitors get my information. Any investor that forces me into disclosing: I don’t want them [in my fund].”
But at $8 billion, Sequoia’s new global growth fund is quadruple the size of the previous fund, Global Growth II, which closed last year. The firm needs LPs to feed this growth, and US public pension plans aren’t shy about writing big tickets.
Time to change
These two facts may have prompted a rethink. Washington State Investment Board committed $350 million to Sequoia Global Growth III in April and told PEI Sequoia will be treated “like every other fund”, with IRR reported quarterly. “All general partners that work with Washington State understand the level of transparency and public disclosure that accompanies a working relationship with the WSIB. We discuss this explicitly, along with the fact that forward-looking investment strategy is protected as exempt from public disclosure under public information laws,” Chris Phillips, WSIB’s director of institutional relations tells PEI. The firm “is reaching out to a broader array of potential investors in an effort to build a relatively larger pool of growth capital”, according to Phillips.
It’s difficult to quantify how widespread the barring of public LPs or the withholding of performance information is. California Regents does disclose other venture IRRs, as does WSIB. But the largest US public plans have limited exposure to the brand-name venture houses. The California Public Employees’ Retirement System tells PEI it hasn’t invested in a venture fund in more than seven years. Sequoia declined to comment. KPCB and Accel did not respond to requests.
“Members of the venture capital community do not believe that recitation of IRRs are an accurate reflection of assets,” California Regents said at a meeting where it discussed venture firms’ reluctance to disclose. These concerns aren’t unwarranted. There are good reasons to be cautious when judging a fund by its IRR, and plenty of critics who argue it’s not the best metric.
But big firms such as Sequoia, which champion innovation, haven’t innovated IRR away. Instead they’ve chosen to hide from it. With Sequoia’s performance coming back online, perhaps it’s time for the venture industry to disrupt the world of performance metrics.