Sequoia Capital Warned of a ‘Black Swan.’ Instead, 2020 Is One of Its Best Years Ever

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About a week before the coronavirus was declared a pandemic, one of the world’s leading venture capital firms issued a dire prophecy. Sequoia Capital advised its companies to rein in spending, cut jobs and adapt to a new economic reality. Containing the virus, the investors wrote in a widely circulated memo known as “The Black Swan,” could take several quarters. “It will take even longer for the global economy to recover its footing.”

Barely three months later, they realized that while the virus was killing thousands, leaving countless others jobless and decimating small businesses, it might actually help certain types of companies. The stock market roared back, and businesses lined up to go public, including several of Sequoia’s own. Two of the most valuable companies in the firm’s portfolio, Airbnb Inc. and DoorDash Inc., will hold initial public offerings this week. They’ll cap what will be among the best years in the nearly half-century since Sequoia laid roots.

Investors in at least two mature yet active Sequoia funds will see 11-fold returns on paper, after fees, according to performance data reviewed by Bloomberg, which haven’t been previously reported. A third fund reports eight-fold returns, the data shows. A spokeswoman for Sequoia declined to comment on the numbers.

The initial economic shock in the spring has given way to a very comfortable year for venture capitalists. Venture-backed IPOs have raised more so far this year than at the height of the dot-com boom, market data from Dealogic shows. And VC firms are on track to invest more than $140 billion in U.S. startups, exceeding last year’s total, according to research firm PitchBook. Peter Thiel’s Founders Fund had two big listings in September and is looking forward to at least three more expected this month: Airbnb, Affirm Inc. and Wish. Andreessen Horowitz is counting on the first two of those, plus the video game maker Roblox Corp. And GGV Capital, also an Airbnb backer, will see eight of its companies go public in the U.S. this year.

When Sequoia investors made their prediction in early March, they didn’t fully account for the ways a world of isolation would benefit technology companies or the impact of government stimulus programs, said Roelof Botha, a partner at the firm. People ordered more food on DoorDash and groceries on Instacart Inc., another IPO-bound Sequoia company. They played a lot of games made with development tools from Unity Software Inc. And they rented pandemic pads on Airbnb. “It’s a positive surprise,” Botha said, acknowledging the overall devastation. “Technology has helped us cope with this pandemic.”

Any investor wants to be perceived as having an innate ability to see the future. Sequoia had cultivated this reputation in venture capital through decades of lucrative bets that include Apple Inc., Google, PayPal, Oracle Corp., WhatsApp and YouTube. And it became seen as a sort of Silicon Valley Nostradamus after a 2008 PowerPoint presentation titled “R.I.P. Good Times” that accurately foretold the coming economic winter.

Sequoia secured some of its biggest hits of the current generation alongside formal and informal relationships forged within Y Combinator. At the urging of former partner Greg McAdoo, Sequoia invested directly in the business incubator in 2009, effectively taking a stake in all of its companies. Meanwhile, Sequoia spent time getting to know founders of Y Combinator companies, including Airbnb and Instacart. The investment in the incubator quietly ended several years ago.

For three recent Sequoia funds, each one is doing better than the last. Sequoia Capital XI, the 2003 fund led by LinkedIn and YouTube, posted eight-fold returns over its lifetime, after fees. The 2006 fund XII, which contained the first investments in Airbnb and Unity, reported 10.9-fold returns, the data seen by Bloomberg show. The 13th fund, called Sequoia Capital 2010 with stakes in Square Inc., Stripe Inc. and WhatsApp, was 11.1-fold. The performance of more recent funds, including one that holds DoorDash and Instacart couldn’t be learned.

Not every investment dazzles. Bird Rides Inc., which rents scooters, has had to halt operations in several cities and cut staff this year. Evernote Corp., which makes note-taking software, has lost much of its momentum.

The Ford Foundation, created by the late automotive titan, is a longtime investor in Sequoia, alongside several other venture funds. Sequoia reliably delivers among the best performance in the industry, whereas a typical firm has good years and mediocre ones, said Eric Doppstadt, vice president and chief investment officer at the foundation. Yet, Sequoia partners don’t seem self-congratulatory. “Despite the successes they’ve had this year, they are not pouring Champagne in their partners’ meetings,” Doppstadt said. (He declined to comment on the returns data.)

Alfred Lin, a Sequoia partner who sits on the board of Airbnb and DoorDash, has described the VC partnership by comparing it to Mötley Crüe. His point was the musicians each contribute different talents. (The band draws parallels in another way to Sequoia’s leadership, which was composed entirely of men until 2016, when it hired the first female investment partner in the U.S., Jess Lee.)

Lin demonstrated his commitment to Airbnb during its early days by working at the startup’s office one day a week, something Botha and other partners have done with their companies. When Airbnb sought to evolve the service into one designed as much around feeling like a local while traveling as it was about finding a place to crash, Sequoia partners pledged their support, said Julie Supan, a brand positioning expert who has worked with the company and with Sequoia partners. “They know when there is emotion under the product,” Supan said. “They have a good sense of that.”

Perhaps most importantly, Sequoia prides itself on a willingness to admit when it’s wrong and adapt when required. Not long after the Black Swan memo, Sequoia employees in China, who oversee a large number of local investments including in the parent company of TikTok, began to notice early signs of recovery there, said a person familiar with the firm’s thinking. The partners realized the same may soon happen in the U.S., said the person, who asked not to be identified because the discussions were private.

The tolls the virus took on lives and on people’s livelihoods grew, but by the summer, stock markets were primed for listings. Sequoia advised several of its more mature startups to dust off their IPO plans, according to venture capitalists who sit on boards with Sequoia partners and asked not to be identified. In September alone, Sequoia had three successful offerings: data company Snowflake Inc., cloud-management provider Sumo Logic Inc. and Unity. Sequoia’s stakes in Airbnb and DoorDash will be worth a combined $9 billion this week if each prices shares at the high end of their estimates.

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