United States LPs also could not sit still

I remember that Mr. Zhu said at the annual meeting of China Venture that not only the RMB fund felt that the dividend was good, but the US dollar LP he exchanged also felt that it was very good, and they all thought that it could reduce the cash pressure, "I can't see the money in ten years, and no matter how patient the capital is, I can't stand it."

I didn't expect that it had only been two months, and there were really dollar LPs who couldn't sit still.

It is reported that Sequoia Capital launched a Stripe stock acquisition plan for LPs who participated in the investment between 2009 and 2011, in order to strive to "bring richer returns to investors".

In terms of specific details, the transaction will be carried out according to Stripe's latest 409A (internal valuation) valuation of 70 billion US dollars, and the overall transaction size is about 861 million US dollars (about 6.25 billion yuan), and the buyers are Sequoia Expansion Fund, Sequoia Legacy Fund, Sequoia Global Equity Fund (SCGE) and other funds with a longer duration for the secondary market.

A distant exit

When there is a project in the portfolio that occupies too many positions, cannot find the next round of receivers in the short term, and the IPO is far away, the investor decides to pay out of his own pocket and use the new fund to take over the old stocks in order to optimize its own return performance and appease the emotions of LPs - seeing such a description, you will most likely think "which desperate fund is this trick", but this is actually the latest operation of Sequoia Capital, the top white horse in the industry, United States Sequoia Capital.

Stripe, nicknamed "United States Alipay", was founded in 2010 and emerged from the popularity of mobile payments. In the days when PayPal is getting old and cryptocurrencies are not yet mature, this fintech company has keenly found the wind outlet of "new era infrastructure" and quickly grown into the brightest star in the United States venture capital circle——

According to an open letter released in March this year, Stripe's total user payments have successfully exceeded $1 trillion in 2023, a 25% increase from 2022. On top of that, considering that Stripe charges at least a 2.9% service fee on each transaction, and an additional $30 for credit card transactions, it's not hard to conclude that the surge in business volume will inevitably lead to a rapid increase in revenue, which in turn will put it in a very good financial position on the books.

In recent years, Stripe has awakened the "soul of the chain owner" and began to try to carry out strategic mergers and acquisitions along the upstream and downstream of its own industry, and has successively invested heavily in instant messaging software Kickoff, online accounting platform Recko, card reader manufacturer BBPOS, low-code analysis software developer Okay and other related companies, focusing on building a strong chain and building their own comfort zone.

In short, at the theoretical level, investors do not need to worry about such invested companies at all. What's more, Sequoia participated in Stripe's investment as early as the angel round stage, and its shareholders in the same period also included Musk, Peter Thiel, A16z, and SV Angel - to use the famous line in "Shaolin Football", this is called "Upstream, downstream, and the list of shareholders of competing products are all my people, how do you fight me?" ”

In fact, Stripe does its best to live up to expectations:

In April 2020, Stripe received additional investment from A16z and Sequoia, and at the same time introduced new shareholders such as General Catalyst, and its valuation climbed to $36 billion. In March 2021, Stripe accepted an olive branch from Europe, bringing in new shareholders such as Allianz, Baiji Investments, Fidelity Investments, and the National Treasury Authority of Ireland (NTMA), and Sequoia continued to participate in additional investments, and its valuation continued to climb to $95 billion, making it the world's most valuable technology start-up.

In the same year, Stripe began to rumor about an IPO, and it was reported that the secondary market valued Stripe at a maximum of $115 billion. This news was further confirmed in January 2023, when the Wall Street Journal and other media outlets learned that Stripe had set a 12-month timeline within which they would seek new funding plans, including but not limited to equity investments, IPOs, etc.

However, it was at this critical juncture that Stripe's capital road suddenly entered a state of "ghost hitting the wall", and bad news began to come continuously, especially the valuation fell all the way, falling by nearly half at the most:

In July 2022, some internal employees of the company broke the news that Stripe's internal valuation (i.e., 409A valuation) had been lowered to $74 billion, a decline of nearly 30% from the previous round of large-scale investment from Europe; In November 2022, Stripe launched a large-scale layoff process, with a whopping 14% layoff, which CEO Patrick Collison said was due to the company's "redundancy" of employees due to rising interest rates, inflation and other macro factors.

In January 2023, Stripe once again reported an internal valuation downgrade, bringing the figure to $63 billion, a further 40% decline from the peak of the valuation.

In March 2023, Stripe officially announced the completion of a financing of $6.5 billion, introducing new shareholders GIC, Goldman Sachs, and Temasek, and old shareholders A16z, Baiji Investments, General Catalyst, Founders Fund, etc. to continue to invest, but the valuation scale of this round of financing is "only" $50 billion, and the financing goal has also been changed from "conducting related businesses" to "providing necessary liquidity for current and former employees, and address employee operations related to option incentives".

In February 2024 (the 13th month after the media revealed that Stripe had set a 12-month timeline for the IPO), the market waited for Stripe's "real love feedback" - they announced that they would buy back the old shares in the hands of employees at a valuation of $65 billion, partly from their own cash flow, and partly from the continued support of Sequoia and other shareholders - at this time, Sequoia's cumulative investment in Stripe has reached $517 million.

And the opening scene unfolds along this "ghost hitting the wall" story line. In the email informing LPs that they would launch the "Stripe stock acquisition plan", Sequoia Capital frankly told investors that "taking over old stocks with new funds" does not mean that they are not optimistic about Stripe's future, but that Stripe is an "unusual asset" that needs to be deeply cultivated in the economic cycle to create value, and their market prospects are not limited to giants such as Alaska Airlines and Amazon, but more importantly, they should radiate those "smallest companies".

A group of restless LPs

Strictly speaking, Sequoia is very reasonable. With more than $1 trillion in total payments on the platform, and more than $100 of them trading more than $1 billion per year, it's hard to see how many other startups have a stable revenue base like Stripe in the current global venture capital world.

In addition, Stripe is also looking to diversify its operations into non-payment businesses. For example, they help companies manage billing, taxes, and revenue SaaS business, and the annual expected revenue has reached $500 million. Considering the overall weakness of the SaaS market and the generally poor performance of related listed companies, the decline in Stripe's valuation in the short term is not an unacceptable result.

But even if Sequoia is willing to give Stripe enough trust endorsement, the big picture that can't be changed is that only four VC-backed tech companies have completed IPOs so far in 2024 (Reddit, Astera Labs, Ibotta, and Rubrik). Even if you zoom in on the entire U.S. stock market, the total size of IPOs in a single month has fallen to about $8 billion, almost half of the same period in 2021.

Against this backdrop, it's easy for LPs to lose patience if they don't take action.

According to a report released by Pitchbook last week, the second quarter of 2024 was the worst quarter for the venture capital industry since 2016, with LPs only reaping about $36 billion in asset exits.

As a result, VCs worldwide only received $80.5 billion in "committed fundraising", a new low since 2015, which directly led to more than 2,000 venture capital institutions in the United States market to stop investment activities, and the investment in early-stage venture capital funds has been cut by half compared to 2021.

Therefore, analysts also say that 2024 will be a "self-made year", on the one hand, it is used to describe GPs who cannot afford to fail and are becoming extremely cautious in their decision-making for early-stage investment, and on the other hand, it is used to describe that LPs have allocated more funds to mid-to-late-stage funds, hedge funds, and M&A funds.

As a leading institution that is more sensitive to the market and has smoother information channels, Sequoia obviously has the ability and obligation to walk in the "forefront of the changes of the times", including the expansion of the evergreen fund in 2022:

The gist is that Sequoia will create an "open-ended capital vehicle" (i.e., the main instrument), which will become the only LP for all sub-funds (including seed funds, venture funds, growth funds, etc.) in the future, and the sub-fund managers only need to return assets to this "master instrument"; Correspondingly, the LPs of the main instrument will have an annual redemption right, and the account balance of the main instrument will be used to meet the "return needs" of the LPs.

According to insiders quoted by the media, Sequoia hopes that through such a change, closed-end funds and open-end funds can learn from each other's strengths and weaknesses, and be in a state of "constantly feeding each other", and finally better coordinate the distribution of interests between itself and the invested companies and LPs.

Another old shareholder of Stripe, A16z, has also undergone a similar "version upgrade". In October 2023, a large number of media reported that A16z will open a new phase of flagship fund raising in a "new way", which is mainly reflected in the change in the way LPs are subscribed: A16z will advise LPs to hand over their funds to a master fund (master investment vehicle) in advance, and then this master fund (master investment vehicle) will be allocated to other sub-funds.

In other words, Sequoia's promotion of Sequoia Expansion Fund and Sequoia Legacy Fund to take over Stripe's old stocks is an inevitable structure after the implementation of the above-mentioned reform plan, and it is also the embodiment of the consensus of the entire industry.

As for the LPs who are not satisfied with this result, they may not even have a quasi-score in Sequoia themselves. It is foreseeable that before August 14 (that is, Sequoia's DDL for this acquisition plan), the two sides will definitely engage in multiple rounds of extreme pulling, and whether the plan will go smoothly, how many LPs will choose to participate, and whether there will be personalized adjustments, are full of unknowns.