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08/28/2007

Sequoia vs. Yale

There's an excellent story in the Wall Street Journal today about some venture funds "taxing" their limited partners (LPs) by either explicitly or implicitly requiring their LPs to commit to other non-core funds in order to get an allocation in their main fund.  This really wasn't an issue until recently because in the past most VC funds only had one "main fund", but in the last few years many of the top-tier VCs have been aggressively raising separate funds focused on either late stage/growth capital or specific geographies, such as China and/or India.

The juiciest part of the story is a spat between Yale and Sequoia in which Sequoia allegedly kicked Yale out of it's main fund (easily one of the toughest top-tier funds to get an allocation in) because they wouldn't play ball and invest in Sequoia's rapidly increasing stable of stage and geography specific funds.  While I suspect most of the folks at both Sequoia and Yale are probably displeased that their dispute made it into the Wall Street Journal, they shouldn't be because the article cements both firms as the current "big dogs" in their respective industries:

  • Sequoia should be pleased because there could be no stronger signal to the LP community that they are the top dog in the VC world then kicking out Yale, one of the the most sought after LPs in the venture community.  As they say, the best way to stop desertions is to conduct a few public executions and you can't get any more public than the Wall Street Journal.  My guess is the next time Sequoia calls it's LPs asking for money, for any fund, the only question they are going to get is "How much money am I allowed to give you, sir?"

  • Yale should be pleased because this officially cements them, and David Swensen in particular, as the LP with the biggest cojones in the industry.  Most LPs would kill to have access to Sequoia's funds and yet Yale is willing to walk on principle.  Yale can walk because they have one of the best investment track records and are an acknowledged trend setter in the LP community.  Walking from Sequoia makes them a man among man.

It will be interesting to see if Yale's principled position turns out to be the right call in the long term.

August 28, 2007 in Venture Capital | Permalink

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