Sequoia's gravity-defying fund marks

Nov 12, 2023 @ 11:13 AM

Sequoia's gravity-defying fund marks

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TO: seanfenlon@abovo.co

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The Weekend Pitch

November 12, 2023

Presented by the U.S. National Science Foundation

(Julia Midkiff/PitchBook News)

Talk to any valuation professional, and one of the first things they'll tell you is that pricing companies is both an art and a science.

It means that despite financial theory and general guidelines—some of which I previously explored in detail—figuring out how much a privately held business is worth involves a degree of subjectivity.

LPs know this all too well. They regularly see VCs value the same company differently.

I kept that context in mind when I wrote about Sequoia's fund valuations in October. While my conversations with LPs and my review of PitchBook's fund performance benchmarks revealed that most venture firms reduced their portfolio valuations between 15% and 25% in 2022, the legendary VC firm has largely bucked that trend.

Sequoia marked up 15 of the 19 funds with vintage years 2018 and later by 9.2% on average over the 12 months ended June 20, according to a UC Regents investments report.

I couldn't help but wonder what drove Sequoia's markups at a time when the rest of the VC industry has generally done the opposite. How was one firm able to defy the market rout across multiple vehicles?

This is the Weekend Pitch and I'm Marina Temkin. You can reach me at marina.temkin@pitchbook.com or @MTemkin on X.

Sequoia declined to comment. The LPs, VCs, valuation consultants, auditors and others I interviewed for this column all agreed that it's impossible to know without reviewing the funds' portfolio companies Still, the experts offered a few theories that could explain Sequoia's success.

A message from the U.S. National Science Foundation

Invention to impact

Kelvin develops smart radiator covers to help control the temperature in older buildings. The technology is placed on top of older heating systems to allow for more comfortable, sustainable, and cost-effective use of radiators. Kelvin (NSF-1659038) is one of the hundreds of deep tech startups funded annually by the U.S. National Science Foundation (NSF), a government agency that plays a central role in accelerating discoveries into the marketplace.

Each startup can receive up to $2 million to support translational research & development. By investing more than $200 million in startups annually, NSF helps teams navigate the earliest stages of technology translation. These companies have gone on to raise billions in follow-on capital, and the portfolio has had 300+ exits.

Learn more about NSF funding at seedfund.nsf.gov.

Trivia

(IndoImages/Getty Images)

North America has dethroned Asia for the first time in a decade to claim the largest share of early-stage venture deals in 2023, according to PitchBook data. How many of these deals has North America recorded so far?

A) 4,567
B) 3,828
C) 3,146
D) 3,949

Find your answer at the bottom of The Weekend Pitch!

Graphing the positive
effects of NAV on returns

In our most recent Global Fund Performance Report, we added a way to look at quarterly returns data broken down by source, for the seven asset classes.

Net asset value had almost always been a negative component of returns as assets moved from unrealized to realized—this changed in H2 2020 and H1 2021 when portfolio holdings were being written up while distributions remained in normal ranges. We've charted out how much of Q3's private capital returns came from realized vs. unrealized components, or distributions and NAV changes, respectively.

VC loses ray of hope
for valuations

A rebound for VC valuations may have seemed to be on the horizon last quarter, but our Q3 2023 US VC Valuations Report shows they are continuing to fall for all stages except for seed. Despite IPOs of prominent companies, their listings performed relatively poorly, indicating reduced investor enthusiasm for VC-backed companies.

Plugging into the cutting edge
of infrastructure SaaS

(Qi Yang/Getty Images)

The big guns of enterprise, from IBM to Microsoft to Oracle, are spending hefty sums on infrastructure SaaS, which covers all the tools powering the digital transformation.

With our Q3 2023 Launch Report: Infrastructure SaaS, we're starting dedicated research coverage for the vertical. Explore the main players in M&A, the risks and potential rewards for fledgling startups and those to watch in everything from DevOps to application infrastructure.

Quote/Unquote

"I was with one of my clients … last week, and he said 'we're keeping a naughty list of those GPs who are doing this to us. And we’re reminding them of it when they come back.'"

—Mina Pacheco Nazemi, head of diversified alternative equity at Barings, discussing the frustrations some LPs have with short election periods for secondary transations.

Stay tuned

Keep an eye out for these insights and research reports coming out this week:

Q3 2023 Crypto Report
Q4 2023 Quant Perspectives: Private Equity
Q3 2023 Supply Chain Tech Report
Emerging Sustainable Investment opportunities: Waste-to-fuel

Trivia

Answer: D)

In North America, 3,949 early-stage venture deals had been recorded as of Nov. 6, surpassing Asia's 3,828. Read more about global early-stage activity here.

This edition of The Weekend Pitch was written by Marina Temkin, Clarinda Simpson and Rosie Bradbury. It was edited by James Thorne and Clarinda Simpson.

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