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Fortune
Anne Sraders

Making sense of Sequoia Capital’s big breakup with China

(Credit: Bryan van der Beek/Bloomberg—Getty Images)

Sequoia Capital certainly made headlines Tuesday by breaking up with China. But VC firms had already been growing wary of China as funding levels continue to fall. 

On Tuesday Sequoia announced in a letter to their limited partners that the firm is going to break off its China and India units into separate entities—with the China entity, launched in 2005, taking on the name HongShan in English and India and Southeast Asia together becoming Peak XV Partners. The U.S. and Europe will remain under Sequoia Capital, but the three will become different brands by March of 2024 at the latest; profit sharing and centralized back-office functions, meanwhile, will cease by the end of this year, a person familiar with the plans confirmed. Sequoia declared the big catalysts for the move included conflicts between portfolio companies among the different entities and difficulties with centralized back-office functions. 

Sequoia’s shift brings the firm in line with how some other VCs are already set up, with separate China arms, like Redpoint Ventures. 

It’s a big move for Sequoia, but it’s not necessarily going to prompt other VCs to follow suit and ditch their China offices or funds. Instead, it’s “another domino” amid VCs and their growing skittishness over investing in China as tensions between the U.S. and China escalate, according to PitchBook senior venture analyst Kyle Stanford. 

“We've heard over the past six months that everyone is taking a much more cautious eye toward China. …[This is] another reason for investors to slow their deployment to China, to rethink their strategy,” he told me. Over the last year, the value of deals in China with non-Chinese investor participation has plummeted, down nearly 70% in 2022 from 2021; the figures are tracking even lower so far in 2023, per PitchBook data. 

Sequoia says their China and India arms were already largely independent with local investors making decisions. The firm’s China and India units also weren't part of Sequoia’s big firm remodel in 2021 when it reorganized its structure to hold all U.S. and European investments under one big, open-ended fund, which included holding public stocks longer. Those exemptions likely indicate that the breakup was only a matter of time, no doubt sped up by the recent iciness with China, Stanford argues.   

But that geopolitical backdrop is key. Amid rising tensions, the Biden administration has been preparing an executive order to restrict U.S. investors’ ability to invest in Chinese companies (it will focus on artificial intelligence, semiconductors, and quantum computing). Meanwhile, VC firms have increasingly been under pressure to divest from China, while Sequoia has reportedly been consulting outside national security experts this year regarding prospective investments in China. Sequoia’s highest-profile China bet is its stake in TikTok owner ByteDance, which, in addition to being the world’s most valuable private company—most recently valued at around $220 billion—has drawn the ire of the U.S. government. 

Those like PitchBook’s Stanford predict U.S. investment into China will slow, especially if and when an executive order comes into play. But the big outstanding question is, what does this all mean for LPs? Fellow PitchBook analyst Kaidi Gao suggests that LPs likely won’t pull back from investing in China because of Sequoia’s move, but “there are going to be a host of other reasons that may or may not make them concerned,” including the geopolitical worries, and “we can see that from several of the largest Canadian pensions” pulling back, she added. Sequoia China has LPs in the U.S. 

The upshot is that Sequoia’s big moves—including their unusual 2021 restructuring—are often pretty Sequoia-specific. What’s not is the increasing complexity, and risk, of investing in China. 

See you tomorrow,

Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
Submit a deal for the Term Sheet newsletter here.

Jackson Fordyce curated the deals section of today’s newsletter.

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