Why Did Sequoia Offer To Buy Stripe Shares From Its Own Investors?

July 23, 2024

In an Unusual Move, Sequoia Offers to Buy Stripe Shares from Its Own Investors

I thoroughly enjoy reading The Information, an online media service based in California that focuses on the tech and venture capital space.

Venture capital is a staple in most institutional portfolios, and tech clearly drives returns across all asset classes. At the same time, many operational due diligence (ODD) practitioners would agree that VC operates under its own set of rules when it comes to operational practices.

This week’s headline really caught my eye: Sequoia Capital buying shares in Stripe, the well-known payments company, for its own balance sheet? That would certainly be more than a little unusual, even for the venture capital world.

However, that’s not exactly what’s happening. In fact, Sequoia has offered investors trapped in older funds the chance to cash out, with the Stripe shares being bought by more recent Sequoia funds.

Perhaps the journalist wrote the article in a hurry, but this situation highlights something we see disproportionately in venture capital: the sentiment that the assets belong to the manager or GP, not the investors. (I am reminded of the infamous Silicon Valley Bank incident where they told Castle Hall that we had no right to ask about cash controls as the fund belonged to the GP). The headline should actually read, “Sequoia offers chance for investors in early vintage funds to sell stock in Stripe to newer vintage vehicles.”

Another tech news site, Axios, has provided more detailed information:

Several Sequoia funds raised between 2009 and 2012 hold Stripe shares. These funds are now 12 to 15 years old, well into “zombie” territory.
Sequoia has already created two continuation vehicles, the Expansion Fund and the Expansion Principals Fund (the latter seemingly a vehicle for Sequoia insiders—why wouldn’t they invest in the main fund?). These vehicles recently paid $139 million to buy some Stripe shares in a tender at a valuation of $65 billion.
Sequoia is now planning to use these vehicles, along with Sequoia Capital Fund, Heritage, and Global Equities—plus other unspecified funds—to offer to buy Stripe shares at a $70 billion valuation, an 8% increase.

Stripe’s valuation has fluctuated dramatically: it was valued at $36 billion at the beginning of COVID-19, peaked at $95 billion a year later, and then halved to $50 billion in March 2023.

Stripe is a great company (Castle Hall uses it!), and this move might turn out to be a fantastic investment for everyone involved. But for every successful “pass the parcel” deal, there are others that don’t fare as well.

There are obvious questions about trade allocation, decisions to extend funds, who decides when to flip assets between funds, how assets are valued, and when to introduce a new continuation vehicle. A lot can go wrong (and probably already has).

In conclusion, governance is at the heart of the issue here.