MC Interview | Global profit-sharing agreement dissolved, will double down on India: Peak XV's Shailendra Singh

Shailendra J Singh is the Managing Director or Sequoia Capital, now Peak XV Partners in India.

Sequoia Capital, one of the world's most storied venture capital firms, sent ripples through the startup ecosystem on June 6 when it announced its decision to split into three independent entities.

While the US and Europe entities will still have the Sequoia tag, India and South East Asia will now go by the name Peak XV, albeit with the same team.

Sequoia India and SEA have raised $9.2 billion, and made $4.5 billion from startup exits so far, making it one of India's biggest and most important startup investors.

In a detailed interview with Moneycontrol, Shailendra Singh, the Managing Director of Peak XV Partners, discussed whether this signals a retreat from India by Sequoia and how it might impact founder equity. He also shed light on the company's plans to go global. Edited excerpts:

With the split, Sequoia (global) has essentially retreated from India for now.  This, at a time when most VC/PE firms are sounding extremely bullish on the country. Why now when everyone else seems to be doubling down on India?

Before you make that conclusion, you should understand what our structure is. Let's say we have a global fund that invests out of a common balance sheet into India and if they stop investing, you could correctly argue that they have retreated.

But if a firm operates with region-dedicated specific funds and specific teams and local presence, then I don't think that's the case. What we're doing is we're rebranding the business, which is not the same as retreating.

Nothing is changing, that business was already independent. The way Sequoia's structure works is that the region used the same brand and some back-office functions.

In fact, we will double down on India and Southeast Asia and other core markets because we have lots of freedom to make unique and specific choices for our market.

Sequoia India and SEA have raised $9.2 billion and made $4.5 billion from startup exits so far. What then explains the decision to hive off the India entity, decoupling it from the US? It almost appears like Sequoia is hyphenating India and China, when the dynamics are vastly different.

Directionally, the China business has started to look quite different from the US business. They now have a buyout business and an infrastructure fund. Moreover, they have two different hedge funds, one of which focuses on healthcare.

Let’s say we want an INR fund and go the full distance, the more unique choices we wish to have and the freedom to make, the harder it becomes to actually keep it in one single global entity as you have regulatory hurdles in every part of the world.

Regulated businesses, like banks, are typically regional, not global. I think the investment business could become a little bit more regional over time, especially if regulatory barriers to things like data privacy continue to arise.

But that wasn't the biggest reason. Our scale works against us as we grow bigger because it becomes increasingly complex, resulting in a greater regulatory burden.

I'll give you a story from many years ago, when a founder was looking for funds for a new company. The founder went to a US fund for money and not us (India), because he felt there was a portfolio conflict as Sequoia US was invested in a rival firm. What happened was a classic case of a company perceiving a portfolio conflict. As a result, they decided to go with another investment.

That was a one-off. Now, 40-50 percent of all inflows are to cross-border companies. This is because innovation has become more democratised, and more companies are becoming cross-border. For example, software, development tools, infrastructure, cybersecurity, cloud computing, and AI are all super important things for us and 40-50 percent of all investments are in these areas.

I believe India will have a parallel ecosystem to the US in the next 5 or 10 years. In every single category, there will be American companies and Indian companies. It will happen.

Our unicorns are now running world-class technology infrastructure. I and my team believe that we will have parallel ecosystems of software companies, development tools companies, infrastructure, and cloud computing, all built by Indian brands. And that's our biggest common brand conflict. If it was one or two deals a year, we could deal with the conflict. But if this conflict is a weekly issue for us. It's a big issue.

Sequoia all said and done, has a different equity or cachet, if you will in the startup ecosystem. So how will founders perceive the new brand? Will LPs have the same confidence and will you start investing again actively and in what areas?

I have been the biggest proponent of the Sequoia brand and we are very grateful for the 17 years of history with Sequoia and that is not changing for us. What happens over time is any business also has an earned brand. But then, over the last 17 years, our team has also built their own goodwill with founders, we have deep relationships, we have our track record, and we have 50 plus unicorns and 19 IPOs. And, you know, our 16 senior-most investment leaders, have an average tenure of over 10 years.

So our own brand has three components. It has a performance and track record. It has our deep founder relationships, which makes us referenceable. Many people expressed their support to us and for which I'm incredibly grateful. Surge was the first program of its kind in the world to offer 10x the capital of Y Combinator. Spark fellowship is the first, I think to start the only one of its kind that we know. Our pitstop, the growth equity conference, is the largest by far. The Guild was a unique idea of a community at a late stage. Horizon is our own unique event. These are things we built like this to create our own brand. These are not things we did because, in other parts, Sequoia was doing it. This isn't what other VCs in the industry were doing.

I absolutely have admiration for Sequoia and we feel grateful but we have a strong earned brand and we can move forward with our own brand, and build our partnerships and friendships and support in the ecosystem.

So when will you start investing again? What changes in the existing fund? Do the existing LPs (limited partners, i.e. investors in VCs) need to recommit? Are there any other really legal technicalities that you need to adjust before you start investing?

In the last two or three weeks, we stopped signing new term sheets, we tried to defer some term sheets. But we didn't want any founders to have a term sheet signed and have these questions. All term sheets already signed, can say that they were invested in by Sequoia India and Southeast Asia, including all our portfolio companies. So the way the rebrand is going to work is that all companies and investments that have closed as well as term sheets already signed can say that.

Yesterday, we told them, we are now ready to proceed, many founders have since reached out to us asking whether they can be the first company to be funded by the new brand, Peak XV. So fingers crossed. We find that plenty of founders are pretty excited to have the Peak XV name. So, I expect that before the week is out, we will sign term sheets for new investments with a few of them.

So nothing has stopped for us, we paused things leading up to this announcement for two or three weeks, in fact, now will accelerate things. Look, all our investment areas, our strategy, everything stays the same. One nuance though, an important one, is for cross border now, we have a lot more freedom to help our founders. So, many of the other firms have US officers and their India teams have a US headcount.

And that's something we expect to do. So we will go over to the US in the second half of the year, bring on board "go to market" leaders, recruit leaders to be able to serve 100s of companies and help them expand more actively in the US. So we will directly go and help in building capabilities for our companies in the US. That is something we expect to do differently in the near term.

Will your LPs negotiate the management fee and carry structure? Sequoia has a 2.5/30 structure vs the industry norm of 2/20?

Nothing in our LP agreements requires us to change anything, so our LP agreements don't need any modifications to the carry structure and so on. At this time, we want to run things as business as usual. Our top priority is to finish the rebranding process, make sure our founders understand what transpired, and how we can begin supporting them in our relationships. Additionally, we aim to continue investing in new areas.

Honestly, we will be talking to a lot of LPs over the next two or three weeks and explaining why we did it. (With this move) Our TAM (total addressable market) has expanded, meaning our addressable profit pool of global opportunities has expanded a lot because now we can invest in every area of technology whether or not other parts of Sequoia are invested in.

We can also invest in companies that might have more cross-border headcount. Let's say one founder is in the US, and one founder is in India and the CEO is based in the US. Historically, we would not invest in such companies. But now we're going to invest in such companies. So if any good CEO has a co-founder of engineering in India, we will invest in the company. So our addressable market has improved.

I've not yet had the chance to have these discussions with 20 or 30 LPs yet, but I got a few emails already last night and LPs are pretty supportive. It’s not like our strategy has changed or our leadership team has changed.

Did the series of governance lapses at 4-5 Sequoia India portfolio companies make the US entity wary about liabilities?

Governance has no bearing on this decision (to rebrand) at all and governance is not an issue that is unique either to us or to any other investor or to this region.

What happens to Surge?

Surge is incredibly successful for us. We couldn’t be more thrilled. Eight cohorts have finished. The NPS in every cohort has been between 93 and 100. So we are definitely going to double down on Surge and you will see us being very active at the Seed stage.

Size of the Peak XV  team- it is one of the largest firms in this part of the world.  A lot of people have come with MNC salaries. Would you need to look at realigning India ops and cost?

Flat response, zero changes to the cost structure. We are not handing out salary cuts. Investment businesses are very profitable, not just us, all investment businesses are profitable. We are not going to trim down the team or there’s going to be no impact of this on employees. There are going to be no layoffs, no reductions, no change basically.

There is no non-compete agreement. What if Sequoia US starts investing in Indian companies remotely after some time?

To the best of my knowledge, I don’t think they have any plans to do it (invest in India). But it would be their choice if they choose to or not in the future. The biggest reason for (the breakup) was to prevent brand confusion. Our success in different regions caused so much portfolio conflict that we were seeing brand confusion. If theoretically, people look at it, we would all be growing in our pie for our own regions, but I am aware that they do not have any plans (of investing in India) but it will be their choice if they choose to.

What other areas will you be investing in? Will the investment strategy change? Partners at Sequoia (Peak XV now) sounded extremely bullish on generative AI, Machine Learning, and other models built on top of these technologies, when they met other VCs last month.

In the next few quarters, we expect there to be no major changes. The only change will be a focus on cross-border, specifically helping founders open US offices.

Obviously winning AI is a priority for all VC firms so making sure that we are on top of one of the most monumental trends in decades is also very important for us.

We do have one other exciting product launch coming up in four weeks. I think later in June or early July, you will see a new product launch from us, by product I mean things like Surge or Spark or something different that we might do. It has been in the works already for five-six months.

Will you now look at more domestic pools of capital?

We won’t need to raise any more capital. We have lots of dry powder. So the questions around LPs and all are good, but honestly, these are questions we don’t necessarily have to force ourselves to answer for the next one or two years. Our job is to learn a lot, engage with people and understand and it’s great to have choices, but we don’t have to decide for the next two years.

Has Sequoia US given up all their rights on the India and SEA portfolio companies? Will Sequoia US or its partners not make any money when there is an exit in India from the existing Sequoia-Peak XV pre-transition portfolio?

We had something called One Sequoia, which is a global fee and carry sharing pool, which will be dissolved. There are some nuances but you can say the profit-sharing agreement will get dissolved.