Sequoia Capital's fee cuts won't become the norm
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Sequoia Capital in December sent an unusual letter to limited partners in two of its funds, informing them that management fee percentages would be reduced and applied to called capital instead of to committed capital.
Why it matters: Sequoia, despite some recent stumbles, remains the VC industry's most venerable firm, and its move sparked some LP calls for other firms to follow suit.
But, but, but: Do not expect many other VC firms to mimic Sequoia.
- Sequoia is unusual in that it has so many different strategies and accumulated wealth that it can easily afford this fee-flow reduction without impacting operations or take-home pay.
Details: Sequoia made the changes to a so-called "ecosystem" vehicle, which is basically a VC fund-of-funds, and to its debut crypto fund. It left other funds, including its flagship and global growth efforts, untouched.
- The firm isn't commenting, but my understanding is that Sequoia historically has introduced new products like its seed fund with reduced fees. But it didn't do so with ecosystem or crypto because ... well, because the market was going gangbusters and LPs were over a barrel.
- Now, as the market has changed and the investment cycle is expected to be much longer for ecosystem and crypto, Sequoia is basically doing a solid for LPs who bet on unproven strategies.
Caveat: We are seeing some downward fee pressure on new funds being raised, as denominator effects have caused LPs to become more selective. This is particularly true for first and second-time managers, even though they're often the ones who can least afford the decrease.
Zoom in: There's a certain logic to LPs only having to pay fees on called captial, rather than committed capital. But it can create perverse incentives, encouraging GPs to invest money faster than they otherwise would.
The bottom line: Sequoia is the venture market leader. But that doesn't mean it has many followers.
