ANALYSIS: Squeezed by East–West Tension, Sequoia Capital Splits

Experts say scrutiny from Washington, distrust from Beijing led to investment giant's split

Sequoia Capital China founder Neil Shen speaks at an event of tech incubator Hong Kong X in Hong Kong on Sept. 11, 2017. Bobby Yip/Reuters

“America’s pre-eminent investment firm is employing a member of the Chinese government.”

That comment, made by tech executive Brian Costello on Steve Bannon’s “War Room” podcast on June 27, reflects the ongoing attention surrounding the recent Sequoia Capital split, following scrutiny of the firm’s ties to the Chinese Communist Party (CCP).

The venture-capital giant announced on June 6 that it will separate into American, Chinese, and Indian businesses. Experts believe geopolitical tension between China and the United States, as well as internal tensions over the national security issue, contributed to the firm’s decision.

Further, Sequoia Capital may be at the forefront of a trend.

“I think that major multinational and diverse capital firms will all split,” said U.S.-based economist Davy J. Wong, referring to the effect of tightened regulations as U.S.–China relations continue to chill.

A Threefold Split

Sequoia Capital announced it will split into three geographic entities. The Chinese arm will be known as “HongShan,” the mandarin word for Redwood. The Indian and Southeast Asian unit will be known as Peak XV Partners, and the U.S. and European unit will remain as Sequoia Capital, according to a statement issued to the company’s limited partners and shared on Twitter.

The firm stated that the key to the success of each regional unit was its “founder-focused, local-first approach,” based on its decision to establish “teams with intimate understandings of their local networks and industries.”

However, the statement continued, “It has become increasingly complex to run a decentralized global investment business.”

Sequoia Capital said it had decided to “fully embrace” its local-first approach. “We will move to completely independent partnerships and become distinct firms with separate brands no later than March 31, 2024,” it said.

Geopolitics: A ‘One-Vote Veto’

As geographical tensions have escalated, investments in Chinese private assets have dropped. According to a report by The Economist, funds that focus on such bets raised just $25 billion last year worldwide, down by 77 percent from the year before. Moreover, “greater China’s share of fundraising relative to the rest of Asia has fallen to a 15-year low,” it noted.

Wong explained that investors used to ponder the impact of local policies, regulations, and protections on their investments. Now they are more focused on the relationship between China, the United States, and the EU, he said. “Geopolitics is pretty much a one-vote veto.”

He anticipates that multinational businesses will re-organize by seeking new balance points, or take sides in order to survive and develop between the world’s first and second economies.

According to a recent Financial Times report, fund managers are encountering requests for “ex-China” products. That includes the possibility of “Asian allies” funds that would invest in U.S.-friendly markets and provide clear insulation from Beijing-related geopolitical risk in the region.

A security guard near the front gate of the Shanghai Stock Exchange building in Shanghai, on Feb. 3, 2020. Yifan Ding/Getty Images

U.S.-based China commentator Zheng Xuguang told The Epoch Times that when Warren Buffett shifted his Asian portfolio from China and increased his investments in Japan, it sent a powerful message. Due to tensions over Taiwan in particular, Buffett considers Japan to be a much safer political environment than China.

Warning Signs

Li Hengqing, a China expert at the Washington-based Institute of Information and Strategy, believes geopolitical tension is not the only reason investors are withdrawing from China. He is not optimistic about China’s economy. “It has been bad, and it could last for years or even longer,” he said.

While investors typically look to big companies as weathervanes, Li advised them to be on the lookout for warning signs. As an example, he cited the May visit to China of JPMorgan Chase president Jamie Dimon.

“Dimon was very serious about investment in China when he was interviewed in China, but he talked about the threat of China after he returned to Washington,” Li pointed out that such talk can be deceiving.

Investors should be wary of the real danger of investing in China, he said. “Once the money goes in, it’s easily stuck.”

Speaking of the investment environment in China under the CCP’s rule, Zheng said “It’s completely subjective, there’s no law, and the boundaries are very difficult to grasp.”

Sequoia’s Shen

According to the Hurun Research Institute’s September 2022 report, Sequoia Capital was the world’s most successful “unicorn and gazelle” investor, investing in 328 of the world’s top startups.

Co-founded by Neil Shen and Sequoia Capital in 2005, Sequoia China currently manages a scale of funds exceeding $41.4 billion, involving more than 900 investment projects and focusing on the three major areas of science and technology, consumption, and health care.

Shen is a mysterious figure whom Tencent CEO Pony Ma once praised as the most successful investor in the Chinese venture capital industry.

After working as an investment banker, the Yale-educated Shen made his entrepreneurial mark with the founding of online travel company Trip.com in 1999, followed by Chinese hotel chain Home Inns in 2002.

Like most successful Chinese businessmen, Shen has had close political ties to the CCP. He worked closely with CCP officials and in 2018 was made a member of a top CCP advisory committee, the Chinese People’s Political Consultative Conference (CPPCC).

Banknotes of Hong Kong, the UK, China, the United States, Japan, and the EU are seen in this illustration on Jan. 21, 2016. Jason Lee/Illustration/Reuters

The grandson of former Chinese leader Jiang Zemin, Alvin Jiang, has been one of Shen’s close collaborators; Sequoia China and Jiang’s Boyu Capital more than once led investments in the same Chinese start-ups.

As tensions between the United States and China ratcheted up, Sequoia—and Shen—became the object of U.S. government scrutiny for funding Chinese technology competitors.

The situation came to a head last summer. At a time when China’s economy was reeling from three years of zero-COVID policies, Sequoia China was able to secure a whopping $8.5 billion to fund promising Chinese companies. It tapped American investors for what The Information called possibly “the biggest pool of capital ever raised by a single venture capital firm to bet on Chinese technology startups.”

American investors’ growing district of Sequoia China was expressed in a post from independent Chinese journalist Chan Fu.

“The CCP launched a financially unrestricted war against the United States through Sequoia Capital more than ten years ago,” Chan said, commenting that Shen and others infiltrated the United States in a well-organized strategy, through legal circles, the military, intelligence, and Capitol Hill.

‘Trust Issues’

A Wall Street Journal report on June 27 detailed the scrutiny from Washington that led to Sequoia’s split.

However, it’s worth noting that Sequoia China’s Shen was also drawing unwanted attention from CCP authorities.

This January, Shen lost his CPPCC delegate seat, “raising questions about his relationship with the Chinese government,” according to a report in The Information.

Then, on March 17, the Shanghai Stock Exchange announced its restructured sci-tech advisory committee, under the guidance of the China Securities Regulatory Commission. Three big names in the venture capital circle, Neil Shen, Zhang Lei, and Bao Fan, were missing from the committee member list.

Around the same time, it was confirmed that investment banker Bao Fan, whose February disappearance sent a chill through the financial community, had been detained by authorities in connection with a corruption investigation.

Shen was clearly feeling the squeeze from both East and West.

Wong said Beijing’s investigation of its venture capital stars is to be expected. Distrust is bound to escalate when countries are in a high-tension state.

Moreover, Zheng noted, CCP leader Xi Jinping has always had “trust issues” with capitalism.

The Epoch Times contacted Sequoia for comment.

Song Tang, Yi Ru, and Reuters contributed to this report.