Sequoia Capital Finally Gets ‘Red-Pilled’ on Crypto Investing

(Bloomberg) -- When venture firm Sequoia Capital changed its Twitter bio this month to misspell the word “build,” include a blockchain reference and sign off “LFG” (crypto-speak for “Let’s go”), people thought it had been hacked.

In reality, the new bio, which stayed up for 16 hours, was a winking reference to a larger shift at the half-century-old firm: Sequoia is serious about crypto.

Like much of the venture industry this year, Sequoia has bankrolled a bevy of startups focused on the cryptocurrency ecosystem and the technology that undergirds it. It’s made 21 such bets in 2021, representing 25% of its total new investments, Sequoia partners told Bloomberg. The firm is also putting its weight behind pro-crypto policies through a policy arm in Washington. 

“The conviction on crypto has only increased since I joined Sequoia and it basically broke through over the last year,” said partner Shaun Maguire. He described excitement about the field as a “one-way ratchet” where an investor’s interest goes up “but not down.” Sequoia’s Alfred Lin said that most of the partners realized the potential of crypto after having their own “red pill” moments, referring to the 1999 blockbuster “The Matrix,” in which characters took a red pill to reveal the truth. Lin said the pace of such revelations accelerated in recent months. 

That Sequoia, among the most prestigious names in venture capital, is making such a substantial commitment to crypto marks a pivotal moment for the industry. Blockchain tech is suddenly enjoying mainstream support — and the giant checks that come with it. At Sequoia, it’s a process that started slowly, firm partners say, and then accelerated fast.  

Around 2015, Sequoia quietly started making a handful of small bets in the industry through its Scouts program, which gives founders some cash to invest on the firm’s behalf. It also dabbled in the space by investing as a limited partner in specialized crypto funds. Its investments include Polychain Capital, MetaStable and Paradigm.

In the hyper-enthusiastic world of crypto, Sequoia’s relatively low-risk work didn't do much to fortify its reputation for trendspotting. The firm got famous for its early bets on companies like Apple Inc., Google, Airbnb Inc. and Stripe Inc. But like most mainstream investors that made fortunes on companies built on older technology, it has been slower to back the still-volatile industry of companies building on blockchain.

Early entrepreneurs of now-giant crypto companies did not consider Sequoia their first stop while fundraising. Instead they gravitated toward competitors like Andreessen Horowitz, which has been publicly tweeting, writing and investing with conviction on the topic since at least 2013. And even when crypto deals were brought to Sequoia, getting them funded could be tough. Every firm investment requires unanimous support from partners, meaning a single skeptical partner can torpedo a deal. That dynamic resulted in Sequoia passing on one now-highly successful cryptocurrency exchange, Maguire said, declining to identify the company. 

In 2018, attitudes were gradually changing. Roelof Botha — a Sequoia partner and former chief financial officer of PayPal — witnessed the excitement when Jack Dorsey’s payments company Square started allowing people to buy Bitcoin. (Botha sits on the board of Square — now called Block Inc.) Maguire and colleague Michelle Bailhe joined Sequoia over the next couple of years, and while neither was hired as a crypto expert — Sequoia has a generalist team approach — their interest in the space compounded the convictions of several existing partners, including Botha. Around the same time, Coinbase Global Inc. began delivering un-ignorable financial results.

This year, as Sequoia partners gathered on Zoom on Monday mornings to vote on deals, crypto investments were more likely to sail through with the whole team's support.

Earlier this month, the firm even created an NFT, or non-fungible token, sold it for 200 ETH, and donated the roughly $800,000 in proceeds to a blockchain foundation. And when the founder of Showtime, a decentralized social network, made a mock Twitter profile for Sequoia reading in part “We help the daring buidl legendary DAOs from idea to token airdrops,” it got adopted as the firm’s actual bio for a day. When the Founders Fund account took a crack at the firm’s Twitter crypto conversion, Sequoia replied “wagmi” — crypto parlance  for “we’re all going to make it.” 

Today, Sequoia’s bets touch most corners of a universe of internet businesses known as Web 3, including decentralized finance, identity, gaming and NFTs. Web 3 is the loosely defined concept that involves a decentralized internet relying on blockchain technology, essentially a shared database where digital information is recorded and stored. Some of Sequoia’s bets, like social blockchain game company Faraway Inc., just launched. Others are more established growth-stage bets, like crypto currency exchange FTX Trading Ltd., valued in October at $25 billion. Bailhe said they all represent elements of what will ultimately be a new internet that’s decentralized, secure and transparent. 

“I’m definitely a true believer in the technology and the potential,” Bailhe said. She expects its applications will spread throughout industries. “It’s already in fintech and consumer applications, and it’s seeping into enterprise and health care,” she added.  

To support its growing portfolio, Sequoia has quietly built a Washington policy team during the past 18 months to help favorably shape legislation, Maguire said. This team has focused increasingly on crypto and “is talking to regulators on a daily basis,” said Maguire, who compared this moment for crypto regulation to the 1990s adoption of the internet and the positive impact of net neutrality. 

Sequoia isn’t alone in embracing crypto investing this year. Global venture investors plowed more than $21 billion into the sector in 2021 — more than the past decade combined, according to research firm CB Insights. Zack Seward, deputy global news editor at crypto trade publication CoinDesk, said many crypto founders are loyal to early sector advocates like Andreessen Horowitz, Union Square Ventures and San Francisco-based crypto-native firm Paradigm, which have backed crypto leaders like Coinbase and Uniswap. At the same time, new firms are popping up. Andreessen Horowitz crypto guru Katie Haun said this week she would leave the firm to start her own fund.

In general, crypto founders are still less familiar with generalist firms like Sequoia. “Some of these legacy players are late to establish themselves so to a degree they’re now playing catchup,” Seward said. Sequoia’s investors are “clearly trying to position themselves as a bigger player moving forward.”

When Sequoia revamped its fund structure this fall to have an open-ended timeline for selling shares in its companies, the overhaul also created a path for the firm to further amp up its crypto investing. By becoming a registered investment advisor, as Andreessen Horowitz did in 2019, Sequoia was able to ditch the regulations capping crypto investments for venture firms at 20% of a total fund. 

Under the new structure, there will be no limit to crypto investing for the firm, opening up the possibility of a dedicated fund devoted to the sector, the strategy adopted by Andreessen Horowitz. Sequoia declined to comment on whether it would raise a separate crypto fund, but Maguire said that doesn’t mean the firm hasn’t discussed it. In the new internet era, there's not much that’s off the table. 

©2021 Bloomberg L.P.