Unshackled: After breaking free from Sequoia, can Peak XV double down on the India story?

As ventures go, there is one recorded on May 29, 1953, that still captures the imagination. That was the day Sir Edmund Hilary and Tenzing Norgay made history by becoming the first to reach the summit of Mount Everest. Since then, that feat has symbolised the triumph of the human will in the face of overwhelming odds. Almost exactly to that day, 70 years later, on June 6 to be precise, Sequoia Capital, one of the most revered names in the venture capital world, announced that it was splitting its business into three independent entities for the US and Europe, China, and India and Southeast Asia (SEA). More importantly for those in this country, it also revealed that the India and SEA business would be rebranded as Peak XV Partners, taking inspiration from Mount Everest, which was called Peak XV before being renamed.

Let us get back to Peak XV Partners. Few were aware of this impending decision. In fact, not many in its own team had a clue until the day of the announcement. What followed was an aggressive rebranding. “The way they have very quickly rebranded themselves is remarkable. At their office, it is almost taboo to use the word Sequoia. You will be corrected even by people in the lift if you say Sequoia by chance,” says a person who visited the Peak XV office recently.

Many have wondered since the split why that decision was taken, especially at a time of turmoil in the start-up world, sparked by a deepening funding winter. It is also a time when problems at many start-ups—that bubbled under the surface when the funding taps were gushing—have become impossible to ignore.

Others, including Peak XV Partners’ Managing Director Shailendra Singh, see an opportunity to build on what Sequoia has already achieved, aided no doubt by its significant war chest, betting on the Indian economy’s ability to remain the “bright light” of the world.

Singh says the split resulted from increasing overlaps in strategy between the India and US businesses that was hurting its limited partners (LPs) and founders.

Those overlaps occurred because Sequoia India’s investment strategy shifted to focus more on cross-border software opportunities. The percentage of such investments increased from just 10 per cent in 2018 to 50-55 per cent in 2023. This means that more than half of Sequoia India’s portfolio in the last four years had a global presence, particularly in the US, potentially leading to competition with its parent fund’s portfolio.

Singh says this convergence, when operating under the same brand, cannibalises the interest of LPs. “Earlier, we had a crack which companies used to fall through. Good companies [land] neither in our, nor in their jurisdiction fully. Now we will both be able to cover it more clearly. This [the split] is good for LPs in the long term,” he says.

However, multiple individuals, including global VCs and LPs, highlight major disagreements between the India-SEA and the US teams as a key factor. “Once China goes separate, it only makes sense to have India-SEA going separate as the partners here felt that all the real carry that has happened in the last few years has happened from here versus from the US. That’s where the ego battle comes, which is why it is a three-way split instead of two,” says a growth-stage VC investor.

According to an Indian LP, the local team feels it has built the Sequoia brand here and its track record speaks for itself. They believe they can perform better as an independent unit, with more freedom and flexibility.

There’s evidence close at hand that this could work. In 2018, a trio of senior Sequoia India executives—V.T. Bharadwaj, Gautam Mago, and Abhay Pandey—left the firm to float the new fund A91 Partners, which went on to raise over $900 million across two funds.

Enviable legacy

Of course, it helps that Peak XV has a legacy that it can fall back on. Since its inception in 2006 through a merger with WestBridge Capital, Sequoia India has invested a total of $6.7 billion in the country, of which $4.5 billion has been realised through exits and initial public offers (IPO) and another $1.6 billion in public stock is readily available for liquidity. In that time, the VC delivered over 50 unicorns and 19 IPOs.

Besides, Peak XV already has an extensive portfolio of over 400 firms spread across the region. It also has $2.5 billion of uninvested capital.

“Financially, their [Sequoia Capital’s] investments in India have performed very well. In the venture industry, if you compared between 2013 and 2023, the Indian ecosystem is orders of magnitude larger. In 2013 we had three–four unicorns, today we have 110. Everyone has made returns here including the US, Japanese, European and Middle Eastern funds. This is now the time when the whole world’s capital is going to come to India in much [larger] volumes... Therefore, Peak XV, as a standalone fund, has immense possibilities,” says Pranav Pai, Founding Partner and Chief Investment Officer at 3one4 Capital.

The Challenges

Sizeable bequest or not, Peak XV faces multiple headwinds. One impact of the rebranding, some in the industry say, could be the changed perceptions of LPs without the Sequoia tag.

Singh isn’t worried. He says the India team has been successful in establishing direct relationships with global LPs and that its last fundraise—$2.85 billion in June 2022—was done independently.

“We have met over 70 institutional LPs across the US and Europe since the announcement and are very grateful for their continued support. The big takeaway is that a lot of LPs are quite keen on maintaining or increasing their India investments and I think that is good news for us and all other India-centric funds,” he says.

The other more pressing issue is the string of instances of alleged governance lapses in Sequoia portfolio firms such as BharatPe, Zilingo, Trell, and GoMechanic that have tumbled out over the past year. At BharatPe and Zilingo, investigations led to the sacking of founders and several employees over suspected financial irregularities.

Then there are the problems that are currently playing out at edtech giant BYJU’S. Three board members, including Peak XV’s Managing Director G.V. Ravishankar, stepped down from the company’s board and its statutory auditor Deloitte Haskins resigned. Currently, Peak XV holds just about 7 per cent in the company and BYJU’S says the resignations were the result of the investors’ shareholding falling below a minimum threshold.

According to an insider, Peak XV is not overly concerned about BYJU’S because it has already regained its principal. “BYJU’S is, of course, the big bet that’s going down for them. But from their (Peak XV’s) perspective, they have cleanly gotten out of BYJU’S, at least their principal capital has been returned. So, essentially, it’s their free money that is riding.”

Peak XV will have to navigate these tricky situations quickly. “They are no longer protected by their US parent. They will have to own up their mistakes. These issues are not taken lightly, particularly by the American LPs. The mandate is that when serious governance issues arise, you exit, even if it means you take a 99 per cent loss. Sequoia India has not done that. They have chosen to fight and defend,” says a senior executive at a family office, who wished to remain anonymous.

Peak XV’s Singh says the company has taken prompt action and implemented appropriate remedies in collaboration with other investors whenever such instances have come to light.

Shriram Subramanian, Founder and MD of InGovern, a proxy advisory and corporate governance research firm, believes governance concerns would be a source of concern for LPs, and the VC may have to thoroughly scrutinise all its portfolio companies.

“They (LPs) would want to know how serious these governance issues are and what measures are being taken to resolve them. These are misdeeds of the past because they have been chasing valuations and, like many VCs, Sequoia India too has knowingly pushed these promoters towards a ‘growth-at-any-cost’ type of operating model, and that has come back to bite them. Sequoia has a large portfolio, so it must assure investors about its seriousness,” he says.

According to Subramanian, Peak XV should ask portfolio companies to establish robust systems and processes. It must make them understand that it is essential to have a strong accounting system in place, including a Chief Financial Officer. “You cannot have these companies not have a CFO; it is almost criminal. Monthly reporting metrics should be strictly followed and internal audit should be a continuous process. I would say all growth-stage companies should be doing concurrent audits. They have the resources to do that,” he adds.

The way ahead

Beyond the challenges, there are the undeniable opportunities Peak XV is staring at. Singh says the company will not need to raise funds for the next two to three years.

“In the next 10 years, we think an Indian company will be among the Top 3 in the world in every category of software. There’s a reason for that. There will be $16–20 trillion of GDP in our region. When these companies get to $5-, $10- or $20 million (revenue), their products improve a lot, and they will be able to compete in the US and Europe too. Our objective is to be in as many of those companies over the next 10 years. It’s the same objective that the [Sequoia] US team also has,” he says.

Despite the rebranding, Mohit Gulati, Managing General Partner at ITI Growth Opportunities Fund, feels the Peak XV team has built a solid reputation that LPs and founders will find compelling. “This is a strong team. They have shown their calibre over several years of hard work. They are the ones who dictate where the market goes. They’ll continue to attract a steady stream of high quality entrepreneurs.”

The real challenge now will be in deploying its sizeable war chest.

“The problem now in India is that they don’t have the ability to cut those $20-50-million cheques because they are not seeing any company crossing that Series B, C mark with corporate governance in the right place and numbers actually [adding] up. It is sort of everyone’s problem. For Peak XV, they are now restricted to India and SEA and this $2.5 billion needs to find its home in the next 12 months,” says a top executive at an investment bank that works with leading Indian VCs.

Singh acknowledges the dearth of opportunities. “Our sweet spot is $20-50 million for growth-stage investments, and sometimes we can go higher. Our fund structure allows us to invest even $100 million growth cheques if we would like to, but we will do that only if we find something special. So, for growth-stage investments, we have over $1 billion available and we can also make investments from our Southeast Asia fund. We have found fewer growth opportunities than we would have liked in the last six months and we are hoping that our growth will accelerate in the months ahead,” Singh says.

With its 60-member team, Peak XV is aiming to double down on investments in cross-border opportunities. And it plans to set up a team in the US soon to help start-ups from India and other SEA geographies recruit talent, build capabilities and expand customer base. Singh expects Peak XV’s portfolio composition to move further towards the software side with an increased focus on AI-centric opportunities. The company has signed five term sheets in the first two weeks of the rebrand.

Peak XV is patient and focussed on the long-term India. “In India, you have to be patient and very long term. If you want to do stuff very quickly, it’s going to be challenging. All India investors that take a multi-decade view are very nicely rewarded. We are very patient, very committed. We are just going to keep doing what we’ve been doing, year in and year out,” says Singh.

Like Singh says, it’s a brand new day for Peak XV, a chance to embark on a fresh journey and craft its own narrative in the region, drawing inspiration from its parent. But it must navigate the immediate challenges first.

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