No non-competes signed, will open a US office: Peak XV’s Shailendra Singh

The new firm is now called Peak XV (pronounced fifteen) and it will pursue a similar strategy as before. But will there be any change? In an interview with Mint, Shailendra Singh, now managing partner at Peak XV, talks about how this came to pass, the kind of conflicts that the firm had to manage, and the path it is likely to adopt going forward.

The backdrop to this move, for the former India Sequoia team, has been rocky. Multiple India portfolio companies such as Byju’s, BharatPe, Trell, Zilingo among others have been plagued with difficulties. But the team has together invested in over 400 companies. Of $9.2 billion it has raised, $6.7 billion have been deployed and while around $2.5 billion remain uninvested. 

The global startup ecosystem has also seen a valuation reset. Will we see the latest VC firm in India adopt a new strategy?

Edited Excerpts:

Seismic shift for the firm. How did this come about? And can you talk about the pains you anticipate going forward.

Our unyielding commitment is to do the right thing for our LPs (limited partners) and founders. So we have had to have a completely unyielding commitment to that. I have so many friendships and warm relationships with people in the US team. We have received advice, mentorship, help, support everything, so tons of gratitude. But I think this decision is really based on trying to set our founders and LPs in the best possible manner for the next 10-20 years.

We tell our founders, don’t worry about optics, do the right thing. And we ask ourselves, let’s apply the same principles to ourselves.

Why is it so important that we create independent brands? Because our success can also create challenges for us. So to your point – on real points of friction or pain in the last few years, it was all actually linked to portfolio conflict.

And let me tell you there are many nuances to portfolio conflict. So I’ll give you some examples and try to explain. Basically, what is happening is a massive India ecosystem is emerging and 40-50% of our entire deal flow has now become cross-border companies in AI (artificial intelligence), cloud computing, SaaS, – what we call modern data stack, cloud infrastructure, cybersecurity.

If you look at how many Surge startups– which is our funnel– it’s a proxy for us on where the world is headed. And if you look at the funnel, 50% and in some cohorts 60-70% are actually cross-border global companies.

Five or seven years ago, our business was maybe 80-85%, domestically focused companies and 10-15% was global companies. Now, it has shifted to 40-50% global companies.

So we run into this problem where our US team will say – we backed the category leader, and if your company has a similar model, this other founder will get very upset if you invest in the same company in the same category. That naturally causes frustration.

And so we were constantly finding that we are locked out of pursuing opportunities which were causing a lot of founder angst.

The rebrand effectively gives us full freedom – to be able to invest in every category of technology and then also gives us freedom for one more important cross-border trend, which accelerated a lot post-pandemic.

The second trend is that a lot of companies have co-founders placed in two regions. Post-pandemic, what happened is you started seeing teams with one person in Singapore, three co-founders in the US.

Historically, with Sequoia’s construct, we would not be able to invest in companies where co-founders were based in the US.

Do you think it’s their way of distancing themselves from whatever is happening with your India, Southeast Asia portfolio?

If that was the case, they wouldn’t split with China.

We have 51 unicorns, and have done 19 IPOs. I think we are doing everything we can to drive great governance in the portfolio. And we are not being shy to call it out. Economically, much less than 1% of the value of our portfolio has been impacted by these governance issues. Governance issues in startups are not unique to us or to our region.

Sequoia had a certain brand value in the ecosystem. Without that brand, how will it be for you going ahead?

I think there’s no question that the Sequoia brand definitely helped us get established in our market. But I’ll share with you what I’ve been sharing with our team.

I think of a brand as two buckets, you can have a given brand and you can have an earned brand. Our earned brand, is our track record, is the success we had with the 19 IPOs and the 51 unicorns. The second part of our earned brand, is our founder connect or our deep relationship- building over years and years.

For example, the average tenure of 16 people (MDs and principals), on average, in our firm is 10 years. If you go and look at all global investment firms, you will not find many VC firms that have an average tenure of so many years. So over the last 10 years, people have built relationships with founders, they have helped a founder, they’ve tried to nurture a young startup, they’re trying to help a company. We have world-class operating teams, we have 60-plus operators who help our companies. The years of hard work done with our founders and our deep relationships, this is our own brand.

When Surge was launched, it was the first product of its type in the world. Other examples where our creativity and first principles thinking created successful programs include Pitstop Event, Spark Fellowship, Guild, which is a community of late-stage founders, our strategic development team– they were all first of a kind. Even Pathfinders was a first of its kind.

We have lots of work to do here, lots of improvements. But we’ve had a very strong streak of innovation. I am super grateful to Sequoia – a phenomenal brand – but these things we created on our own.

You mentioned legal and compliance processes were becoming a pain. How will that change going forward?

More than compliance, it was regulatory. Sequoia India and SEA have 11 MDs. Our portfolio is in 19 countries, with 14 nationalities (our team).

Like a startup, it is critical for an investment partnership to move quickly and efficiently while complying with applicable rules and regulations. Operating as independent brands will enable this. For example, by eliminating centralized legal and compliance functions, we can make decisions on the basis of our nuanced understanding of local regulations, rather than be constrained by regulations that may have no bearing in our region. This is just one example of how we will be able to make the investment process more nimble.

Who really pushed for this? Was it India or the US?

It was a collective decision. Why was it a collective decision? Because people believed that this would serve founders and LPs best.

Will you be competing with Sequoia US in deals?

I don’t think in a major way, but it is possible. Sometimes you will have some overlap. Could there be 5-10% cases where there will be overlap? Yes.

Could they set up a different India outfit. Do you have non-competes signed?

There is no non-compete signed anywhere. So, we are free to go open a US office, and they are free to open an India office.

Can we expect to see both Sequoia Capital and Peak XV investing in the same company?

Absolutely, why not.

When is the profit sharing ending between the entities?

Profit- sharing agreement will be dissolved imminently, in a short few months.

Partners tend to invest in each other’s funds. Will they divest those stakes?

All investments stay. US Partners were invested in our funds, we were invested in US funds. That will stay invested. In a way, we are LPs (limited partners) in each other’s funds. Whatever happened in the past, stays, going forward we will not be doing that.

How will the compensation structure or your fee change?

No change to LP agreements, no change to fee and carry structure, no change to partner – compensation. There is no materiality to the change in that relationship. We will add a few headcounts in a few areas.

Usually, LPs have the option to opt out. What is your sense — will LPs honour their capital calls? When will you know finally?

There’s no change in LP agreements.

What are the broad challenges you might face in the next 3 months?

I think when a big change happens, every leader has a massive burden, to explain and communicate to people on what transpired, how it transpired so that they can develop a point of view.

So if you ask me, what is my biggest goal in the next 90 days, it is to meet as many founders in person as I can, meet as many limited partners in person as I can. Not just me, but all our leaders will overinvest in the next 90 days in meeting people – so that if people have questions or doubts, they should not feel like we didn’t tell them or we were not transparent.

Could you invest more aggressively in non-tech areas now?

It was never closed to us, we have had a lot of success in NBFCs and in consumer investing.

But one of our challenges, one of our main jobs is to make sure people understand that this is a rebrand and nothing has changed. It is a change of our identity but not a change in our business strategy and make sure that all understand that. I think we will take one step at a time.

The most important thing we will do is double down on our cross-border investments. We got a lot of freedom to invest in all areas of technology. We will double down on our cross-border efforts and will open a US office. So that would be probably the most important thing from a sector strategy perspective where we will open a US office, so that we can help our founders from India and Southeast Asia more actively grow their business in the US.

Updated: 07 Jun 2023, 04:58 PM IST