Peak XV is far from the Sequoia tree. Can it retain its parent’s aura?

Instead, the venture fund appears to have suffered an erosion in brand value since losing the Sequoia moniker. Earlier this month, the fund’s general partners decided to reduce their compensation from its growth fund, a move that may have been prompted by this hard reality. The 16%—$465 million—cut in its current $2.85 billion fund for deployment across seed, venture and growth stages at a time when most global investors are bullish on India also took observers by surprise.

All of this aside, a few other things have gone awry for the investor in the last few years, especially with a slew of corporate governance issues coming to light at its portfolio companies.

Nevertheless, Peak XV has a lot going for it, having inherited $9.2 billion in assets under management from Sequoia India, across portfolios in India and South East Asia.Over the last 18 years, Sequoia had invested in 400 companies in the two regions (South East Asia accounts for a quarter of the business) through 13 funds.

That portfolio, which was inherited by Peak XV Partners, includes Zomato, Truecaller, Pocket Aces, Absolute Foods, Atlan, Pine Labs, Cred and Groww. The last three are expected to list in early 2025, while 23 ventures have already gone public. Indeed, Peak XV has facilitated more IPOs than any other India-focused fund. Since the June 2023 rebrand, proceeds worth $1.1 billion have come in from public and private exits of portfolio companies.

The venture investor has 44 companies in its portfolio with revenue of over $100 million and 70 with more than $50 million revenue. “These metrics will define our exits," said Bhatnagar.

Carry fee shocker

Earlier this month, Peak XV made a surprise announcement. The venture fund’s leadership decided to reduce the management fee and carried interest in its growth and multistage funds, in the clearest indication that with the Sequoia name gone, the premium they enjoyed had gone. The reduced fee is in line with what other funds in India charge.

A venture fund’s management fee is a yearly charge to compensate the fund’s general partners (GP) for their work and to cover the expenses incurred in operating the fund, such as salary, rent, travel, insurance and other overheads. The fee is usually based on a percentage of the fund’s committed capital, but can also be based on a percentage of the fund's returns or assets under management. Typically, the management fee charged by general partners is 2% to 2.5%. In an unusual move, Peak XV cut its management fee and carried interest from 2.5:30 to 2:20.

Carried interest or ‘carry’ is what general partners get for spotting and investing in ventures that are likely to become big companies tomorrow. The ‘carry’ is a portion of the fund’s profits and is a performance-based incentive aimed at ensuring the GP’s interests are in consonance with those of the fund’s investors (limited partners or LPs). If the carry is 20%, the GP will receive 20% of the profits from any investment after the principal is returned to the LPs. The remaining 80% goes to the LPs. So, in absolute terms, if a fund makes an annual profit of $10 million from its principal investment of say, $1 million in a venture, $1.8 million goes to the GPs and $7.2 million and the principal amount goes to the LPs. Peak XV has reduced its carry to 20% from 30% earlier.

The reduction will happen in Peak XV’s growth fund, which backs late-stage startups (post Series A), and not in the seed and venture funds. “The truth is, when our cost of capital is higher than another firm, it actually makes us uncompetitive. That puts us at a disadvantage," said Shailendra Singh, managing director, who leads Peak XV globally today. “But even after changing this, we have the best economics in the industry—2 (management fee) and 20 (carry) is the base case," he asserted.

Asked if this was the outcome of Peak XV losing the premium and brand value that came with the Sequoia name, the venture investor’s leaders insist that brand value shouldn’t be at the cost of making the fund uncompetitive. “The brand should be earned, not given. Sequoia was a given brand, it’s a great brand. By the time we separated, we had earned enough brand value," claimed Singh, pointing to the 40-plus companies in its portfolio with over $100 million in revenue.

Returning LP money

It is almost unheard of for a venture fund to return money to LPs instead of investing it, so the $465 million reduction in its current fund was another surprise. Why reduce the fund size when the market is attractive? “It’s a rare event. And despite the cut we are among the largest growth funds in India," said a defensive Singh.

Peak XV insists that the decision to return money was taken because of a heated market and the unrealistic expectations of founders, without any pressure from its LPs—the endowment, sovereign wealth funds, universities, pension funds and other long-term funds from whom it has raised money over decades.

However, a VC head, who sought anonymity in order to speak freely, told Mint there was much more to it. “While the markets are overheated, in the case of Peak XV, their main sponsor, Sequoia, is no longer there. So, they had to return the money. Sequoia is a fundraising genius, Peak XV is not," he said.

Singh, however, instead insisted that anyone taking a view over 10-20 years would know the reduction in the fund size was immaterial. “These funds were sized at the end of 2021-early 2022 when there was an investment boom. The reality today is that the Indian public markets have done well and all the growth-stage companies want the same multiples. Making plans off the current public market multiples is not a prudent strategy," he said, alluding to the stratospheric valuation expectations of founders. “India is a hot market right now, but Southeast Asia could be a better bet in such times. We definitely don’t want to do deals at 50-60 times Ebitda."

The valuation multiple at which founders want to raise money is way higher than Peak XV is willing to agree on. Founders expect to raise funds at whopping valuations of 40x to 60x their revenue.

Peak XV is concerned about the expectations in the smallcap segment which it sees as particularly overheated (with founders expecting a valuation of $500 million to $1.5 billion), given that many companies do not have the sales or users to justify such a valuation. For a venture capital fund, a seed investment is typically up to $25 million and a venture infusion is between $25 million to $100 million.

“Our growth team has chosen not to pay up public market multiples for a private company," explained Bhatnagar. “Our job as stewards of somebody else’s (LPs’) capital is to stay disciplined and play out the cycles."

While Peak XV is being cautious about growth stage investments, Indian startups raised $7.5 billion in VC funding across 780 deals between January and August 2024, a 53% increase in funding value and a 5.1% increase in deal volume against the same period last year, according to GlobalData, a London based analytics and consulting firm.

In the same period, India accounted for 7.3% of global VC deals and 4.6% of the total funding value. While this is a big improvement over the prolonged funding winter of the last two years, it is still below the peak of 2021, when Indian startups were raising huge sums.

Some of the key VC funding deals that took place in India between January and August include $665 million and $340 million raised by quick commerce company Zepto in two separate funding rounds, $300 million raised by marketplace Meesho, $216 million raised by online pharmacy PharmEasy, $173.5 million raised by hospitality chain OYO and $150 million raised by Radiance, a renewal energy firm.

A solid foundation

Sequoia Capital was founded in 1972 by Don Valentine, who had earlier co-founded Fairchild Semiconductor in Silicon Valley. It backed many of today’s marquee names, including Apple, Google, Airbnb, Zoom, Nvidia, WhatsApp, Stripe and ByteDance, demonstrating its ability to identify, back and nurture high-potential startups.

In 2006, it started the India office, with the then US-based Singh as its head. G.V. Ravishankar, who now spearheads the growth fund, and Bhatnagar joined almost at the same time. The three MDs will complete 19 years together by early 2025.

Peak XV has a team of 100+ employees, including 12 managing directors (general partners), with Rajan Anandan leading seed fund Surge and Bhatnagar leading the venture fund (Series A) or early-stage investments.

Of late, the brand has suffered a series of fires in its portfolio companies (Peak XV was not the only investor in them), including BharatPe, Zilingo, Trell, Byjus and GoMechanic. Governance has been found wanting in most of these ventures. Some of the founders admitted to financial irregularities, while Trell was found to have inflated its user numbers.

“We have taken a lot of steps to ensure such issues don’t crop up in the future," said Singh, who served on Sequoia’s global board for 12 years, listing various measures. The broader venture investing sector has tightened disclosure norms even for early-stage companies to try and prevent more such episodes.

Betting on niche plays

Today, Peak XV’s focus is trained on backing three themes: artificial intelligence (AI), fintech and consumer. It has also opened an office in the US to enable cross-border deals.

Despite the high valuations, Peak XV has invested in five growth-stage ventures in the last 12 months, including social commerce marketplace Meesho, jewellery retailer BlueStone, NBFC Neo Wealth and Singapore-based open-source developer platform Supabase, which raised $80 million in September in its Series C round (led by Peak XV and Craft Ventures).

India continues to be a price-sensitive market and Peak XV is looking at ideas that drive costs lower and open up the next layer of the market. For instance, Bhatanagar is eyeing ventures that can offer, say, low-cost healthcare services ( ₹100 to ₹300 price point), at scale. He believes, much like things played out in telecom, that once you drop prices, new competitors cannot enter easily, and the playground just expands for the incumbent. He should know, as he had a brief stint at Bharti Airtel before joining Sequoia Capital.

Peak XV is more bullish on seed, venture investments and exits. Surge, the seed investment play, launched its tenth cohort on 22 October. In the consumer segment, the focus is on premium brands. For instance, it is looking at ventures such as direct-to-consumer luggage brand Mokobara, which raised $12 million in a February funding round led by Peak XV Partners at a valuation of $80 million. With a few million new passports being issued every year, peak XV anticipates a surge in travel and growth for ideas catering to this segment.

In AI, Peak XV is interested in ideas like Sarvam, which is focusing on voice-centric AI solutions for India. As for the fintech segment, which already has more than 2,000 startups, it sees room for more niche players and spaces that are yet to be tapped. There are lots of secondary opportunities and sub-categories, such as supply chain financing, and Peak XV will evaluate these, said Bhatnagar.

As for the future, he said, “Expansion is on our mind and not contraction. We are hiring in the US as well to enable cross-border deals."