Sequoia Made a Fortune Investing in the U.S. and China. Then It Had to Pick One.

Sequoia Capital became the most consistent moneymaking venture-capital firm in history, placing huge winning bets in the U.S. and in China. In the end, the Silicon Valley firm found it had to choose just one.

Scrutiny of Sequoia’s China ventures had been rising in Washington for months, with officials and members of Congress hammering the firm for bankrolling Chinese technology competitors and potentially boosting China’s military. Then, last summer, Sequoia’s China arm tapped American investors to raise a record $8.5 billion to pour into promising Chinese companies, and the pressure notched higher.

The Biden administration’s senior Asia policy official, Kurt Campbell, confronted Sequoia’s top executive in Washington, Don Vieira. Campbell asked why Sequoia would fund Chinese companies that might threaten U.S. national security and do so when Washington wants that financing to stop, according to people familiar with the matter.

Vieira explained that Sequoia China doesn’t invest in defense technology, but given the firm’s structure, Sequoia in the U.S. has no control over the China unit’s investments, the people familiar with the matter said.

It wasn’t enough. Sequoia this month bowed to the fraught competition between the U.S. and China in announcing a plan to break up the firm. Its senior partners unanimously made the decision, Sequoia said. A public statement cited the rising complexity of running a decentralized, global investment firm.

The bitter rivalry between the two major powers made Sequoia a political lightning rod in Washington and exacerbated tensions within the firm, feeding into the decision to break up.

Sequoia’s rainmaker China chief, Neil Shen, for one, had lost out in a succession battle to lead the group. He didn’t work as closely with the new leadership, was dismayed by recent financial losses from the U.S. side and had talked for years about striking out on his own, people familiar with the matter said.

Sequoia’s U.S., China and other arms sometimes invested in competing companies, and the China and India units had expanded into consumer and other sectors not typically part of the U.S. unit’s focus.

Sequoia will split into five independent entities: one for the U.S. and Europe, one for China and one for India and Southeast Asia, plus a hedge fund and wealth-management business.

As the Biden administration works to keep semiconductors and other advanced technologies from China, financial ties are being undone too. The firm that made its reputation on investments in Apple and TikTok owner ByteDance found its business model was no longer tenable.

This account of how one of the world’s storied venture-capital firms got caught out when U.S.-China relations began to spiral, and how it responded, is based on interviews with people close to Sequoia, officials in the Biden and Trump administrations and lawmakers on Capitol Hill.

Under the reorganization, Sequoia China will rebrand as HongShan—“sequoia” in Chinese—and operate independently, Sequoia Capital said.

After early investments in Google and Cisco Systems, Sequoia Capital launched Sequoia Capital China in 2005 with Shen, a founder and managing partner. Overseen by a group of senior partners, Sequoia gave its units some autonomy, though they shared a name, profits and some back office operations.

The power of Sequoia’s brand helped the China arm attract American university endowments and other large investors. Shen excelled, with investments in companies including food-delivery company Meituan and e-commerce platform Pinduoduo.

His returns outpaced those of other top partners in the U.S., according to people familiar with the performance.

As recently as 2018, Sequoia’s then-global managing partner Doug Leone discussed elevating Shen to lead or co-lead the global firm. That year, Sequoia held its biennial investor conference in Beijing, with a dinner hosted in the Great Hall of the People, the landmark government building next to Tiananmen Square.

Meanwhile, U.S.-China relations pitched down, with technology becoming a battlefield. Beijing launched ambitious plans to dominate robotics, AI and other future-looking tech. The Obama and Trump administrations squelched Chinese plays for U.S. semiconductor companies.

Shen’s stardom in China and relationship with the Chinese government started to raise eyebrows in Washington. He often met Communist Party officials and joined a top government advisory committee.

Shen told Chinese financial news outlet Yicai in a 2016 interview posted to YouTube in 2019 about an internal Sequoia database that held 40 years of the firm’s intelligence on the companies it had invested in and that Sequoia teams worldwide could access. He called the database Sequoia’s “most important competitive power.”

Some at the firm worried such comments could draw criticism from Washington. Sequoia tightened controls on database access.

When the Trump administration turned its interest to TikTok and its potential to siphon Americans’ data, Shen appeared to underestimate the politics. He told ByteDance it could deflect U.S. regulatory heat by offering security guarantees, hiring more white Americans to run TikTok U.S. and saying it aspires to be a global company.

Washington’s scrutiny soon focused on Sequoia. At a Senate Armed Services Committee hearing in June 2021, Sen. Dan Sullivan (R., Alaska) blasted Sequoia, among others, as “unpatriotic.” “They knowingly are funding, financing, our competitor, the PLA,” he said, referring to China’s People’s Liberation Army.

The Biden administration began to examine U.S. investment in Chinese tech firms. National security adviser Jake Sullivan in a speech signaled support for regulations to screen American investment overseas in technology ventures in rival countries.

Then, a report from a Georgetown University think tank identified a Sequoia China-funded startup in artificial intelligence, 4Paradigm, as a contractor for the PLA.

Sequoia told lawmakers and White House officials who asked about 4Paradigm that Shen was prohibited from investing in Chinese military technology, but Sequoia hadn’t anticipated that an AI startup it helped get off the ground would later become a PLA contractor.

“Sequoia China doesn’t invest in businesses that operate for the purpose of facilitating or providing support to the Chinese military,” a company spokesperson said. Sequoia Capital said it was assured by Sequoia China that it had not invested in nor planned to invest in “companies that are in the business of selling their products or services to the Chinese military.”

In meetings, Vieira explained to congressional staff members and administration officials that Sequoia Capital didn’t control Sequoia China’s investments. Since Sequoia China uses the firm’s name, the staff aides and officials argued, there must be more that Sequoia Capital can do.

As part of its plans for investment restrictions in China, the National Security Council in early 2022 surveyed recent U.S. investments in sensitive Chinese tech and found that Sequoia China was among the most dominant.

Sequoia’s U.S. and China arms edged away from each other. They each raised separate expansion funds to back large startups, rather than tapping combined funds as in the past.

Then came the record $8.5 billion funding round, which had been approved by the firm’s global leadership and included large U.S. institutional investors. The enormous stockpile clashed with the sentiment in Congress and the White House’s planned investment restrictions.

Around the time of the fundraising round, Sequoia settled its leadership transition, passing over Shen and handing the reins to partner Roelof Botha, who had led early investments in Square and Instagram. The partners concluded that having a Chinese national lead a global firm would be difficult given souring U.S.-China relations.

Another change Sequoia made was introducing a screening process for any new Sequoia China investments in Chinese semiconductor or quantum-computing companies. The measure was modeled after a draft of the outbound investment restrictions.

When Vieira briefed the National Security Council and lawmakers about the plan, many remained skeptical. A January meeting in the office of Sen. Marco Rubio (R., Fla.) went awry. Vieira and the senator’s aides argued about whether the U.S. could stop China’s technological development.

“Sequoia is incredibly concerning,” Rep. Mike Gallagher (R., Wis.) told Fox News, saying the special committee on China he chairs plans to investigate the firm.

Shen’s term on the Chinese government advisory body had ended, and he had pared some investments in Chinese technology.

Still, senior partners at Sequoia thought that, given the U.S. and China were increasingly at odds, keeping the two entities together was no longer feasible.