Comment Two Is Sequoia China in Trouble

Is Sequoia China in Trouble? http://www.techcrunch.com/2009/05/15/is-sequoia-china-in-tro...
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Is Sequoia China in Trouble?
33 Comments
by Sarah Lacy on May 15, 2009
1 of 17 5/18/09 9:17 PM
BEIJING, CHINA– Starbucks is a franchise in China that worked. The

company opened locations at the bottom of all the major tourist hotels and downtown areas where returning
Chinese, expats and business people traveling to China would pop in for some familiarity and to hold meetings,
much like they do in the U.S. For people hoping to mix with that crowd, Starbucks became something of an
aspirational brand in China. Tea was what your parents drank; a latte was something exotic and western.
No one thought Starbucks would work in China, but it did. Sequoia Capital, however, is not Starbucks.
There are a few ways to set up venture activity in China. One is to become a limited partner for a local firm.
Another is to relocate an existing partner to build an office. The most common is to hire well-known, connected
investors already in China, and Intel Capital, which has been investing in China longer than almost anyone, is
one of a few farm systems for that. Typically this is known as the “franchise model.” The hired China partners
operate under the Kleiner Perkins or Sequoia brand name and typically share the same limited partners, but the
funds themselves are separate. In exchange for that name and fund raising advantage, the Valley firms take a
healthy chunk of the carry.
It seemed like the best of all strategies a few years ago. These firms want experts but don’t necessarily want to
slow down or meddle in their deal making. But the cachet of the top Valley brands only goes so far over here. In
2008 Kleiner Perkins’ China partnership exploded, with two of its four partners quitting in a dispute that was
far more contentious than a lot of Valley media reported at the time. In a week of touring China’s start-up
scene, I’ve barely heard the KPCB brand mentioned at all. Now, it seems it’s Sequoia’s turn in the spotlight.
It’s no secret Mike Mortiz has been traveling back-and-forth to China a great deal, and he’s fond of telling
reporters that’s because of all the opportunity. I asked him at Kenshoo’s recent US launch party about the unique
challenges of investing in China versus the US, Europe or Israel. He said he wasn’t trying to stonewall on the
answer, but that all venture investing was just hard, no one place more than another.
Really? Several sources in China and Silicon Valley have confirmed Moritz has been in China this week
addressing Sequoia’s so-called “China Problem.” In February, one of Sequoia China’s founding partners, Zhang
Fan, resigned due to “personal reasons.” People are fond of pointing out that Zhang’s biggest hit was Asia
Media Company, which later had to de-list from the Tokyo Stock Exchange under a scandal. Whether it’s true or
not, the situation certainly didn’t do Sequoia’s brand any favors here.
That left the other founding managing director at the helm, the highly respected Neil Shen, who founded
Ctrip.com, the so-called “Expedia of China,” and Home Inns & Hotels Management. I’ve talked to several VCs
and entrepreneurs in China who say Shen is a prickly guy but his deal judgment is unparalleled in the country.
Indeed sequoia has had two other IPOs (Renhe and VanceInfo) and a stake in the hot social networking name
51.com. Another investment, Peak Performance, has filed for its IPO. Shen is even a bit of a hero to some
entrepreneurs. But unfortunately, Shen too is in hot water. U.S. firm Carlyle Group is suing Shen for more than
$200 million in damages for allegedly blocking a Carlyle deal in a Chinese medical research firm.
Even the widespread speculation could be a big blow for Sequoia, which at one point seemed to be one of the
better-adapted Valley names here. It still employs two other managing directors and several more vice
presidents and associates in China, but for many Chinese entrepreneurs Shen represents the brand as much as
Moritz does in the U.S. There are few China investors with solid operating experience, particularly in the
Internet.
And it can’t be good news for Sequoia’s limited partners who haven’t taken too kindly to Sequoia’s pressure to
make them invest in not only China, but in other unproven Sequoia funds aimed at India and later stage U.S.
2 of 17 5/18/09 9:17 PM
companies, according to very wide-spread reports and my own reporting.
Player hating is part of human nature, so it’s no surprise that other Valley investors have whispered with glee
that the once-dominant Sequoia seems distracted by all this. The competition’s biggest fear: Moritz solves the
problems and Sequoia starts to focus on what it does well again.
(Sequoia did not respond to a detailed request for comment or clairification of this story and has a long-standing
policy of not commenting on the firm’s internal matters.)
Update: I’ve updated this story based on conversations with additional sources.
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Comments
Smart Babes Are Sexy Too... - May 15th, 2009 at 8:43 pm PDT
….great article sister!

I am going to Beijing too - on the hope that Arrington reconsiders and hires me as a TC Senior Editor…
Anjali Sen
From India (in Singapore now)
reply
skippy - May 17th, 2009 at 6:40 pm PDT
I wouldn’t call it great, but congradulations on finally writing a post where you didn’t go on and on
about yourself. You’re now almost qualified to apply to journalism school.
reply
geekevaluation (@geekevaluation) - May 15th, 2009 at 9:28 pm PDT
They also did not had any major hot in China. Or did they had any ? The biggest Chines hit that comes to
mind is Alibaba
reply
what what in the - May 18th, 2009 at 2:27 am PDT
China? They’re closing down the SF office they just leased not too long ago I heard.
reply
3 of 17 5/18/09 9:17 PM
Kevin Eklund - May 15th, 2009 at 9:29 pm PDT
Not really surprising, China is a very different ball game, very different rules, and much harder to conquer
in some business arenas.
reply
VentureDig (@venturedig) - May 15th, 2009 at 9:41 pm PDT
“And it can’t be good news for Sequoia’s limited partners who haven’t taken to kindly to Sequoia’s
pressure to make them invest in not only China, but in other unproven Sequoia funds aimed at India and
later stage U.S. companies, according to very wide-spread reports and my own reporting.”
I’ve heard that as well. At the end of the day, LPs’ opinions are the only ones that matter. I learned that the
hard way lol.
reply
Moses - May 15th, 2009 at 10:11 pm PDT
Nice stuff Laci Michael needs to force you to write more posts.
reply
Michael Arrington (@arrington) - May 16th, 2009 at 12:34 am PDT
yep.
reply
John - May 16th, 2009 at 3:03 am PDT
“Player hating?” Did Sequoia get “served?”
reply
tojo - May 15th, 2009 at 10:14 pm PDT
Hey, post something that will get you arrested.
reply
EDS - May 15th, 2009 at 10:31 pm PDT
Did you mean “cachet?”
Ugh.
reply
4 of 17 5/18/09 9:17 PM
cls - May 15th, 2009 at 10:37 pm PDT
Nice post Sarah,
Yeah China and India are no doubt very different.
I think that big companies shouldn’t focus too much on China and India just because there are over 2
billion people living there.
There are big countries in Eastern - Europe like Ukraine, Russia and Poland they could put more focus
into because the culture is pretty much the same. And they could give it a try in Indonesia also. 260
million people speaks for itself.
reply
nedders - May 15th, 2009 at 10:59 pm PDT
Sarah,
If you want to know about China, like I said, come to Hong Kong!
(That goes for Moritz too).
Nedders
reply
nedders - May 15th, 2009 at 11:02 pm PDT
Sarah,
By the way, we have lots of Starbucks too but, just like Beijing, you won’t meet the right people there!
Nedders
reply
lee - May 15th, 2009 at 11:07 pm PDT
surprised by the comments about zhang fan. i had always been under the impression that zhang fan was
the clean one. curious if this is true or a smear campaign by neil shen and his “people” in china.
reply
bigliu - May 16th, 2009 at 12:29 am PDT
It is surprise to know that even Sequoia China is lacking integrity.
Moving forward, China’s big problem is lacking of trust everywhere, huge obstacle for innovation and
productivity.
reply
5 of 17 5/18/09 9:17 PM
lemon obrien (@lemonobrien) - May 16th, 2009 at 1:14 am PDT
what americans don’t get; is asia is hard core; and they have the money; why would they want to give it
back to the white people when they can keep it in their country?
do any of you think creating twitters is that hard?
plus you’ve outsourced everything to india, china, argentina, philippines. i know start ups now in india
outsourcing americans lawyers.
the only thing americans can do, is bullshit.
look at twitter, it’s nothing but a spam feast with no business model;
i speak and read japanese and chinese, and lived in both countries for a number of years.
reply
Alex - May 16th, 2009 at 7:53 am PDT
ROFL.
VC biz is a PROFESSIONAL BS and kickbacks and bribery. People made it their PROFESSION,
what do you want from them after that?
reply
lemon obrien (@lemonobrien) - May 17th, 2009 at 11:28 pm PDT
investing in businesses with real models; i get the BS, and i know asians, they don’t BS; and
they’re not stupid.
reply
Robert - May 16th, 2009 at 1:50 am PDT
Well, at least they did well in Israel. I heard the Sequoia Israel has returns at the high end of any VC
worldwide. Can anyone confirm?
reply
Dave - May 16th, 2009 at 2:57 am PDT
“And it can’t be good news for Sequoia’s limited partners who haven’t taken to kindly to Sequoia’s
pressure to make them invest in not only China, but in other unproven Sequoia funds aimed at India and
later stage U.S. companies, according to very wide-spread reports and my own reporting.”
Hey guys I can understand the aversion in investing in unproven places like India and China. But I don’t
understand how investing in Later Stage companies is a bad thing.
Is it because the returns on later stage investments are low? Thanks guys
reply
6 of 17 5/18/09 9:17 PM
francine hardaway (@hardaway) - May 16th, 2009 at 5:55 am PDT
Sara, this is a terrific post, because Sequoia, like many other companies who go global, has overlooked the
cultural differences. Chinese society has anger and lack of trust that is generations deep, from when people
ratted on their friends during the “cultural revolution” and it makes people live in the back brain, in
survival mode. Not the way we do business, and not something we easily comprehend. But we are going
to have to understand the Chinese cuture better if we are going to play in it, and respect their traditions as
well as our own.
reply
You are not invited ‘to play in it’, instead THEY will be playing in your 19-th century (which is
equivalent to ‘obsolete’) culture. They are doing that already if you didn’t notice.
reply
Marc - May 16th, 2009 at 6:19 am PDT
China is on the verge of collapse. How do you grow the GDP of an export dependent nation at 8% while
exports have shrunk by 22%?
Answer: Catastrophic misallocation of capital.
If that’s not the case, then they are falsifying numbers big time. Their stimulus is still not a factor as it
hasn’t hit the economy yet (and it’s not big enough to make up the difference anyway).
China’s in big trouble dudes.
reply
That is very true. The only reason why central planning exists is: it allows the centralized
falsification of EVERYTHiNG, including the economic data.
reply
Greg - May 16th, 2009 at 6:59 am PDT
Graft is the name of the game over here, so it’s no surprise to me that Sequoia was involved in paybacks
and the like…as a founding partner in a Chinese tech. start-up, I know all too well that in order to get
certain things done fast, i.e. raise capital, you have to be willing to provide the enabler, the guy on the
other side, with a small fortune.
I doubt that Sequoia will have that much trouble restoring their image here. In fact, this article probably
did more damage to their brand in China than any of their internal problems — I’ve received at least
twenty e-mails about this story already, from friends running other tech. start-ups in Beijing
7 of 17 5/18/09 9:17 PM
reply
JP - May 16th, 2009 at 7:44 am PDT
You can go to China looking for the analogy to the Web 2.0 Valley. Meeting at the starbucks or bookworm
and people will expertly feed you that story. They’ll dazzle you with huge traffic growth (falsified data)
and localized twists on social behavior with the occasional “look how bizarre” China is anecdote thrown
in.
You miss the real story:

The innovation of underground social networks instantly translating movies, of advanced P2P networks
for streaming video long before joost, of working around a fragmented network system or creating
marketing websites that work; and the immense innovation in combining offline and online marketing and
events. That’s just the start.
Take ctrip.com, the travel site mentioned above. Online travel? Sure…except it does most of its business
through a call center, most of its advertising through pamphlets at train stations and its “CDN” are a bunch
of people on bicycles. The internet makes it work, but not like in the U.S…
Similarly, one can scoff at the corruption or graft; but that again misses the point. The innovation is in
working in a different set of rules and constraints.
The process of innovation is the same. The parameters are fundamentally different. That’s what the failed
foreign ventures miss.
I’ve been lucky enough to spend three years living in Beijing working with a fantastic team creating
innovative online products. Everyone is devoted to using new technologies to make the world a better
place. Most importantly, everyone has the patience to really understand the underlying cultural differences
that make this world an interesting place.
I know that journalism works well with “analogies” or “gotcha’s”…but this is exactly what is causing
such misunderstandings and hindrance to progress in the first place. With thousands of years of a different
history there isn’t analogies between China and the West. There is, however, the shared human emotions
and reasonings enacted through a different vantage point.
That’s the story.
reply
Well said, JP.
reply
…except for the fact that you are NOT talking to journalists… these are just… BLOGGERS, all of
them here.
reply
8 of 17 5/18/09 9:17 PM
bruno (@brubrushanghai) - May 17th, 2009 at 6:01 pm PDT
strangely, the story was deleted from the home page overnight on saturday (while other stories stayed). Is
techcrunch in conflict of interest in publishing the story too openly? happy to see they covered KPCB as
well, and highlighted the corruption issue with VCs in china. FINALLY!
reply
Xin Chen - May 17th, 2009 at 9:18 pm PDT
I happened to read the earlier version of this post that contained the comments regarding Sequoia China’s
former partner Zhang Fan. I had several meeting with Zhang. In my mind, he is straight forward , honest
man who has acute perspectives on internet business and yet is very encouraging when speaking with
entrepreneurs. He is nothing like what the original post described based on my personal experience. I
highly doubted Sarah’s sources on this one. BTW He didn’t invested my company, but I have to agree
with his decision looking back.
reply
Concerned Reader - May 18th, 2009 at 3:32 am PDT
The original story wasn’t pulled because Techcrunch was protecting Sequoia, it was pulled because there
was a statement about Zhang Fan that began “I’ve now talked to close to twenty sources in the venture
scene in Beijing and Shanghai who say…”
What followed was gossip at best, slander at worst. This re-post removed the language but should begin
with an apology to Zhang Fan and Techcrunch readers for failing to uphold a better standard.
This was bad for all parties involved (and professional bloggers in general) and I can understand not
wanting to draw attention to it immediately since it would only further hurt the the subjects of the story.
Very soon, however, Techcrunch needs to address this - and do better than rewrite stories without
explanation.
And an appropriate next assignment for Sarah might be the importance of face and guangxi in China.
reply
Bill (@niubi) - May 18th, 2009 at 5:56 am PDT
Re-posting a comment that was deleted earlier today. please explain why you consider this inappropriate.
I find it disturbing that this article has been reposted almost 48 hours after disappearing from TechCrunch
within hours of its original publication. The only change appears to be the deletion of a sentence repeating
libelous innuendo about a former Sequoia China partner. There is no mention of that specific change, just
an “Update: I’ve updated this story based on conversations with additional sources.” If your lawyers are
limiting you to saying only this then find a clever way to tell your readers. Don’t just hope no one notices.
There is no shortage of dirty doings in the investment business in China, but TechCrunch, as a publication
with a massive audience, tremendous market power and aspirations to reputability, should know that you
do not print allegations of criminal behavior based on rumors and hearsay. And you especially do not
9 of 17 5/18/09 9:17 PM
write those things without at least trying to contact the person about whom you are making these
allegations.
Yes, you read that correctly. The author, an established reporter, never bothered to contact the former
Sequoia partner in question before she wrote that he was dirty. He is very easy to find and at a dinner in
Beijing last week at least three of the attendees have his number in our mobiles and could have given Ms.
Lacy his phone number. But she wasn’t even trying to contact him. Again, that is not how credible
journalists practice their craft.
In a tweet over the weekend @sarahcuda wrote “pretty surprised people who were *silent* in room when
ppl said things about sequoia china are publicly calling me out for being unfair. ok.” http://twitter.com
/sarahcuda/statuses/1819511453
As Ms. Lacy knows, I was one of the 8-9 people at the dinner in Beijing on Thursday night. She is the one
who mentioned that Michael Moritz was in Beijing and that big changes were coming to Sequoia China.
That comment spurred a discussion about Sequoia China among the party. Neither I nor any of the
attendees with whom I have spoken remember any specific discussions about the partner in question, and
especially nothing negative. In fact, she was told of Neil Shen’s reputation for being smart but very
difficult to deal with, and of a BBS posting that circulated on the Chinese web a couple of years alleging
all sorts of sketchy dealings between Shen and former Yahoo China head Zhou Hongyi.
We also discussed that the Sequoia China portfolio appears to have some companies in trouble, and the
fact that their only public exit to date has been Asia Media, a company recently delisted in Tokyo for
financial irregularities. Curiously, she addressed no questions about the partner in question to the dinner
party. This group included several VCs, entrepreneurs and other people who have some knowledge about
the topic of her article. After publication several of us were surprised that these allegations seemingly
came out of left field.
So I don’t who she is calling silent or otherwise in her snarky way is inferring is a hypocrite. I didn’t
follow the party to the Chocolate Club, so perhaps there were further conversations or moments of
“silence” on this topic of which I am not aware.
TechCrunch should be better than this. Ms Lacy seems like a perfectly nice person, but this article is so
poorly reported and unprofessionally written, and about such a serious issue (accusing a respected investor
of being a criminal), that readers should wonder what kind of editorial standards are in place.
Full disclosure: I am acquainted with the former Sequoia partner but would not consider him a friend; he
is good friends with a very good friend. More importantly, I don’t like bad journalism and believe very
strongly that influential media organizations especially should not abuse their power and trust with sloppy
work.
One more nitpick, I believe your fact checkers got the date of the Sequoia China partner’s departure
wrong. My understanding is that he left at the end of 2008, not in February 2009.
reply
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Live CrunchCam: Watch Bloggers While They Blog »

BEIJING, CHINA– Starbucks is a franchise in China that worked. The

companies, according to very wide-spread reports and my own reporting.

….great article sister!

skippy - May 17th, 2009 at 6:40 pm PDT

geekevaluation (@geekevaluation) - May 15th, 2009 at 9:28 pm PDT

what what in the - May 18th, 2009 at 2:27 am PDT

Kevin Eklund - May 15th, 2009 at 9:29 pm PDT

VentureDig (@venturedig) - May 15th, 2009 at 9:41 pm PDT

Moses - May 15th, 2009 at 10:11 pm PDT

Michael Arrington (@arrington) - May 16th, 2009 at 12:34 am PDT

John - May 16th, 2009 at 3:03 am PDT

“Player hating?” Did Sequoia get “served?”

tojo - May 15th, 2009 at 10:14 pm PDT

Hey, post something that will get you arrested.

EDS - May 15th, 2009 at 10:31 pm PDT

Did you mean “cachet?”

cls - May 15th, 2009 at 10:37 pm PDT

Nice post Sarah,

Yeah China and India are no doubt very different.

nedders - May 15th, 2009 at 10:59 pm PDT

(That goes for Moritz too).

nedders - May 15th, 2009 at 11:02 pm PDT

lee - May 15th, 2009 at 11:07 pm PDT

bigliu - May 16th, 2009 at 12:29 am PDT

It is surprise to know that even Sequoia China is lacking integrity.

lemon obrien (@lemonobrien) - May 16th, 2009 at 1:14 am PDT

do any of you think creating twitters is that hard?

the only thing americans can do, is bullshit.

Alex - May 16th, 2009 at 7:53 am PDT

lemon obrien (@lemonobrien) - May 17th, 2009 at 11:28 pm PDT

Robert - May 16th, 2009 at 1:50 am PDT

Dave - May 16th, 2009 at 2:57 am PDT

francine hardaway (@hardaway) - May 16th, 2009 at 5:55 am PDT

Alex - May 16th, 2009 at 7:56 am PDT

Marc - May 16th, 2009 at 6:19 am PDT

Answer: Catastrophic misallocation of capital.

China’s in big trouble dudes.

Alex - May 16th, 2009 at 7:59 am PDT

Greg - May 16th, 2009 at 6:59 am PDT

JP - May 16th, 2009 at 7:44 am PDT

You miss the real story:

That’s the story.

Alex - May 16th, 2009 at 8:02 am PDT

Well said, JP.

Alex - May 16th, 2009 at 8:04 am PDT

bruno (@brubrushanghai) - May 17th, 2009 at 6:01 pm PDT

Xin Chen - May 17th, 2009 at 9:18 pm PDT

Concerned Reader - May 18th, 2009 at 3:32 am PDT

Bill (@niubi) - May 18th, 2009 at 5:56 am PDT

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