Sequoia Capital: "Crypto is one of the two big sectors of the next 10 years"

Sequoia Capital: "Crypto is one of the two big sectors of the next 10 years"

Web3, Bitcoin, Europe... In a lengthy interview, Shaun Maguire and Pat Grady (partners at Sequoia) discuss the strategy of the US fund, which is investing heavily in cryptos.

What do Google, LinkedIn, PayPal and Facebook have in common? Sequoia Capital. In its 50 years of existence, the American investment fund has been part of almost every good move in Tech. And it intends to do the same in crypto and Web3. In any case, the Californian giant, which manages just over $80 billion in assets, wants to give itself the means to do so, as two of its managers explained to us in a cross interview.

👉 News. The American fund specialising in technology has created a fund dedicated to cryptos worth just over $500 million.

👉 The context.  With the market downturn, many companies are weakened.

👉 Why it matters. Sequoia Capital is one of the largest venture capital funds on the planet ($86 billion in assets under management). Its two partners, Shaun Maguire and Pat Grady, hosted The Big Whale 🐳.

The Big Whale: You are currently visiting Paris. Why are you here? Are you here to invest, to prospect?

Shaun Maguire: It's important for us to be active at the moment, to show ourselves, because the markets have certainly fallen, but the opportunities are still there, particularly in France and Europe. There may even be more than ever.

Why are you interested in crypto and Web3 more generally?

Pat Grady: The aim of a fund like Sequoia Capital is to identify the next big trends. Look at Snowflake, DoorDash or Zoom... These companies that we invested in quite early on are all leaders in their field. When you look at the next sectors of the future, those in which there are going to be new leaders, you identify two themes: artificial intelligence and crypto.

Crypto is one of the two big sectors of the next 10 years. There are huge prospects. And as Shaun says, the bear market is a great opportunity. Some companies are worth a lot less even though their business and prospects haven't moved an inch.

What is the composition of your portfolio? Which crypto companies have you invested in?

Shaun Maguire: We've already made a lot of investments. Some in groups like FTX or Fireblocks, others in layer 2s and even very early investments in small start-ups.

Which ones, for example?

Shaun Maguire: EthSign, Strips Finance, Iron Fish, Espresso, Handshake... We don't disclose all our investments. In total, Sequoia Capital has made around fifty investments in crypto.

Doesn't the downturn in the markets encourage you to invest less?

Pat Grady: On the contrary, it would be a mistake not to invest at the moment knowing that it's in periods of downturn that the best projects are created and developed. Today we are fully mobilised with our "classic" funds (early, growth, late stage...) and our dedicated crypto fund.

Why have a dedicated crypto fund?

Shaun Maguire: Sequoia Capital has historically had several types of technology funds that correspond to the size of the companies we have invested in. But the crypto theme is so special that we decided to create a dedicated fund (a first for Sequoia, editor's note) because some crypto projects have characteristics and show performance that can't really be measured with existing tools. Take the case of tokens. It's a super-interesting instrument, but it's not valued at all according to the usual standards like shares.

How do you keep your tokens? In Europe, it's still quite a complicated subject...

Pat Grady: In the US too. We've created our own infrastructure to store the tokens and we also work with groups like Coinbase, FTX and Fireblocks to hold them. I'd say at the moment there isn't a single satisfactory solution, so we're working with a number of partners.

How much will be set aside for crypto investments?

Pat Grady: We have a crypto fund of just over $500 million and the other Sequoia funds are also investing, so that's money. It's possible we'll invest billions of dollars.

How are your investments split?

Shaun Maguire: Sequoia Capital is split into several structures. There's the "Western" entity with the US and Europe which should represent 25 crypto investments, the entity in China which should represent around ten projects and the one in South East Asia which should represent around twenty, making around fifty in total.

What crypto activity are you most interested in? Decentralised finance, NFTs, gaming?

Shaun Maguire: At the risk of disappointing you, the real topic for us is infrastructure. There's still so much to do there. Wallets aren't very efficient yet, most blockchains can't scale... Even custody activities aren't satisfactory. Everything needs to be done in the industry.

After that, from a more personal point of view, I'm very interested in everything to do with 'DeFi' (decentralised finance). I'm also very interested in NFT and gaming. I'm a big Dark Forest player. But it's all the same, we're only at the very beginning of the wave. Most crypto games today have a fairly small audience. And for DeFi, there are still a lot of regulatory issues.

And you Pat?

Pat Grady: The subject of infrastructure is, indeed, decisive. When we look at the subject of cryptos, we see a real resemblance to what happened with the Internet in the 1990s. Before we had services like Google, Amazon and others, we had to create the infrastructure. This is exactly the period we are experiencing in crypto. It's like 1996 with the Internet. That's why there's no point today in looking for the perfect service in crypto. The infrastructure is still being built and that's what we need to invest in.

What is the most ambitious crypto ecosystem for you?

Shaun Maguire: For me, it's Ethereum. I've been interested in this ecosystem for years. After that, even though I'm very optimistic about Ethereum, especially with the "Merge" (the move to the more energy-efficient Proof-of-Stake) coming in September, I hope the other layer 1s succeed too. But Ethereum has the biggest projects.

And Solana? You've also invested in it and they've just had another hack...

Shaun Maguire: We'll wait until we know a bit more specifically what happened. I was pretty sceptical about Solana just a few months ago, I thought they were pretty centralised and technically lacking. But they've come up with some interesting things and made some progress. There are many more validators, the number of wallets has increased, even if, as we've just seen, there are still flaws.

What is the main difference between Sequoia and other crypto funds?

Pat Grady: We want to be the bridge between crypto and the rest of the world. That's why, for example, we're not "maxed out" on Bitcoin or Ethereum. Sequoia Capital is open to all projects. And the advantage we have is that we don't just do crypto, we invest in all technologies, computer, cloud, artificial intelligence, and therefore crypto, which forces us to select the best projects. That's what has made us successful for 50 years (Sequoia was founded in 1972, editor's note).

Speaking of the best projects, what do you think of the French ecosystem. You invested in Multis. Who else?

Shaun Maguire: We've already invested in 3 crypto projects in France. Multis is one of them, there are others, but we haven't communicated on them yet. The French ecosystem is very interesting, you have some of the best projects, because when we talk about crypto, we're talking about mathematics and France has one of the best schools in the field.

How long have you had offices in Europe?

Pat Grady: We've been investing in Europe for a long time, but we've only had a physical presence here for 18 months. What might surprise you is that the country in which we have invested the most recently is France (across all activities). Since 2020, France should account for 50% of our investments in Europe.

What do you think of the term "Web3"? Isn't it too marketing?

Pat Grady: The real question is what problems cryptocurrencies are supposed to solve. The real problem with the internet today is that it's essentially data mining. I think cryptos and Web3 have the potential, and I mean the potential, to solve that problem. But how? Users don't control them, so we need to develop a digital identity that will allow everyone to be sovereign and authorise a bank, an airline, a hospital to consult their data...

This control of data will allow users to regain control. Companies will have to pay to access data or serve advertising to users. Identity is a key issue. The second key issue is value on the Internet, in other words money. If you put identity and value together, then you have a new, safer and more efficient Internet. It's a huge change.

Shaun Maguire: Web3 is a new layer of the Internet that will bring in things as essential as identity and value. People use different definitions. For some, it's a totally decentralised Internet where all companies and applications will be decentralised: Google will be decentralised, Twitter will be decentralised... But that's not realistic and it's not necessarily essential. For me, Web3 will be 95% like the current Internet, but with the possibility for people to control their data.

Would Sequoia Capital invest in Bitcoin's infrastructure?

Shaun Maguire: Yes of course. Bitcoin has the huge advantage of being completely decentralised. Ethereum, on the other hand, offers more services, particularly with NFTs and DeFi.

When do you think the bear market will be over?

Pat Grady: This question! (laughs). Nobody knows, and if we did, we wouldn't be here with you. The only real difference between this bear market and the others is the role of the Fed. It has never been in this situation, with such inflation, since cryptos have existed, so it's impossible to know what's going to happen. What is certain is that money is going to be more expensive in the coming years. Let's not forget where we've come from either: over the past two years, the crypto market has grown at a pretty crazy rate. By the end of 2021, it will be worth $3,000 billion! So we need to digest all that.

As we said a little earlier, cryptocurrency prices are important, but the most important thing is what is being built, the projects that are being developed, and from that point of view there have never been so many developers and creators in the ecosystem. The market will recover, but in the meantime, we need to build. Who could have imagined at the time of the bear market in 2018 that there would be so many new projects, that NFTs would have grown so much, that DeFi would have developed so much? The same thing will happen in the coming years.

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