Does Sequoia really need Surge?

Sequoia also pulled off a coup by hiring Rajan Anandan, the erstwhile head of Google India and one of the country’s most prolific angel investors, to head the Surge program. The firm is also said to be in the process of raising a separate $200 million fund dedicated to Surge that Anandan will oversee.

If this fund does fructify, it would be rather unique in that it would represent the first time a growth-size fund (Sequoia’s latest fund for India was around $700 million) is extending a new fund at a seed-stage level (the traditional playbook has VCs start with smaller funds and subsequently raise larger funds or SPVs for follow-on funding).

Understanding the mechanics

Beyond the mechanics of the program, Surge is interesting for a number of reasons.

What drove Sequoia to come up with a dedicated accelerator program, the first of its kind?

What impact will Surge have on investing in the country? Will it be a game-changer that rewrites the rules of the playbook?

Let’s first start with the Sequoia question.

With nearly $4 billion of capital under management, Sequoia is by far India’s largest VC firm. Over the past eleven years, the firm has deployed over $2 billion across more than 130 Indian startups. In the past five years alone, Sequoia has participated in 190 deals with a total deal value of $5.4 billion.

But for a fund of this scale and a marquee brand, there is one sore point that sticks out prominently.

Sequoia doesn’t have a single tech unicorn startup in its India portfolio that it backed as the first institutional investor. While the firm does have unicorns like Ola, Zomato, OYO, Byju’s, Freshworks and MuSigma in its portfolio, it was not an early investor in any of them and most of these investments happened at the growth stage.

Fetching up the good returns

While these investments will undoubtedly fetch Sequoia good returns at some point of time, a one-round difference in investing (say for instance, missing the bus in a seed round and subsequently investing in the same company’s Series A) can lead to a 3X difference in IRR (Internal Rate of Return—a common financial metric by which VCs are evaluated).

Against this statistic, Surge is an effective way for Sequoia to muster early-stage deal flow. The competitive-based, self-service format of startups submitting applications is an efficient and inexpensive filter to learn about these companies. The numbers seem to be working—Sequoia claims that it received over 1,500 applications for the first Surge cohort, out of which 17 were selected.

There are other drivers, too, as to why Sequoia needs a program like a Surge at this point in time.

Last year saw the exit of three partners from Sequoia’s India team. Other partners such as Shailendra Singh have relocated from India to Singapore. This leaves the firm with a marginal presence in India, with only a couple of partners tasked with not just sourcing and making new investments but also managing the large Indian portfolio on a day-to-day basis. The surge will help Sequoia bridge this physical presence deficiency.

Finally, the fact that there is a gap in early-stage investing is not an epiphany that Sequoia alone saw. Others have woken up to the fact as well. There are a number of seed funds that have been started to fill the gap left behind by traditional VCs moving increasingly upstream.

Announcing the funds

The likes of AngelList have announced their own funds dedicated to India. Even the mighty YCombinator has sharpened its focus on India by holding admission interviews in Bengaluru, the first time the accelerator has attempted something like this outside Silicon Valley. Surge gives Sequoia a leg-up on these competitors.

There is no doubt that Surge will benefit Sequoia. At an investment of $1.5m a pop across the 17 companies in its first cohort, the total outlay of $25m is chump change for a firm that has nearly $4 billion of assets under management. In the worst-case scenario for Sequoia, it represents an inexpensive call option to take a punt on an entire cohort of companies.

The larger question though is whether Surge will be a game-changer for early-stage investing in India.