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Sequoia Shines

Published: 26 Jul 2009 19:03:20 PST

BURLINGAME, Calif. -- Marc Andreessen, in a recent Forbes interview, noted there are hundreds of venture-capital outfits slogging it out right now, trying desperately to squeeze profits out of a terrible investing environment--but only a handful worth their salt.

He's right. And this week's news that ( AMZN - news - people ) would buy online-shoe retailer Zappos for $807 million in Amazon stock, plus some cash, highlights the staying power of one of those perennial Sand Hill Road stars, Sequoia Capital.

Sequoia is the notoriously tough firm that backed winners like Google ( GOOG - news - people ), Apple ( AAPL - news - people ), Cisco ( CSCO - news - people ), YouTube and PayPal. (I could go on.) It also owned a big chunk of Zappos, a company with a somewhat unlikely business model that excelled by providing unparalleled customer service and shoe selection on the Web. Sequoia recently told its investors it put about $48 million into Zappos and will get just over $169 million from the Amazon transaction. That's not a "home run" in VC parlance. But it's a very respectable return of about three-and-a-half times Sequoia's original investment, particularly in these depressed times.

In the first six months of this year, there were only four tech-related M&A deals of over $100 million involving companies that took venture capital, according to Thomson Reuters and the National Venture Capital Association. (There were a few VC-backed IPOs in the first half, too, but no blockbusters.) The biggest of the tech M&A deals, Cisco Systems' $590 million purchase of camcorder maker Pure Digital Technologies, also involved Sequoia, which owned a small stake.

Sequoia's profits from that deal were very small, but it still made a nice return: Sequoia told its investors in March that it invested just over $1.4 million in Pure Digital and would receive $13 million in Cisco shares and $1 million in cash after the acquisition. (The biggest VC-related deal in the first half of this year was Medtronic's ( MDT - news - people ) $700 million purchase of CoreValve, a company with a new catheter technology to improve heart-valve replacements. Sequoia doesn't do health care investing.) Plenty of other VCs have sold companies in fire sales this year for less than what investors put into them.

Sequoia has had its stumbles too. Flush with earlier successes, like YouTube's sale to Google, the firm last year tried to branch out into new types of investing. It had visions of starting a hedge fund and an endowment-type investment vehicle that could put money into assets as varied as real estate and commodities. After two key staff departures, it's unclear if Sequoia has moved forward with those projects.

Michael Moritz, the Sequoia partner responsible for the Pure Digital and Zappos deals, didn't respond to requests for comment.

On the early-stage investing front, there has been speculation that Sequoia pressured Zappos to do the deal with Amazon, so Sequoia could finally glean some profit from its investment. Zappos CEO Tony Hsieh, in a statement, called such rumors "simply not accurate. Nobody was forced to sell to Amazon."

These kinds of conflicts arise between VCs and their portfolio companies all the time. The bigger takeaway from the Zappos deal is that Moritz's firm, hard-nosed or not, is still making good bets on early-stage, high-tech start-ups--and should probably just stick to its knitting. The Sequoia portfolio remains risky, with lots of investments in so-called "Web 2.0" companies that may not pan out. But in a sea of underperformers, Sequoia is floating to the top right now.

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