Sequoia keeps growing, raises another fund

Sequoia Capital raised $175 million from 83 accredited investors for a new growth fund, according to a regulatory filing.

Sequoia Capital Growth Fund III AIV appears to be distinct from the Sequoia Capital Growth Fund, which closed $861.5 million from 82 investors in May.

The firm did not return telephone calls or emails requesting information about the filing.

It is possible that this filing is for a China-focused growth fund, since the firm was raising such a fund in August, according to a source familiar with the firm. No information was available about the size of the China growth fund or whether it would stand separate from the Sequoia Capital China Principals Fund I, which raised $20 million in 2005.

Sequoia has already raised $400 million for a growth fund in India. And the firm beefed up its China investment team, hiring three associates last year. The firm brought Kevin Pan over from China International Capital Corp. Ltd., where he was an investment banker. It hired Glen Sun away from General Atlantic, where he was focused on IT-related growth stage investment in China. And Sequoia hired Shauna Xie, who was a management consultant with the Monitor Group. The staffing increase mirrored an increase in the U.S. staff associated with the firm’s domestic growth fund.

Growth funds are nothing new for Sequoia. It has managed a growth fund in parallel with its core early stage funds since the late 1990s. The first version, Sequoia Capital Franchise Fund, raised $350 million in 1999. Its latest growth fund is flexible across deals. For example, it invested in privately held ITA Software. The 10-year-old company, which designs back-end processing programs for airlines, raised $100 million from Sequoia, Battery Ventures, General Catalyst Partners and Spectrum Equity Investors.

Sequoia’s growth fund also plays in the public markets. It worked with Francisco Partners in June for a $42 million investment for Blue Coat Systems (Nasdaq: BCSI). Blue Coat used the cash to purchase Network Appliance’s NetCache business.

Sequoia has also participated in buyouts of tech companies. Through its various funds and partners’ money, Sequoia represents the single largest investor in buyout shop Francisco Partners, according to Francisco Managing Partner Dipanjan Deb. And buyouts have been going gangbusters of late, with one-year returns more than double that of venture firms during the last quarter of 2005.

Maybe that’s what convinced Sequoia to partner with Kohlberg Kravis Roberts & Co. to buy 85% of the software division of Flextronics for $765 million. (Sequoia bought a 9% stake.) The deal was likely brokered by Michael Moritz, who had previously invested in Flextronics and sat on the company’s board until October 2005.

The firm’s ability to close another growth fund so quickly on the heels of its third fund suggests investors are optimistic about the firm’s growth strategy.

As PE Week reported last week, Draper Fisher Jurvetson is still raising its first $250 million growth fund. It crossed the halfway point this month after one year of fund-raising efforts. One source who claims to have seen DFJ’s growth offering says: “The issue was the lack of differentiation, in terms of their product and what exactly defines a growth deal. They were not very good at explaining how those growth deals differ from the things PE firms might look at, or larger VC funds.”

Sequoia, it seems, has no such problem.