Sequoia breaks its own rules with Anthropic investment

Sequoia Capital, one of Silicon Valley's most influential investment firms, is joining a massive funding round for Anthropic, the artificial intelligence startup behind the Claude chatbot. The move marks a striking departure from the venture capital world's traditional playbook, which has long discouraged firms from backing rival companies in the same industry.

The funding round values Anthropic at $350 billion, more than double its valuation from just four months ago. Sequoia's decision to invest in Anthropic comes as the firm already holds stakes in OpenAI, the maker of ChatGPT, and xAI, Elon Musk's AI company. This portfolio approach represents a fundamental shift for a firm that once walked away from an investment rather than compete with one of its own companies.

Background

For decades, venture capital firms have operated under an unwritten rule: pick a winner in each sector and commit fully to that company. Competing investments in the same space were seen as a conflict of interest that could damage relationships with founders and dilute the firm's focus. Sequoia itself enforced this principle strictly until recently.

In 2020, Sequoia took the unusual step of abandoning its investment in Finix, a payments startup, after determining it competed with Stripe, another Sequoia portfolio company. The firm forfeited a $21 million investment and gave up its board seat and information rights, marking the first time in Sequoia's history that it had severed ties with a newly funded company over a conflict of interest.

That decision seemed to define Sequoia's approach to portfolio conflicts. Yet less than six years later, the firm is making simultaneous bets on multiple AI companies that directly compete with each other.

Key Details

The Funding Round

Anthropric is raising $25 billion or more in the current funding round, led by Singapore's GIC and U.S. investor Coatue, each contributing $1.5 billion. Microsoft and Nvidia have committed up to $15 billion combined, while venture capital firms and other investors are contributing another $10 billion or more.

Sequoia's involvement adds significant weight to the round. The firm's decision to participate signals confidence in Anthropic's future and sends a message to other investors about the company's prospects. Anthropic is reportedly preparing for an initial public offering that could happen as soon as this year.

Why Sequoia's Move Matters

Sequoia's investment in xAI could be explained as primarily about deepening ties with Elon Musk rather than backing an AI competitor. Sequoia is already invested in X, SpaceX, The Boring Company, and Neuralink, Musk's brain-computer interface company. Former Sequoia leader Michael Moritz was even an early investor in Musk's X.com, which later became part of PayPal.

But the Anthropic investment is harder to characterize as anything other than a direct bet on an AI company that competes with OpenAI. The timing is also notable, coming after significant leadership changes at Sequoia. In the fall, the firm's global steward, Roelof Botha, was forced out in a surprise vote. Alfred Lin and Pat Grady took over leadership roles. Grady led the Finix deal that resulted in Sequoia walking away from the investment.

"Sequoia backed him. He later became a 'scout' for Sequoia, introducing the firm to Stripe, which became one of the firm's most valuable portfolio companies." – describing Sam Altman's relationship with Sequoia

Sequoia's connection to OpenAI founder Sam Altman runs particularly deep. Sequoia backed Altman's early company Loopt when he dropped out of Stanford. Altman later became a scout for Sequoia and introduced the firm to Stripe, one of its most successful investments. Sequoia's new co-leader Alfred Lin has interviewed Altman multiple times at Sequoia events, and when Altman was briefly ousted from OpenAI in November 2023, Lin publicly said he would eagerly back Altman's next venture.

What This Means

Sequoia's Anthropic investment signals a fundamental change in how top-tier venture firms approach portfolio strategy. Rather than betting on a single winner in a sector, Sequoia is now comfortable holding stakes in multiple competing companies. This could reflect confidence that the AI market is large enough to support multiple winners, or it could indicate that the traditional conflict-of-interest concerns no longer apply in the fast-moving AI space.

The move also raises questions about how Sequoia will manage its relationships with both OpenAI and Anthropic going forward. The firm will need to navigate potential conflicts carefully, from board meetings to strategic decisions that could affect one company's competitive position against another.

For Anthropic, Sequoia's involvement provides both financial backing and credibility. The firm's participation suggests that despite intense competition in the AI market, there is room for multiple strong companies to succeed. The $350 billion valuation places Anthropic in elite company, though it remains behind OpenAI in terms of market perception and product maturity.

The broader venture capital industry will likely watch Sequoia's experiment closely. If the firm successfully manages competing investments without major conflicts, other firms may follow suit. If problems emerge, it could reinforce the traditional taboo against backing rivals.