Special: Sequoia Capital's Investment Playbook (with Alfred Lin)

Transcript from https://podmenti.com/t/c321f4cbd268c92c

I'm Ben Gilbert and I am the co founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle.
Oh that's me. And I'm David Rosenthal.
Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them.
I'm Ben Gilbert, and I'm the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle.
And I'm David Rosenthal and I am an angel investor.
Based in San Francisco.
And we are your hosts.
Sequoia Capital needs almost no introduction.
When we did the comprehensive two part series on their history, we noted that they had investe early in companies that went on to be worth over three point three trillion dollars.
At the time, the market cap of the entire NASDAQ was about ten trillion dollars.
I'm sure both of these numbers are dramatically higher right now as we record this in January of twenty twenty one.
At the end of last year, we saw a Sequoia double header in the two enormous IPOs of DoorDash and Airbnb.
Alfred Lynn, a partner at Sequoia, sits on not one, but both of these boards. And as pointed out by Dan Primack at Axios,
These were his first two IPOs after his decade at Sequoia.
It certainly pays to be patient.
So after that, we couldn't help ourselves but reach out to Alfred to have him back on Acquired and ask the questions.
How does Sequoia identify these investment opportunities?
What is the internal playbook for creating their famous prepared mind to evaluate such opportunities when they come along?
And today we dive into what this all means in practice at Sequoia, and we take a few lessons from what they've learned in over forty-nine years.
Of finding and building.
Great companies.
So David, who is Alfred?
Forty nine years.
Yeah.
So Alfred.
As we covered.
with you on our Zappos episode.
Alfred, you are the CFO of Link Exchange and Tell Me Networks, the co-founder of Venture Frogs with Tony Shay, and then of course
the COO and chairman of Zappos until its sale to Amazon.
Today
Alfred is a partner at Sequoia, where he manages the early stage business in the US and sits on the boards of Airbnb, DoorDash,
Fair, house, instacart, reddit.
Zip line and more.
And of course, I know, Alfred, you're gonna shrug this off and use the Robert Lewis Stevenson quote that you love about judging each day by the seeds you plant, not the harvest you reap.
But
We have to congratulate you.
on those two IPOs, DoorDash and Airbnb last month.
Truly amazing.
Well, thank you and thank you for having me on the show. I would point out that this is a team effort. Many of the companies that we work with
I may represent Sequoia on the board, but uh it is the whole partnership that brings the weight of Sequoia to the table and helps those companies become legendary companies, and we couldn't have done that without the spectacular founders that we partner with. So
The kudos goes to them for having the courage to start those companies and wanting to put a ding in the universe.
Love it. Well that is everything that we are gonna talk about here today.
All right listeners.
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David.
Take us in.
So, Alfred, to kick things off, can you give us a little bit of the just sort of history of how
This idea at Sequoia of
Wanting to have a prepared mind.
Going into
markets and investments and meeting teams came to be.
Well, I think it all started with Don thinking about the market. I think the thing that we look for is a combination a great founding team and a great market. And great founding teams find great markets or they find a wedge into that market or they find
What's wrong with the market and then
they discover that there's a problem that the world has gotten wrong, and they want to go fix that problem. And we've always had to sort of listen to founders because they come from the problem of solving their own pain. And they may not be thinking about the market per se.
They're thinking about the problem that they have. And so to
pair up and to work with and partner with these great founders.
We had to come prepared.
uh thinking about the market and thinking about what the market can become. Because nobody's gonna sort of wake up one day and suddenly know, Oh yeah, lots of people were gonna share their bedrooms or their couches with a total stranger. Nobody's gonna think that if you don't have density in
the suburbs that you can actually make a delivery service
work. But you do have to sort of think about this from a sort of perspective of
Being prepared.
and thinking about both the market and the ability of the market to grow and change.
We often talk a lot about prepared mind because
Chance favors the prepared mind, as Louis Presteur would say. And when Jen gets joined Sequoia, he had
identified a lot of interesting areas to invest in and
You know, he was he pioneered some of our uh thinking of having landscapes and having a prepared mind for the mobile landscape.
for the rise of the developer.
And he would work and try to understand the landscape of what was possible. Where were the white spaces? Where were the places that you can actually build a company because the incumbents, the legendary companies of the past, were not so much focused on those areas.
In um if you wanted to sort of think about in Airbnb's case, Greg McAdoo had been thinking about timeshares and vacation rentals for a long time because
It was kinda weird that
Hotels were slowly being aggregated and
There were sort of
being aggregated onto global online
Travel platforms.
But that wasn't quite true with timeshares and vacation rentals to the same extent.
And it didn't lead necessarily immediately to an investment.
But it gave us a sort of prepared mind on localized listings didn't really exist. C R BOs and home away, which made most of its revenue was from advertising rather than booking it and the transaction itself.
So when we saw Air and B and B, it's like a completely different vector and a different way of thinking about the business.
And in DoorDash's case, since you asked about DoorDash.
Between twenty eleven and twenty thirteen, with the rise of the on demand economy, we actually evaluated a variety of investments opportunities in this space. And we met with GrebHub, we met with Caviar, we met with Postmates.
And each time we pass, not because we were uncertain about the market size, we were actually
We noticed that this required a very, very operational.
founder. This business is going to be won by both
having a differentiated strategy but also a person and a team
that was gonna be very, very focused on operations. And when we met Tony
That was the combination we saw. He had a differentiated approach.
And the differentiation for him was the strategy of focusing on
The merchants.
And in the suburbs.
And the thing that he also brought up was his keen eye for operations.
And so
We unfortunately decided to pass on the seed.
And then that's my fault.
It took time for us to sort of understand that Tony was a different character.
He had both the strategy side.
As well as the operational side that brought what we consider
founder market fit. And we invest in their series A and in every single round after that.
And as you think about
the way that you had previously thought about this food delivery market, the way that, you know, Greg had been thinking about the timeshare market and all that was wrong with it and aggregating it. How does something bubble up within Sequoia from someone's sort of personal fascination with something to doing proactive work to come with a prepared mind when you do start to see pitches?
Yeah, so I think the answer, the simple answer is there's no straight formula for any of this. I think the way that it has bubbled up has come through because we identify a trend through just reading.
We're curious about
Vacation rentals, we start reading about it, we start digging into it.
And nothing may come out out of it.
for that particular point in time and then later on it becomes more important. It can be a full blown landscape that you sort of plot out and
write up a memo about exactly what's going on in the landscape, who are the players, what's going on, where do we see white space.
And it could be anywhere in between. Mention it to your partners. What do you think about this idea? What do you think about that idea? We have blue sky sessions every quarter where we sort of just try to dream.
This business is about
Inspiration just as much as as about prespiration.
We need to both
hustle, but at the same time we need to be able to sort of think and be inspired about the world.
And some of it comes from reading and some of it comes from just talking to founders.
Other landscapes have started because we met an interesting founder with an interesting idea. They're actually still riffing on the idea with us, and we go deep with them as well as go deep with other founders who are in that space trying to sort of make sense of what's going on.
And so
I think the sort of the ways that this has come about has come from
complete randomness and serendipity to very, very structured thinking.
The great part about Secor is we have a partnership and we have people who love to be
proactive and think structurally and we have partners who love to
Being uh
ecosystems meeting lots of people and riffing ideas with lots of people in an imaginary way.
And dream up ideas with others.
So this is a business that you can do well with both someone who's an introvert as well as a as someone who's an extrovert.
When you get to the
landscape stage. You know, whether that's
As you're looking at a space.
as part of a team at the firm, or or or maybe you're looking at a specific investment and you're you're doing diligence on that investment. What are the key
Things you're trying to understand. I mean, you know, Don and some of the old uh like the talk at GSB and uh the oral history with him, you know, he talks about
needing to understand what the change is that's occurring in the market.
needing to have a very specific
problem that the company is solving, needing the timing to be right. What are these key features that you guys are focused on?
The simple questions are you you've heard before. Th is why now? What many of these ideas have
people have thought of in the past. It's not the first time that someone has decided that we should deliver food. There in nineteen ninety nine there was a company called Cosmo that opened up in New York. So
That didn't work. Why is Instacard in a much better position today than they were when Web Van started and Web Van didn't work. I think there are specific good reasons for why now and then there are times when there's not a good why now.
And in Instacart's case or in DoorDash's case, the Why Now has a lot to do with mobile and the on demand
economy, people have always wanted instant gratification.
But the ability to get
A sort of a
on demand workforce.
Was not available.
in nineteen ninety nine because not everybody was carrying a mobile phone.
So
There are sort of situations where you have good why nows for a particular company to be able to sort of take off.
The other question we ask all the time is in ten years, why who cares about this company? Don used to ask.
Who cares?
And
It applies to
Who cares today, but it also because we're investing early and we partner early, we partner at the idea stage.
at the seed stage and the venture stage at the series A.
The company has to be an important company ten years from now. So who cares ten years from now?
And what does this company become ten years and now?
So imagination about that and what
happens when everything goes right.
is really important.
No, so we do ask
If everything goes right, what does this company become?
In the early stages, easy to spot why the company may fail. Then it's quite easy to write the pre mortem of a company.
What will go wrong? What are the major risks?
It sometimes is very hard.
To really write.
about what this company can become.
Do you find that founders know this at the seed stage? I mean, David and I know this from meeting with very early stage founders that so much is gonna change in the dynamic market n over the next ten years. Do great founders
know what could go right picture looks like. Does the Brian Chesky of today are they able to fully articulate that they'll overtake hotels?
I think it's easy to sort of look back from now and it was obvious, but at the time it was not always obvious.
And I think what they will articulate
Is that people should do this this way.
The way I view the future
is a far superior future.
And I think that that's the dream that you have to be able to riff on, and whether if that's the future, can you build a really large company? And in some cases.
it's more obvious because the market is so large. If you get
just even a slice of the market, you'll be in good position. In other cases it's less
easy because you actually have to dream that the market gets bigger.
that you're gonna change behavior. You're gonna take away from a different way that people
used to do something. And both can happen. And we we generally like
the more non obvious markets where
they're good tailwinds and the markets could be small at the beginning and
it can grow over time. Everybody knows where all the large markets are, and it's generally a bloodbath when you enter those markets. And so
You know, I'm not saying that
You know
Competition.
is not going to happen in any of any company. Like in every company. If you're afraid of competition, you should just get up because if you're at all successful, someone's gonna come after you.
But I think
For a startup you kinda want some air cover at the beginning.
You don't wanna go into a competitive market and go head on with a large competitor on day one because they'll just crush you.
And so you need areas of white space, you need
A market entry strategy where people think
You know, you're that's that little company, oh well you know, that's kinda cute. Go ahead, you can take that.
You know, in in innovator's dilemma, they talk about all the low margin stuff. They alwa the big companies always give the low margin stuff to
The startups because the startups, yeah, who cares, there's not a lot of margin and that they get really, really good at that because they figured out how to make money with low margin and they go up market to the higher margin stuff and then eventually they uh they overtake the industry.
That is one way, obviously, of entering a market. There are other ways of entering the market, just with a superior product. So you get
more and more people to sort of talk about you and you know, if it if it's ten times or twenty times better product, then everybody's gonna talk about you and
will migrate to you. There are other ways by having a completely different strategy.
If you think the f everybody thinks this is a future, it may be someone else's bug.
not everybody is the same. You're not gonna capture a hundred percent of the market in some something as big as travel.
But it's the ability to differentiate yourself from a current trend sometimes that makes you
Successful.
And I think in both Air B's case and DoorDash's case that
Is exactly what happened.
I'm super curious and I'm sure everybody listening is too right now.
When you're debating
That
question within Sequoia. Like
Is
Brian.
Right? That like the is this gonna move beyond airbeds? Like

This is cute.
And you're debating
Is this gonna be more than cute?
What does that look like inside the firm?
It has a lot to do with
the sponsor s in Airbnb's case, Greg, and uh in
Door dash just case me sort of painting a picture of the world that
and showing the conviction of why you believe that this is going to be the case. And
And it happens over and over again, right? Like if you you might be a uh investor in the seed like we were in Airbnb.
And then in the A you still have to sort of paint the picture again and maybe is it bigger? Sometimes these companies it's easy to dream with them because they
Every single point along the way.
Dave out.
Stripped.
Everybody's expectations.
Because there's more usage or more revenue, but the
Сорвай the world has r react.
to
The company
Is
Just phenomenal. You know, we
We just Doug Leone used to always say don't find the
the tape and sometimes the evidence is just in the tape where like they just keep growing, they keep doing well, they attract great talent, people love the service.
And they continue to sort of broaden their vision. Every single one of these companies had challenges.
Airbnb had a PR crisis with E J. They also had a crisis where people were
fighting tooth and nail with them and copying every single pixel of their website.
In Europe and
They decided
That they wanted
to win Europe and
They were either going to potentially buy Wim Do or merge with them or
Have to go
down the path of a pretty expensive
Ground war. They decide to do that and won.
And so like some of these things have to do with just being crafty and being smart about exactly how you go about
winning and coming out on top.
I'm curious to um
dive in on that a little bit. So they decided to do the very expensive ground war with Wimdu.
And you know, part of that financing came from you. How did you think about evaluating whether that was a a good use of capital versus any other place that you could place that marginal dollar as Sequoia?
It's always easy to say in retrospect that um
It was obvious and everybody talks about that, but
It it what's obvious at the time is that travel is a global network effects business.
And maybe not today during the pandemic. Uh it's more localized.
But
We're going to get past the pandemic, we're all gonna get vaccinated, people will go back to traveling, traveling won't be the same as before.
But we all love visiting different parts of the world.
And what is true is that you you want to travel to different parts of the world and
more than you do locally. And
If you win that, if you win the
supply you will most likely get all the demand.
And that was the reason why we had conviction.
on investing more in later rounds.
Makes sense.
I'm curious in that specific case with Airbnb.
You know, of course, we covered it so many times on this show, the Airbnb episode, many others.
That global network effect.
Is so powerful.
you know, one of the reasons why
Airbnb has, you know, been able to build so much power in the Hamilton Helmer sense over the years. When did you guys realize that at Sequoia? Like was that part of the thesis going in like if this works, if we can build up supply and demand
Globally, like
There is an opportunity for a global network effect here. Or is that something that revealed itself
Over time as as you were saying.
You can create one. It's not that we
It's not that it it got realized on the first uh on our seed investment.
At the seed investment they had a listing service, right? They they had
Two thousand m or so listings.
Uh they had a few transactions. It was
Definitely not a network effects business at that time.
But you have to dream that if you get
enough of the supply, it should be a network effects business. That's part of having a prepared mind. Uh the sort of concept of a marketplace
Has been around for a while, pioneered by eBay on the internet.
But it wasn't the only
marketplace. We've had other marketplaces and it
A stock exchange as a marketplace. And so
Having a prepared mind allows you to think about
These conceptually.
into the future.
Even though it it may not
Ring true.
The day you make the investment.
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I wanna switch gears a little bit here and talk about market size, which
for any early stage entrepreneurs listening who are currently in a small market but are dreaming as is the way you put it, Alfred, could be a big market, they've encountered the experience of banging their head against a wall because they keep getting these pass emails from venture capitalists that say market's too small, market's too small, market's too small. How how do you
Think about it
as a great investor, whether the market is small today and will stay small.
Or whether the market five, ten years from now could be enormous and how do you work that into your investment decision?
That's a great question. I think the the reason why there's a lot of
passes on market size is, you know, Warren Buffett famously said, when a management team with a reputation for brilliance tackles
A business with a reputation for bad economics.
It is the reputation of the business.
that remains intact. And it is good advice and it's
It's not a vice that
I often talk about with founders because I think the the the one thing that
Is a little different at the early stages.
Is that
You're going after non obvious markets.
So if you go after a obvious market, as we talked about, and there it's a very large market, there's intense competition because it's it's obvious.
And then if you go after a small market
And it's obviously a small market, that's also a bad idea. The question is, are you actually in a small market that looks small today, but it's actually going to be a big market in the future? And that's how I kind of
would like to have that conversation with the founder. Why is this market going to be large in the future? And
There's a bit of the founder doing some work, there's a bit of the investor doing some work, and we certainly do our own work at Sequoia.
And then we work with the founders to sort of think about it and
Some of it has to do with what are the trends that are carrying you in this business. It's not it's not hard to know that
Mobile is gonna be a big trend back when mobile
was a big thing, but mobile had some fits and starts as well. We thought we could
build mobile just on a StarTak phone.
But the user experience wasn't great.
Mobile really started to take off because the smartphones started to take off and
it was a full functioning computer. That that sort of was what carried mobile through
for many, many years. The move to SAS was actually identified way before
This current wave.
Because
As soon as you saw people moving racks into co-location spaces, you could kinda see that more and more software is gonna be written.
and put in the cloud. You know, it took AWS coming around where developers are starting to build for the first time right straight
into someone else's rats, not your own.
that you're like, Okay, well this is gonna carry
for a long period of time because it you know what it lowered the cost.
of starting a company.
A developer
Jim Getz, who talked about having a prepared mind. He
Talked about the rise of the developer as a landscape because
The developers didn't have to
Rack their own racks anymore.
They didn't have to s sort of go raise a bunch of money to buy the servers and put it in their own colo.
What they needed.
Was
just be able to have a credit card and start coding and put it on AWS. And so you could see that that was going to be a trend for some period of time. There's that uh amazing moment that we talked about in the Airbnb episode where um the
Y C startup school where Bezos sort of
Launched.
A W S to startups was the startup school that Brian Nathan Joe went and
Attended before they did Y C.
And it again, like, you know, th those are the type of things that you know, these these little things happen and then you realize it's gonna unlock a an explosion because

Brian, Joe, and Nate would have had to rack their own servers, right? Like that that's for them, that's no fun. Cause two designers and and someone who wrote code and
I don't think Brian or Joe. Maybe Nate would be okay with uh going into Colo and racking racks, but I don't think Brian or Joe be particularly happy doing that. They they want to dream about what yeah, the company might have been like DOA if they had to do that. Yeah. Exactly. Those trends that carry you are quite important.
You know, th I often talk about
There are three components of a pitch
And some founders do all three well, and most founders do the first one well, which is like, What's your vision of the world?
And so the beginning is you paint this
picture of what you
What the world to become.
You've experienced personal pain, that this is not the right way to do this. You show how passionate you are. You have a vision of the future of how the world's gonna be different.
Then you have the realities of today. Paint the pictures of what's going on
and why this is broken, how you can fix it.
How do you think?
customers you think you can get because they face the same pain that you do. And then
To connect the dots between those two worlds.
You kinda have to sort of you know
You won't have to paint the whole picture, the whole path of how you get from
where you are today into the future.
But you do have to sort of show us like
How exactly are you gonna get from
a few thousand listings at Airbnb
to more than that. You do have to sort of talk about okay, well if you're not gonna focus on the cities where all the
Volume is
And all the density is. How do you win in the suburbs? If you want us to believe in the suburbs strategy
How do you win the submers? And
In both cases they had very good answers to these questions.
The sort of notion was it didn't work outside of New York City because the only reason it worked in New York City is be was because of the density. And
That was a false
Assumption.
It was not backed up in fact.
Antonio was very, very good at like pushing on that. It's like does it only really work in New York City or does it work elsewhere?
And c how can it work elsewhere?
Right.
Well it's funny, we've danced from this idea uh you know this question around market size to this this topic in unit economics of you know, will it work in a given market?
And you know, Don among
Only a few other factors early Sequoia days would say that the the very important things in evaluating an opportunity are the market size, because no one ever started a huge business in a small market, and the potential for large gross margins. And I'm curious
as you come with this proactive stance and a prepared mind when you're meeting with entrepreneurs, how do you apply that thinking
in unit economics and is it still important today to be able to start a business with high gross margin ability in in sort of your eyes? The answer is nuanced. I think high gross margin, as Bezos would say, it's not about margin percent. It's about margin dollars.
If you have
large margin dollars, that can be okay even though the gross margin percent is not as high.
If you're going after a low
gross margin percent business, you just need a ton of volume. So you need high repeatability.
And the notion of gross margin is a strange thing. If you look at
Store dash from a GMV standpoint, then
their gross margin is really low.
But if you just look at their take.
If you net out everything else then their margins are decent. And the same is true with Airbnb.
People don't think about this, but nobody measures Airbnb's margins off of their GMV. They measure it off of their take rate. And so some of the stuff is a little more more nuanced than that. Software businesses, you're paying for just the software. You're not looking at all the sort of transactions that happen on the software.
The reason why unit economics is important is because eventually y this has to be a business.
to be able to be valued highly, eventually you'll be valued off of your profits and a multiple off of your profits. And the confusion I think is the availability of capital.
In the last few years
A lot of people have complained there's too much capital in the system.
There's always been too much capital in the system. When I started ten years ago, I was frustrated there was too much capital in the system. I I remember sitting my desk was right next to Mike Moritz's and I
Said hey there's just too much
money in the venture ecosystem. He's like, Yeah, thanks for observing that. You know, go back to work and and it's your job is to figure that out.
And I was like, That's not a satisfying answer and he's like, Well, there's too much capital in the cisna, I agree with you.
Well, you know what? Ten years before you, there was too much capital and twenty f years before you, when I started the in the venture business, there was too much money in the system. There'll always be too much money in the system. And
The thing that we've learned over time is that the winners
get a disproportionate amount of the market cap.
And if that's true, then they also will
by just simple logic
investors then want to invest in the winners, and so the winners get more and more of the capital.
And if there is more money in the system today, the winners will get more money.
And that allows them to do things slightly differently.
And I use the
sort of case where
In e commerce when
I was at Zappos, we needed to make sure that the payback on the CAC was
On the first order.
Well, I don't think any company today in e commerce does that. If you have more capital
If you know it works on the first order
Then if I give you a little bit more capital, maybe you can extend it to
Seven days or a month.
Or
you know, six months or a year. I do think that this this transitive property doesn't always work. You g you know, it's not like if it works with zero cap you can do it for, you know, a year, two years, three years, four years. At some point it breaks because
At some point you won't be able to raise enough capital to keep you afloat, but I do think there is more willingness
To see
Unit economics payback.
over a longer period of time if the market is large.
Yeah, that makes total sense. So
You know, unlike
The early days of Skoya for sure.
You have different entry points where you can partner with companies now, whether it's
Dreaming with the entrepreneur at a seed stage.
Or
partnering at the growth stage with more established companies that have already answered some of these questions.
As you're thinking about a given market.
How do you decide what the right you know is that winner that you mentioned that's gonna get
the lion's share of the market cap in a space.
How do you decide if it already exists and you should go invest at the growth stage?
Or there's still an opportunity for a new entrant at the seed stage. I think the simple answer is that we at Sequoia want to identify the most important companies of tomorrow as early as possible. So we do want to partner with them at the seed stage.
And
be there for them from idea to IPO and beyond.
Point out that there's so much going on in the world. There's so much innovation that we're not gonna get to every great company at the seed stage. And so they're going to be
Companies that we miss at the C that we'll do at the A, there are companies that we miss at the A that hopefully we do at the B.
And uh company that we miss at the B that hopefully we pick up at a growth round.
So in some sense
we we can enter at many different levels, but also what's an interesting company at the seed is gonna look very different than a company at the A or the company at a growth round. You know, just a simple sort of idea like what's happening at the seed, identifying new markets, you have this view that the market will be very, very
different a few years from now is different than a growth round. You may be looking for a developing market that continues to grow, but it is somewhat established, if not already developed, when you make an investment at the growth round.
Makes total sense. That also brings up a question I've been trying to ask you guys.
The other
dimension that's changed over the years at Sequoia is not just stage at which you invest, but geography too.
And obviously you have a
Very robust practice in China and India and now you're building one in Europe, everywhere around the globe. How do insights
And learnings from each of those geographies.
influence your thinking back here in the US and and each other.
The fact of the matter is you can start a company almost anywhere in the world and talent is evenly distributed and opportunity is not, is uh is a quote that lots of people uh said. We're doing this we're we're sort of expanding around the world because we want to be a global partnership and we do learn from each other.
And sort of their observations around the world are that
People are pretty similar. They do things slightly differently because of cultural reasons or how they grow up.
But we kinda want similar things. From a consumer standpoint, if something works in one geo, it's likely to work
Maybe not the same exact sort of formation.
But it's likely to work somewhere else. And vice versa. And
Yes.
You come up with a great, interesting
sort of efficient way of doing things on the enterprise side, it's probably gonna be wanted
in different parts of the region.
And just
As an example with DoorDash, we're investors in Maituan and in China and there are a lot of learnings back and forth about w what works, what doesn't, how much market share you need to get, how much the unit economics changes when you get to scale, et cetera. So so the growth path, the the sort of
viability of the business, those things can be learned across the world. And then the other thing related to the pandemic
I think there was a lot of learning China faced this virus
First.
Tony called up people around the world that were facing the same issues and Tony realized the most important thing was to keep the restaurants open.
There are parts of the world where the restaurants are closed. So long as you keep the restaurant open, then you can fix some of the other issues. So they onboarded restaurants as much as they could. Once you did that, then you needed to solve the f issue related to
drivers will provided them with masks and PPE and also worked on contactless deliveries. And if you did that and you got the food safely to the customer, the customers obviously wanted to to order.
Yeah, I'm curious, y you brought up this idea that we keep in touch and and we learn from each other around the world.
as Sequoia grew from a few partners to, you know, several pieces of a larger partnership in these global offices.
obviously you increase the overhead. You could spend all your time communicating with each other. You know, it's a large organization with sort of communication networks like any other. So how do you
Find that fine line. Like I'm curious if you have a meeting cadence or anything like that where you do get to learn from each other, but you're not spending all your time communicating with each other. No, we it's very lightweight. Sequoia is structured in a very decentralized way. Each group makes their own investment decisions. Each geo makes their own investment decisions. And we do that on purpose.
Because what's on the ground is way more important than the global themes and the global trends. You
you can think about the global themes and the global trends on a quarterly basis, but you're acting locally every single day. So we try to think globally, but act locally.
And that's the mantra that we have inside of Sequoia. What did the different operating teams sort of look like, just so people get a sense of
scale. I mean, they're not very large, right? Uh like you're like how big is is the
US early stage practice. The early stage team is about fifteen people.
It's just not a big team. But you know, the way we think about it is
While there's a lot of opportunity, each one of us are only gonna make one or two seed investments or one or two venture investments a year, and the reason we keep it small is because what we enjoy is to partner with the founders as early as possible and
help them and their companies reach their full potential.
And not
is an enormous amount of work and we enjoy that part just as much as meeting new founders and
thinking about the future. But once we make an investment, we want to
bring the future to fruition. It's not just about making the investment. We don't really think about buying low and selling high. We think about helping founders reach their full potential.
Bring
the future that they
Envision.
to reality.
The next thing I wanted to ask in many ways it's
Sequoia's history that is
Sparked me thinking a lot about this over the past year.
And you the Apple investment that we've covered so many times of you know, that was an early example of I think buying low and selling high that
In the long run.
Probably served Sequoia.
Not nearly as well as it could have. I think you guys made six million dollars in net profit on the on the early pre IPO Apple investment.
How do you guys think about
Time horizon, like
Obviously
You need a long time horizon as you're talking about, and that's the way to compound capital.
At the same time.
You are a fund structure, a series of funds. You have limited partners. They want distributions at some point.
When do you guys think about the right time to start to distribute out your investments? We we think about whether the company has brighter prospects
in the future than they do today, and if that's the case then
we continue to hold. We we don't actively think about distributions from a IR or money on money perspective. Yes, obviously we are a fund and we get measure that way, but
We're very proud of the fact that our ass held
multiples are higher than our net multiples of
the stock that we distribute. It's a deliberate strategy that that's the case. And so
The reason that that is, is because
We both pick the right founders who want to build long lasting companies and we help them focus on what's enduring about their business.
you know, you're just a lot better off focusing on the long run than on any short run.
swings up or down in the market. And so when we distribute it's yes, it's because it's maybe the end of the life of a fund
But it's more about even when we distribute, we we hope that the company has much longer prospects than when we
the day we sort of send the shares to our LPs. We distribute shares and let our LPs decide whether they want to sell or not. We generally don't sell the stock.
It's funny, it's a nice thing to say to say, you know, we're long run focused over short term focused, but in the business that we're in
it's quite literally and mathematically just a much, much better strategy given how much of the area under the curve of a compounding returns business shows up in those later years. I mean I think I heard a stat recently that was Amazon made
as m or more money in its twenty first year after IPO than in the entirety of the twenty cents IPO. And so it's it's just funny to think about these businesses that we're in
Like the opportunity to invest where you're investing does come early, but the real returns do come much, much, much later.
It it's a testament to compounding, the thing that people don't get right, and it's hard for us to understand compounding.
Because we're human and we like linear projections as opposed to exponential projections. We get it wrong in the beginning and in the end.
Uh I think the the things you get wrong at the beginning is you're y it looks linear. It's not
it doesn't look like it's compounding. Well actually early years of compounding look very linear.
And in fact at any single point in time, at any point
compounding it still looks linear exactly where you are. Tangent half yeah.
The tangent of it looks very linear and it's not that far off from being linear, or you draw the line wrong.
It's almost always more obvious after the fact.
uh that you're in a compounding situation. I hope that people understand that more given what's happened with the pandemic, because that is also an exponential growth sort of situation, and we always get
Surprised.
And then we clamp down after the fact and we still continue to see like cases
After
People to take more c precautions.
over a longer period of time because compounding
Sticks it's a hard thing to reverse.
Mm-hmm.
It's such a good point.
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Well, I've I've one more sort of structural question here before we start to wind toward the end of our episode. So uh a lot of people who are building firms or building enduring institutions of any type look to Sequoia as an example of forty-nine years high performance at almost every, if not every stage along the journey.
building from a small group of people into a globally distributed team that runs like a well oiled machine, at least perception from the outside. And I'm curious, what are some of the practices
That
have contributed
to allowing you to learn and get better and become that enduring institution instead of something that flames out at some point. And I I'm thinking, you know, do you do postmortems? How do you think about learning from your mistakes, learning from your successes? How how does that all happen?
Well this is gonna sound trite, but the it had to deal with Don starting out and say calling it Sequoia Capital instead of
Valentine Capital.
He had set the culture right at the beginning. And this is a people business. We hire partners that then
Interface with our founders.
There's very little secret sauce in this business, and the simple fact of basically calling it Sequoia Capital because he wanted to build the tallest tree inside of Venture Capital
Makes a statement. It also makes a statement that that
The firm is not his.
that he's around to start the
Firm and then he's gonna hand it over to
Mike and Doug.
And it's their job to sort of keep
Sequoia going and at some point they're going to go and
they're gonna hand it off to the next generation, the next generation after that. And you're pointing out that he he didn't put some high value on the management company because it had been so successful to sell to the next generation. He literally just said, You now own the management company, right? Yeah, and nobody owns the management company at Sequoia. The GP's sort of
manage the management company and we don't view it as
owning it, we all view it as
We inherited it from the last generation, and it's our job to make sure that we pass it on to the next generation.
In better hands.
all of us come to Sequoia being able to stand on the shoulder of giants, and we want to make sure that this place is better off for the next generation.
And just coming off of that
is a huge base.
To be able to build upon.
In terms of like constant learning, yeah, th this business
You need three key ingredients, and I think w I've said this before, which is you need
You know, you need high IQ, high EQ, and high hustle.
And then you need to apply it appropriately.
If you're just super smart but you can't
influence your founders or have them influence their management team to do
the right things, that's not really
Gonna work.
Just because you can identify something wrong with the company.
This is a g this is a business of influence. You gotta influence people that take your money because it's your money is just as green as everybody else's. But more importantly, after you make the investments
And you become partners with the founders, you have to influence
Than to
do a bunch of things that they may not like because most founders that
have strengths and have weaknesses and they're really good at certain areas and then you have to influence them to sort of round out and build a company and not just a product or a feature. And this business is high hustle. You hustle every single day going after a theme or a trend. How do I
Think about that and turn it into
understanding the whole landscape of what's going on and then picking the right founder
to partner with to build a company in that space. Those things
require enormous amount of effort and time. It requires being both a sceptic
about what's gonna go wrong. It also requires a lot of imagination for what can go right. And back to There's no secret sauce is if you want to be good at this business, you don't have to be a constant learning machine. You gotta think about every single day what
you can improve for the next day.
In terms of compounding.
That's probably the most important thing if you can just improve a little bit every single day.
You wanna suck less tomorrow.
Is the is the way sort of one way to think about it. And this is a humbling business. When I
Joined I remember Mike saying a line which was like drawing that this is a humbling business because you can
Make money.
Even if you got the investment thesis wrong and you can lose money even though if you got the investment thesis right.
If you don't get
Cognitive dissonance hearing that, you know.
You have to be both excited by that and also know that you're not gonna get things right every single day. And this is why
People who are in this business for a long time continue to love it.
There's the element of meeting founders that
They just
Even if you don't agree with them, they're in f it's infectious to hear them speak because they're painting a future of the world.
That's just different. And then there's the element of like
Gosh, I got that wrong. Gosh I got this.
wrong. Gosh, I made money on this, but I still got most of uh uh everything wrong. W was I actually good or was I just lucky? I always tell people if they want to join Venture Capital, they're like I'm gonna try to convince you not to join and then after all of the reasons why you shouldn't join
You still want to join, I'll tell I'll tell you more about it.
Because
It will take a decade or longer for you to figure out whether you're
good at this business or not. Maybe you'll find out you're bad at it because you don't y y you can't get in front of
interesting opportunities, you don't dream enough. You you can find that out relatively quickly, but you won't know that you're good at this for
A long time.
You're now in a position where
You're doing a lot of
Hiring, I assume it.
It's a quiet in the way that
You know, Don famously in the um D SP view from the top lecture, he held up your resume than the day you uh joined Sequoia. When you're evaluating people to to join the firm
What qualities do you look for that
give you an inkling that they might be good at this. Uh hi IQ, hi Q,

David, weren't you listening at all? Obviously not.
There's no there are no real requirements for this job, right? Like you can put anybody

they can become of great venture capitalists. There's a element of those raw ingredients and then there's an element of desire and
And sticking to
A sort of business that
It pays you to be in it for the long run. Like it
You're not gonna get your biggest gains.
On day one, you're gonna see all your losses earlier in your career.
And your gains take a long time.
to develop. So
You know, maybe the other element is
Just the focus on the enduring.
Which is one of our tenants.
Well, Alfred, I can't think of a better

I do want to give you the floor and say if founders are thinking about reaching out to you, who should reach out and how can they get in touch?
Yeah, just simply email me. I'm at Lynn L. I N at Sequoia Cap dot com if they wanna reach out to me. Another word of encouragement for founders doing
You're doing good work and sort of keep at it.
keep thinking about every single day about how
You can build a sustainable business because your s your business model and your business plan is the strategic weapon. We provide
Capital which is fuel.
But you need the strategic business plan first before
You can do anything with that fuel.
I love it.
Well, Alfred, thank you so much for joining us.
All right, thank you.
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