How to Win by Being Right and Contrarian: Lessons from Zappos to DoorDash

0:00 One of the things that we talk about at Sequoia is you can't just be better. You have to be different too. Whether you want to be a conventional or contrarian, you have to be right. If you're Right and conventional it's probably a less interesting solution, but if you're right. And Um

0:17 And contrarian, you probably won't be able to make a lot more money. Because nobody's fault nobody's going after that opportunity. Um, I often find that it's interesting there are people who just wanna be contrarian, but if you're contrarian wrong That's not a great situation. I try to put things in these two by two matrices of Uh right and wrong and conventional and contrarian.

0:44 Welcome to the Knowledge Project. I'm your host, Shane Parrish. In a world where knowledge is power, this podcast is your toolkit for mastering the best what other people have already figured out. Today's episode will transform how you think about building and scaling transformative companies. My guest is Alfred Lynn. One of Silicon Valley's most successful operators turned investors. After meeting Tony Heisch at Stanford over a pizza arbitrage scheme, Alfred went on to help build and sell Link Exchange to Microsoft, then scaled Zappos from startup to its$1.2 billion acquisition by Amazon as the COO and CFO. Now he's one of tech's most influential people. Like a lot of outliers, Lin struggled in school, preferring to hack solutions together than follow instructions. Sound familiar? That changed with one of his teachers who made him realize the importance of enduring impact over short term gains. Whether you're building a company, scaling operations, or making complex strategic decisions, Alphur breaks down the frameworks and mental models that have guided him through multi billion dollar outcomes. We explore everything from his unique approach to company culture and hiring that helped make Zappos legendary to how he evaluates opportunities at Sequoia. To the crucible movements that shaped his decision making philosophy. This conversation goes deep into specific practices around scaling, competing with giants, and navigation

2:08 Getting technological disruptions while revealing the deeper principles that have guided him through multiple successful chapters in tech. His insights on building entering impact over short term gains are more relevant than ever as we enter the AI era. And of course, we talk about AI. It's time to listen and learn. There are too many podcasts and not enough time. What if you could skip the noise and get just the insightful moments, even from shows you didn't know existed? That's what Overlap does. Overlap is an AI-driven podcast app that uses large language models to curate the best moments from episodes. Imagine having a smart assistant who reads through every transcript.

2:55 finds just the best parts and serves them up based on whatever topic you're interested in. I use overlap every day to research, guess, explore, and learn. Give it a try and start discovering the best moments from the best podcasts. Go to join overlap.com. That's join overlap.

3:13 dot com You've had a remarkable journey from entrepreneur to investor. And I wanna know more about this story, but I wanna start with some of your early life experiences that Changed. you and impacted you in the future.

3:31 I guess I was born in Taiwan. Um The two parents who um were both commercial bankers. Um And an early age the From what they tell me I was always a little bit

3:43 I saw the world a little differently, and did things in a little different. The story that they like to tell about me being different was when I was about two years old. There's a new dresser that was delivered through our apartment in new uh in um Taiwan and I figured out a way to get to the top by pulling out the first drawer, crawling into it, then pulling out the second drawer, pulling it uh crawling into that and then getting all the way to the top. And when I got up there I thought I could fly, so I jumped off and uh

4:13 So They lost telling that story because Um they rushed me to the hospital and They were very concerned. Whether there was any permanent damage and things like that. And

4:25 My mom kept bringing me back to the hospital again and again, and the doctor said, Don't worry, I think he's fine. I think he's fine And eventually I said, Well it's there gonna be any problem with, you know, his development. He's like, Well, he's either going to be Um a genius or he's gonna be an idiot. He's one or the other. I mean Yeah.

4:43 So That's that's how my parents would describe me. High variance and high beta. And throughout school and throughout life I was very much like that. I like to hack things and not

4:57 And this was in you know, in high in elementary school. I just Try to not do the work and hacker my way through things and uh got suspended a few times. Uh, one of which was just cr coming up with a creative idea of taking Sure is from

5:12 the second floor into the first floor, I went down a slide instead of following the teacher's directions, I got suspended for that. And so I didn't ever really like school all that much because it was so rigid. Until m until I used to hack. my way through things and one of the teachers That I had Mrs. Einstein had this way of teaching where she would put up a problem.

5:33 She would then have us try to solve that problem or do the assignment and un try to understand why she put the the reading up there. And uh I would always bet with her if I knew the answer or if I knew the conclusion of the lesson, then I wouldn't have to do the homework.

5:50 She let me get away with that once or twice and then she said to me once uh You know, you're you're very smart. I've seen a lot of people waste their talent. So do you wanna D do you want to start first or do you want to finish first? And I think I retorted back saying

6:06 Well, I'd like to start first and finish f first with the least amount of work possible. And then she said to me. That's a great answer for A sixth grader, but what happens in life when there's no finish line? What are you gonna do then? Not sort of

6:24 Put me back. And I didn't quite understand it until maybe now that This is the whole concept of having an infinite game and thinking through Not Some

6:36 thing, some finish line, some goal. But just just think about what you want your enduring impact to be and what do you want to do and what do you want to accomplish and when the world doesn't give you a finish line. We all have the same twenty four hours in a day. What do you want to decide to accomplish in that twenty four hours? We have an unknown number of years on this planet. What do you want to get accomplished? That sort of shaped the way I sort of started thinking about the world.

7:00 Did it hit you then at the time, or was it something you reflected on later? I think it hit me then But I didn't think I I don't think I understood. It done. And so then that led to a n number of explorations on

7:16 What I did want to accomplish, why was it important to think about This concept of like Infinite games, how do you win an infinite game when there are no set rules? You're making the rules for yourself. In an ethnic game.

7:30 And the rules change, you get to change some of the rules, the world changes some of the rules. How do you How do you navigate that? And then you quickly realize it's not about winning. There in a a finite game chest, there's a winner, there's a loser.

7:47 In an ethnic game. There are a lot of peop different people in the world. They play the game differently. And in some ways they're all Trying to

7:58 get on with the world and trying to do the best they can. But some people are more successful than others. And the reason they're more successful, I think, is because They really know what their their values are and they really know what impact they want to have on the world. What are your values?

8:16 Over the years I I thought And this has changed over time, but I think the the values for me or when you Yeah.

8:26 When you want to accomplish something, it's about the inputs. It's about the process by which you Go about getting the outputs. I think it's very, very important to have that. And I value That clarity.

8:41 eventually leads to output and focus on the inputs. I value Uh consistent compounding. And just getting every single Getting up every single day and just making

8:54 Small improvements every single day. And compounding that. I value um Honesty and truth. And

9:03 Just being t very direct. Um, with people? I don't try to sugarcoat anything. Um I value

9:16 I value people for who they are. My father um I learned this from my father where he's he told me once Because I was like, Oh, I'm just so much smarter than everybody else because it's a little cocky little a kid and he said, Well actually you can learn

9:34 Anything from you can learn many things from Every single person on this planet. I think I was probably a six or seven at the time and he was Uh He'd show me all the different people that he learned from and that the collection

9:50 of these lessons from many, many different people is what You become And That was a pretty important lesson. So I value people for for who they are and trying to learn as much as I can from each individual person. I value family.

10:06 And friends. Um Pretty important to me. work life and work life balance that's from as you said, for m many of us, it's work life integration.

10:20 And if you don't have some grounding with people who see you for who you are, call out. When you're not at You're not being a good person or you're not doing the things that you said you were gonna do. Um What is there in life?

10:33 Besides that. How do you want somebody to call you out in those situations or how do you call out other people? The way I do it is try to be fact based. And um Just give examples specifically of what

10:49 has been working and what has not been working. Mm. That tends to work pretty well. And There are there are times when

10:57 Rebecca and my wife will say, Hey, this is not working for us. So what do you want to do about it? Uh you can try to Keep going the same way you Same way down this certain path.

11:07 Well we can try to change it. If we don't like something, we just change it. And it's just much easier to have those kinds of conversations. Um My son a few days ago was being um

11:20 Quite negative about his school and You know, he's start he's thirteen, he's gonna be fourteen this year, or he's starting to think that he's smarter than the whole rest of the world.

11:34 And Said, hey Atticus, do you wanna be do you wanna have a negative attitude because you'll spin into this negative spiral. Um and by the way, if you have a negative attitude, the world just looks worse. When you have a positive w attitude The world just looks better.

11:52 And we played this let's use yes and for a bunch of things and let's create options and then you're going through the no but situation and it doesn't work. So let's try to just change your attitude about some of these things. And I I thought that was quite an interesting conversation where just by simply changing the framework He became much more positive.

12:15 When you talk about inputs versus outputs, what inputs do you think about in life? What I think it the inputs I think about are Um You know, there it depends on what I'm trying to get accomplished. But it if the inputs are just thinking about hard work

12:32 Well. Do I get up every day? Do I if I wanna stay healthy, do I get up every single day and work out? I I hear that you work out every single day because instead of trying to figure out which days you're gonna work out, it's always a negotiation. With which day is oh. Some days you don't feel like

12:48 Um exercising. You just work out every day. I have the same philosophy. Get up every single day and do the things that are important. Um so the inputs I have is I get up every morning, I work out. I look through I read through my email and I try to think about what's the most important thing that I have to get right today.

13:07 What's the most And um And think about first order issues. What is the first order issue that I have to solve? What is the first order issue of a company that needs to get fixed. Uh what is the first what is the thing that I need to do to influence an outcome for

13:23 Um for a founder. And You know, that's very, very clarifying. W often we can create a very, very long to do list and then you've got to pop up a level and just look at the to do list of what's the most important things I have to get accomplished. because if you just list all the desers you probably will not be able to get to all of them.

13:43 And the most important thing might be the last one you list. And so you can't just go down that list and do them one by one. Often It's by popping up a level where you sort of look at the whole list and it's like, Okay. Well, most of this is not important. Is that what you mean by first order issue? I think you mean something a little more nuanced.

14:02 Some people talk about the most important thing. Um And I think I think about First order if I get this problem it I have a problem on my hands if I get to the first order issue and get to the root cause of that.

14:17 Usually. That helps. Solve that problem. And there are other issues that are not first order. Um and

14:26 That concept is Quite important. And we also sort of navigate that into other uh situations where Um Where they are crucible bone. So as an example, like

14:39 Yeah. You have situations where The website's not working fast enough. That's Apos. We had a situation where the website's not fast enough. Is the first order issue that's we have too many pictures? Well, we want the pictures. We have lots of photos. We want to show those photos.

14:56 Is the first order a shoe that we need to Um Well, Customers want Longer search results.

15:05 It's like no, it's none of that. We need to figure out how to make the website go faster. And so we start caching. the the search results. We start caching things and so you start developing the technologies that solve the speed issue, but the first sort of issue is that we need to solve this with technology, not with A bunch of

15:24 Either or solutions. Um that's an example that I learned a l a long time ago. Another situation's The distribution at Daplas was not. Flowing. Well.

15:36 Um And we couldn't figure out which Process was broken. Was it the picking process? Was the Was the ordering process broken? What was broken about it? And

15:47 We went and just looked through. The flow. And the flow was broken. And so uh there is too many handoffs uh across all of these different discrete processes.

16:01 And so we have to sort of pop up a level and figure out what the flow of From when a customer orders something, when it gets Through the distribution center. How is gonna be pick packed? And uh packaged and shipped. And when you look at that from a flow perspective, you start thinking about new solutions.

16:22 that allowed there to be much better flow throughout the distribution center than been than to batch things. for picking batch things for um packing patch. That's Batch things for the

16:33 Uh for shipping. That's what you mean by first order? Uh, I wanna get into more of your experience not only at Zappos, but uh being on the board of some of the companies that everybody has heard of. um today or being involved. But before we get there, I want to come back to the school for a second. Are there any other experiences that you had during school with teachers that might have impacted you? You know, earlier on in junior high school I was um

16:59 I was suspended from the computer lab because I built No, this was very old, so They're a radio shag T R S eighties, so we call them trash eighties today. Um And there was the computer lab uh in it.

17:14 Y you had to run time in our computer lab to to use the computer and it built this game and The central server. at the time was literally a floppy drive where ever all of us saved our programs there. And one day Uh a bunch of

17:31 The students uh in the computer lab all found the game that I programmed and then started playing with it. The teacher and the principal just happened to walk in and saw that we're all playing this game. And um I was told that computer lab is valuable time and you should be doing something much more productive than

17:49 than producing a game, so I I I was no longer allowed to work in the computer lab. And uh Computer lab teacher was Mrs. Potosa and she's she also ran the math team and she said well Yeah.

18:02 I'm sorry, the principal wants you out of the computer lab, but you should join the math team. And I joined the math team there and um one of the things I was very good at was math and she told me that if you want to be a leader and you want the team to win It's not good enough for me to just solve the problems. Figure out how to get the rest of the team to perform. And so I started teaching

18:24 The rest of the math. some of the reasons why I was able to solve some of these problems more quickly than there were. They were very talented, but I had figured out tricks. That they had not figured out. And they had taught me tricks that I had not figured out. So we got better and better by riffing each

18:40 off each other and so I'd learn the value of teamwork by just being thrown into a situation. Like that. You started a company before you joined Sappos. What was that? I started a bunch of things. I started a lemonade stand when I was younger, a

18:56 Those are not interesting. I started a long morning service in junior high school. Um, I did it myself and realized it was not fun. It was too hot in New York City. So I I got the contracts and then asked some of my friends from school if they would do helped me do the work at a few odd jobs here and there and it was just never

19:17 as fulfilling as working at a company. Uh that From the ground up. Um

19:25 Oracle to start this company. That was originally called Internet Marketing Solutions because they're building websites. Uh he asked me to join Not company I said now. Then they

19:37 Anybody to go visit these websites so that he connected all of them. Um and that became Link Exchange. And I joined that company soon after Sequoia invest in that company. And it was a banner advertising exchange that was one of the largest banner advertising exchanges in nineteen ninety eight, nineteen nineteen ninety eight, ninety nine. We saw that to Microsoft for two hundred sixty five million dollars and um That was quite the experience. Did you know at the time we were sort of in a bubble, or how did you think about it back in the late nineties? I mean it we had a

20:08 business. We have fifteen million dollars in revenue. You can kinda tell that we're in a bubble when someone would be willing to buy a company that had fifteen million dollars in revenue for two hundred and sixty five million dollars. Um But also, you know, it was the third largest acquisition at the time. So

20:26 I think when you're in it you don't realize you're in a bubble, but popping up Like the numbers don't make sense. Yeah. So That's why I think it's valuable to have people who are slightly outside of Where you work?

20:40 To keep you accountable. It's like hey. How's this? How does this work? Just by simply asking questions.

20:46 You get into a situation where like Wait, I can't explain that question. I can't answer that question, Six Licky. I can't explain it. Maybe that person's question. Has more. insight than I would have expected.

20:59 What are some of the lessons you learned from Link Exchange? Boy, that was so many um There are many, many lessons because it was the first time we're doing Anything. Um that was at scale.

21:12 And You hear this all the time that um That you should Hire you should hire slowly. And make sure you really, really understand who you're hiring for and

21:26 You know, often when someone's not working out You should It's probably time to let them go and it we always give people too long and And then I think the company's velocity. Uh didn't

21:38 couldn't go any faster because we didn't hire as well as we could have. We didn't let people go when they weren't working out. And those are very, very important things to get right. I often sort of think about the velocity of a company. Velocity and t in I measure that in two ways. There's Yeah, you use the word velocity velocity as opposed to speed because speed is Just how fast you're going.

21:59 But Velocity. Velocity also has direction. And I think the combination of the two is quite important. But the whole speed of a company Generally doesn't get any faster unless you're pushing. And the best companies they keep pushing. And

22:14 Otherwise you're just gonna go slower and slower and slower. Yeah, I think Building a real business is really important. Um, many of the companies that were founded in nineteen ninety nine in nineteen ninety eight, ninety nine, two thousand.

22:29 They were not real businesses. They had lots of eyeballs. They had lots of users. Um, but that's not really Enough. And at Sequoia we often Talk about the fact that we own shares in a company. We don't own shares in the founder. We don't own shares in the product. We don't own shares in their gonna market strategy.

22:50 We own shares in the company and that company needs to have a business one day. My partner, Pat Grady Loves to say that free cash flow equals freedom. More?

23:01 There's us. Generates real. Free cash flow. And the freedom being the The freedom that allows you to not have to raise money, the freedom to allow you to invest in new areas.

23:13 the freedom to continue to grow because you can invest in growth and invest in new novel technologies and new product lines, the freedom to Um Not worry about the quarterly Uh

23:26 sort of pace of having to do more and more sales. You just You You generate free cash flow and it just generates a lot of freedom. Let's go back to the push pull thing for you know y you said companies don't generally increase velocity without force. How do you think about The difference between adding force or removing obstacles.

23:47 That's a very That's very, very insightful of you. I think many times applying for us um Is what what leaders try to do, which is this to uh apply a forcing function and make you make a choice. And often I think removing obstacles are just as important as

24:06 As applying the pressure to keep Going on and on and on. Often You know When you apply for it.

24:16 You realize where the obstacles are. Because you butt against that obstacle. And then you realise okay. I keep butting against this. Maybe I have to figure out a way around it.

24:27 Um And I You know, my job as a board member is to help you identify obstacles and help you remove it. But sometimes you just need to be pushed against it.

24:38 Is there an example that comes to mind when you say that where you push and it helped you identify an obstacle? Maybe in the early days of Airbnb I I think people forget it was much more of a listing service and it was less of a marketplace. And If you sort of take the definition of a marketplace, you have to complete the transaction. And You just not only have to complete the transaction, you have to remove as much friction as possible.

25:03 And so Airbnb in the early days had a calendar Uh the money. Paid out the money. There was this big friction. Big, big friction.

25:14 And it was because there's not enough trust. Uh between the A host and a guest. And so The early days of the

25:23 removing of that friction was to get Um Connect it through Facebook Connect so you can Check someone out and check out their Facebook. um pages and who who they are and to see if this is an authentic person.

25:37 Even that, checking that out took Twenty four, forty eight, seventy two hours. That's just too long. And you just kept pushing. This is not gonna work long term. Um, because there's only so many people that can

25:51 Book travel and waits. Twenty four or to seventy two hours before they know that they can go there. And and so it what started out many great companies started out as a fringe. Sort of.

26:05 activity and you have to figure out how to make it m more mainstream. Often that is about removing. uh obstacles or removing friction. But you butt against this and you're like, What's the solution here? And you keep plying for us. This is this is gonna limit our growth if we don't solve this. And eventually Um

26:24 Brian and the team and the product team figured out that we needed instant book. We needed to figure out how to instantly book people. Well, you have a whole set of hosts now that are used to Not accepting

26:39 book them. So how are you gonna Well you start with do hosts. It's like let me show you That Airbnb can tree can be trusted. We're gonna as new hosts, we're gonna send you some

26:51 Customers and you should just book them automatically. And eventually more and more of the of the hosts realize that Instant Book is just the way to go and Um That's an example where we you just have to be pushed against that for a bit of time to find the solution.

27:08 Was DoorDash sort of fringe too and went mainstream? Didn't they start in like the suburbs or something? George Ash started more fringe than even the suburbs. It started on a on s on a college campus and the reason Mm. We

27:23 We pass on the seed round at Sequoia as we're concerned that the fritter This is like Just Something that college students did with their parents' money. Um and then they started out um

27:36 Focusing on Stanford and then Palawta, and they went to other suburbs. And It turned out that it that was a very smart thing to do because everybody was going after the cities. And one of the things that we talk about at the quiz you can't just be better, you have to be different too. And if it's easy to say and hard to implement because everyb and when everybody is chasing after

28:01 uh the cities because conventional wisdom tells you That that's the right thing to do. Uh it's very, very hard to do something slightly to do something slightly different. Um But if you just

28:13 Here. Uh Tony and the team talk about their business. You realize that they had way more than just Oh, I'm going and doing something contrarian. They actually had real reasons why the suburbs were actually a better place to start.

28:28 The value for someone who lives in the suburbs and have to drive twenty minutes to go get their food is higher than someone that they can Go from their um apartment, go downstairs and walk a few blocks and get the food and bring it back home. So That was like pretty s interesting. The other one was, Well, is there enough density uh around the suburbs? And it turns out Yes, there's

28:50 There is density. You just might not think about it and They had examples where At in Palo Alto there was University Avenue and there was California's Um

29:01 There w that's where all the restaurants were. And so there's density in where you can Go to the those restaurants and you can radiate out from there. So it was not

29:15 as random as any s any restaurant can be anywhere, and any home can be anywhere. Um and it turned out when you go look and look at the data Small towns all have this. There's the reason why small towns there's a main street where everything happens. And so then you start realizing that

29:33 The density problem is not as sufficient. Not as complicated as you might think. And they won because they we're able to take the profits of the suburbs to go into the cities. I often think about that as um You know, there are people who uh

29:49 think of the world and they just follow conventional wisdom and there are people who want to be contrarian. Well, in either case, whether you want to be a conventional or contrarian, you have to be right. If you're right and conventional there's probably l it's probably a less interesting solution, but if you're right And Um

30:08 And contrarian, you probably won't be able to make a lot more money. Because nobody's fault nobody's going after that opportunity. Um, I often find that it's interesting there are people who just want to be contrarian, but if you're contrarian wrong That's not a great situation. I try to put things in these two by two matrices of Uh right and wrong and

30:28 And convention conventional and con um contrarian. You know the term I use for that is advantageous divergence. advantageous ever. Speak tell me more about that. Well that's it. It's exactly what you just said, right? It's not enough to be contrarian, you have to be right. And so you have to diverge from the crowd but you also have to be correct. Yeah. It sounded like It's kind of the Walmart strategy, right? Where it's like we're gonna go in this area with ha which has less competition. we're gonna get really good at what we do and then we're gonna use the the money or profits or

30:59 And we're gonna funnel into maybe the more desirable area. Like when Walmart started competing with Sears, they didn't go into cities and Kmart, you know, they went into the suburbs where nobody was Or the contrast, I think, between their ability and what they were competing against was much

31:17 Higher. Yeah, and and And I think that that is a that's what all startups should focus on. You don't want to compete with someone bigger than you head on because They have more money, they have more people, they have more history, wherever the They have more.

31:32 Uh abilities. You just wanna compete with them where they're Not competing. Double click on that for me. Well your example about Walmart where your the example about DoorDash focused on um The suburbs. There's a example about Door Dash where

31:47 Do you want to win McDonald's? Or do you wanna win the top one hundred merchants and it's not just about one or two yes. McDonalds is one of the largest merchants, but Winning.

31:59 A whole suite of them is actually more valuable. Um Google. The long tail. Keywords.

32:08 More valuable than Yeah. The head. Yeah, and most of advertising was broadcast advertising. You start from the top and This is a bunch of like

32:19 long tail keywords. And I think a lot of great companies, um Whether it's intentional or not. Um Try to do things very differently than what exists today.

32:31 Apple. They weren't the first to many things. They were They didn't make the first P uh personal computer. They just made the user their focus was always about the user experience.

32:44 Whether it was the computer, the phone. The watch. Everything they do is about having a great user experience. That was not the conventional thing that people thought about. It was about you know in the early days of the PC, it was about processing speed and which processor was the fastest, et cetera, et cetera. Uh when the phone came out it was about the keyboard.

33:04 We don't use the keyboard anymore. The Apple thing is fascinating. So is the Blackberry thing,'cause they really hung on to that keyboard thing. But I remember when they came out with their new I forget what the device was called. It was like their Apple Killer and I used it as a demo and I couldn't figure out how to get on the internet and I was like they're done. The user experience is so important. It it took a demo to like figure out how to use the internet. Once he figured it out, it was great, but I was like, Oh man, this is so not intuitive. Yeah.

33:31 Let let's go back to hiring and firing a little bit. Was there any moments sort of It's Sappos or earlier with l link exchange where you thought You had the wrong fit, but it turned around. That's a great way of asking that question. I I would say probably

33:50 Not. In the early days of link exchange, we hired and back to like conventional and You know. We we c hire the conventional right person. We were looking for a marketing person or looking for a marketing person that marketed to small and medium sized businesses. They understood the internet. They They fit all the specs that you would have in a job description.

34:13 Um But they didn't fit the way we operated. They didn't fit the way we val what we valued. And You know, it's easy to sort of limit that down to like they're just Um

34:26 A professional marketer and Yeah. Mercenary, not a missionary. That's how Tony would tell the story, but At the end of the day, they didn't value

34:36 what we're trying to build. They didn't have the same values that we had. And which is why when Zappa started, Tony spent a lot of time defining the values This is Tony Shay of Lake Ashana and Zappa's The Values of the Company. And it's something that I talked to.

34:52 Founders about. If If You don't have the same mission, you don't have the same values, you don't have the same operating Um

35:02 Understanding of the company. It's very, very hard to work together. And then you know, you're asking someone to change. When they fundamentally don't fit. to um

35:14 to the company and how the company works. That is generally the the the issue. Then the other issue on the flip side on the On the um The functional side.

35:28 Once When your company is growing really, really fast and you see someone who is growing but they're not growing as fast as the company. Every single day The delta between How far the company is moving

35:41 fast or how far the person is moving, the delta gets bigger and bigger and bigger. So it gets very hard to turn around. Um and so we have this concept that And a lot of people have it's in Sequoia. We hire for Slope not intercept.

35:59 So Experience obviously matters, but If you just hire for the experience and their slope is not fast. That's gonna become a problem at some point. And so we really, really Asked

36:11 founders to think about what is the person's potential, what is their slope? Um and we'd much rather bet on someone with high High slope and low intercept. Uh because In startups in companies that are new.

36:28 The experience. is helpful. But you're doing something different and new and you need to reinvent. Bring a playbook over from somewhere else. is helpful up to a degree.

36:41 But usually many of the problems that you need to solve. are just different. And that's why you hear a lot of founders talk about first principles thinking and Don't reason by analogy. Et cetera. Because you do have to solve the problem.

36:58 Um A different way. What's the difference between slope and potential? It it's just Well slope is just uh is is pretty much the same thing, slope and potential.

37:10 But having a high high rate of learning, high rate of s you know, sort of being able to move fast and So someone has a lot of potential. There over here. their potentials up here that slope when you draw that line is pretty high.

37:24 How do you gauge somebody's potential? It's like you might be able to do this job and you might be able to grow into it. But like coming into it, it's like they're not gonna check the boxes. They're gonna look different. The future does not look like the past, but you have nothing else to go on but the past. And you can see whether someone moved really, really quickly in the previous situation, where they promoted three times in the same year at a different company that was moving very, very quickly. Do they have a sense of urgency? You can test for some of these things. You can ask about these things. But yeah, you don't know whether they have the potential to grow into the next stage of the company until you N.

38:00 Sure. You put them in that position. Often I think the The challenge is the company is moving so fast and you're hiring someone that has done the job before and you know that they can do the job for the next year or two. And that's maybe

38:13 Good enough. If you hire someone you have to let them go in three months, that was a That was a Messire. There's almost no reason why that person was not gonna be able to do the job for the for three months. They either were not a cultural fit, they didn't have the right skills. If they stick around for a year or two, it's usually because they're They've done the job before and they're picking up a bunch of low hanging fruit. Um

38:35 But I look at you know Tony at Dorash, many of the people who work for him have worked for him for a long period of time. He likes to grow people from up within. He obviously hires from outside as well. But many of the people who've been around the company have been around for a long time. Amazon uh many of the Yeah, the the V senior VPs

38:57 That was w around Bezos had been around the company for a long, long time. Um now that Jassy's were you know. they're now a CEO, he's trying to develop people also for a long period of time. If you f if you look at great companies, they're very, very good at developing talent both from within and hiring from outside. Is it a red flag if the turnover is too high then? Is it like a sign that people don't know how to hire, right?

39:23 I think it's a it's a red flag and you look at it and you don't want to Mm so The issue with metrics is people start managing through the metrics. And so if you start telling

39:34 Um hey you're Your turnover is really high. Uh they start managing to the turnover number. And that's another thing. You have to manage the turnover of regrettable What is a regrettable turnover? Why you're not Able to retain your best people.

39:51 Yeah, w and if you have Unregrettable turnover. Then why did you hire these people in the first place? And so you if you break the problem down that way, you can't find our reads on what the issue is with the turnover. I really like thinking about it in terms of regrettable versus Unregrettable turnover.

40:10 Um, a lot of people when they're hiring, they sort of We need this job. I wanna know somebody who's done it at the next level,'cause that's where we're growing to. So they're trying to like anticipate where they're growing. And one of the problems that I hear commonly is that people run into, well, that person might have done the hundred million to three hundred million growth. But they had a different team than we have. They have a different system, different resources. How do you think about that when it comes to hiring?

40:38 Yeah. from a company that is one chapter or two chapters ahead, they tend to work out better. And And part of that is because they're only one or two chapters ahead of you. If you try to hire someone who

40:50 You're you're over here and you're trying to hire someone that's ten chapters ahead. That usually is a problem because you don't know whether they understand the problem a few chapters before. It's been too far away. On the s on your particular point about the system, I do think that if you hire people who are ten chapters ahead And they have a whole system in place. Even though they took it from one hundred to three hundred.

41:14 in a product division inside of a large, large company, they probably had a lot of guardrails that allowed them to not make a bunch of mistakes. And so you have to dissect whether that operating system works the same way as your operating system. Most startups don't have an operating system, so the thing that you have to sort of assess is how well can this person operate.

41:37 When It's just more nebulous. It's just m less clear. Are they gonna put the the operating system in place.

41:47 Dive into this story behind Zappos from sort of the initial idea in the early days. Just high level five minute version to the the exit with Amazon. Maybe from the start, Zaplas was This is this weird idea. Well, we funded it because that this was uh This is originally founded by Nick Swimmer. He had called

42:11 And left a message on on our answering machine. This is how old And back. we were going in nineteen ninety nine. And Tony and I were running

42:20 A seed fund, a venture fund. uh an incubator called Venture Frogs. And uh Nick said, Hey, I have this crazy idea. I'm a webmaster at uh Auto by towel.

42:32 Which is an auto. Um I'm the webmaster there. I think it would be great to to just um start something for shoes because I went to one store I couldn't find the right size, went to another store, couldn't find the right color.

42:46 Once another store they didn't even have the style. Um looking at and He had already searched the web and found a whole bunch of

42:54 websites where people were basically trying to sell specific shoes on the internet. And we thought it was the craziest idea. And we almost I think one of us had our finger on the delete button to that voicemail and he then he said that that Um And you might think this is crazy.

43:12 But Mail order is or a five percent of Sales in the US. Uh for shoes. I'm like okay, five percent, still small.

43:22 But Uh Shoe industry is forty billion, five percent is two billion. And it just wasn't rocket science to understand that um Shoot that the internet was gonna be bigger. the mail order. And so we took a meeting, we decided to make an investment and we we funded the company five hundred thousand dollars at a time.

43:42 Uh w when I when we were at Venture Frogs. I had to then leave to go work at a company called Tell me networks and Tony joined Zappa's relatively early on as an advisor and then became co CEO and eventually CEO. But the most important thing back then was because it's an e commerce company. And we're going from nineteen nine and nine to two thousand. It was growing from two thousand To two thousand one I was like Uh oh.

44:07 We have a situation. Nine eleven. The company had zero on sales. Zero. You went from whatever it was which was small to zero. And that was the first crucible moment. Um Well using the term because the choir uses the term crucible born. What we're gonna do about that.

44:26 So shook the company and we basically went back to basics and want to build a company that was profitable. And so we ran. So Tony ran the company at break even and continued to grow the company for a long period of time until Sequoia came in in two thousand and five. four two thousand five to make the first investment.

44:45 Most of the And so most of the company was finance. Yeah. Tony invested ten million dollars of his own money But most of it was financed through

44:57 Being very very creative, figuring out how to get merchants that we we we ordered from to give us credit and to increase the credit line. We had uh eventually got a A line of credit from Walls Fargo. But the company burned very little cash. And for a company that went from

45:15 Zero. When we sold the company it had one point six billion dollars in sales. Uh That really didn't have a lot of Equity financing.

45:26 uh was pretty incredible. When you hear about companies raising hundreds of millions of dollars to get to one point six billion in in in GM V or Um, or in sales and here's a company that Basically raised ten million dollars. And it probably was undercapitalized. But it really did.

45:46 highlight that you can build a company. By having CAT be p profitable on the first order, by being focused on customer service and not focus on marketing. Talk to me a little bit more about that because you didn't have a huge budget for marketing. You had to get You know, within the first month you basically had to pay back yourself for marketing.

46:08 How how do you think about that? Not only back then. And then what's different now in a world where there's A lot more money and and maybe all the players aren't rational about how they're spending money to grow. Back then we thought that that was a You know, we probably thought it was a curse that we couldn't raise more money because you probably would rather run the business a little bit looser so we can grow a little faster, et cetera. But being tight

46:35 led us to find solutions that was uh again non obvious or divergent, uh to use your term. Um and the divergent idea we had was if w we can only spend money that was profitable on the first order, we needed other ways to grow. And the focus was to become uh much better at customer service. We notice that it was much easier to keep a customer and ordering getting that customer to order more.

47:02 than it was to acquire a new customer. And Then we just Went down the line of what we can do for the customer. We We

47:11 We tried to make the website load as quickly as possible. We tried to pick back and ship within four hours. The solution to pick back and ship in four hours was to solve Yeah. operations flow issue and not batch the the operations, which I don't think anybody else figured out ex in e commerce back then besides Amazon. Um

47:30 We We decided to work very, very closely with UPS. in particular and then FedEx and USPS to figure out How to get Um

47:41 It was You know, five to seven days. um ground shipping to eventually overnight shipping. So that the customer got it the next day.

47:54 We figured out logistics, uh reverse logistics, so We'll bring the shoe to your home. Um we heard lots of Reasons why people didn't uh want to order shoes on the internet. We knew that before before we invest it and we knew that we needed to bring

48:11 the the store to your home, have you try it on and then return the things that you did not uh that didn't work for you. You did not want anymore. And by doing all those things, um We provide a much better customer service. When we On any given day.

48:28 The the orders that we had, eighty percent of it was from Repey customers. And we grew. The business Some with marketing.

48:38 But the majority was by providing Great customer service, having high repeat rates. Having high LTV and And having

48:51 was how well they were treated, et cetera, et cetera. I read somewhere and this was counterintuitive when I I came across it, so correct me if I'm wrong. That your best customers returned the most shoes. Yeah, that was a very contentious discussion because every Every year the return rate would go slightly higher. And then went slightly higher. Well we kept crying, so

49:13 One way to look at it is Well It's not really hurting us. And then the other way is Well the return rates are high and the most expensive Process.

49:25 In the distribution center was Mm. was managing their returns. You had the return shipping. You have to open up the boxes. Do you have to look at the product and figure out whether it

49:37 It's Ready to go back on the shelf, it's damaged, I need to fix it or it it's can no longer be sold again. Uh because if you put something that cannot be sold away again on the web on the website and make it available and that that gets ordered, it's freaking gonna come back and be returned again. We then did this analysis um

49:55 And this is the type of analysis I really enjoy doing. Like all right, let's take our best customers and let's take our worst customers. and look at their return rates. And it turned out that our best customers at the highest L T V is return the most. And like that. That is crazy. How is that possible?

50:11 Well turns out because they were They understood how to use Zappos. They just ordered more. Yes, they return more, but they kept more too. because they would be willing to try things. If you never return anything, that means the only thing you buy

50:28 Are the things that you're super comfortable with. You know the size. You know the style. You So We we're trying to help people open up the aperture, try new things. Um So we did this analysis on the extremes and compared them and realized our best customers had the highest return rate. So then

50:47 You say, Well, the board doesn't like the fact that we have such expensive return policy and is costing us a bunch of money. So then the solution is not to reduce the return policy and make it less liberal. You want to keep the return policy as liberal as you can, but make the cost of processing as low as possible. And so the first order issue there is exactly going back to first order issue, the first order issue is not the return rate. The first order issue is making the return process as cheap as and efficient as possible.

51:19 It's so counterintuitive, right, when you think about it,'cause you actually like know we're okay with people returning shoes. As long as they're buying more and then then they're trying them on at home, which is exactly what we want, and sending back what doesn't work. Yeah. I think we changed the whole industry and and originally was just a competitive response. We had a liberal return policy in thirty days, other people copy thirty days, then it was ninety days.

51:43 How did the people copy ninety days and then we made it three sixty five days? Not everybody can copy that, some did. But by doing that it would put a stake in the ground. that we want people to try the Zappos experience and have a great experience. Why do you think it works for shoes but doesn't seem to get as much traction when it comes to clothing? No, I think it

52:05 It got a lot of traction for clothing. It was a understood problem by the time we got into clothing that you wanted You're gonna have high returns and therefore you need For clothing I I think for clothing for shoes, um

52:23 And for a variety of soft goods, return rates are high because you need to try it on and try it out. I'd also point out that shoes Good. difference in sizing really does matter. I mean You wear a small or a medium, both could probably fit and you m may look more buff when you wear a small and you it's loose Fitting with a medium or whatever size you

52:47 You want to use. But for shoes, the difference between seven and seven and a half or Twelve and twelve and a half is A difference. And did you guys do things and I I don't I was never a Zappa's customer, so sorry, but like did you do things where it's like hey

53:02 Last time you o you're ordering a ten point five or eleven, last time you ordered Attend. We're just letting you know. as an effort to like reduce returns, like maybe you hit the wrong button. Yeah, we we let people know those things. We also let them know that this brand you're used to buying This brand?

53:19 Um like A6 running shoes and Nike fits a little looser, so you might wanna the size. We had this measure of like does this fit true to size or does it fit a little looser or a little tighter? You guys also had like an incredibly unique culture. What went into

53:37 The thinking behind that. The culture of Zappos, um was very special and It was something that we wanted to preserve partly because Tony Shay had this experience at Link Exchange where we didn't define the values of the company. We started hiring people that work.

53:55 conventionally right? For the positions in the job and when they he woke up and realized the company that he had founded and built. was no longer the company you wanted to work at.

54:08 And he wanted to make sure that the company that had this special culture that was applosed kept the culture. In the early days it was Not very well defined cult what is the culture of Zappos? Well

54:22 You know? That That was More nebulous in the early days. And then the company grew and people asked, Well what is the culture?

54:33 We don't have it written down. How do you know someone's a culture fit? Well, does Tony like them? Does Fred like'em? Does Alfred like'em w after the interview. And I Don't like the term. the word like. Mm-hmm.

54:45 Like can mean so many different things. who was just not well defined. And I some point Tony decided to just ask the company, What do you think the values of Sappas are? What are your personal values?

54:57 And what do you not like about Zappos? And just Parsing through that. We got a lot of responses. And in his book Delivering Happiness, he talks about the fact that we started with thirty eight different values that you Yeah, these are all Sapos valleys and

55:13 combined and Swamp um We ended up with ten core values. The problem with ten is that um there are probably a f handful of people that remember all ten. Most people remember the first one or two or three of them. And the first one was

55:28 was to deliver well through service. It was the Unit is in some sense the most important core value. But we meant it. to deliver well through service to customers, but also to employees.

55:43 to um our our partners, our business partners, and to investors. You had a different management system as well. Talk to me about Was it holistic management? Holocracy. Holocracy. Holocracy, yeah. So um the management philosophy was um Was

56:02 different partly because we wanted to hire people that could just Self rot. and self sustain. And so there was an element of allowing people to do what they love the most and Yeah.

56:16 And pair them with Other people who love other things. And make it sort of home grown. I think Tony's perception of his job was that he was to create he his his idea of creating a operating system for the company was to

56:32 Basically. Build a greenhouse, was his analogy. And He's gonna try to help every single person. Grow.

56:42 Yes. tall and as strong as possible. And so He very much focused on allowing people to focus on their strengths. And hire other people for their weaknesses. to supplement that. Is there an ideal growth rate, do you think? Like can you grow too fast? The the answer depends. I I

57:01 I think the Easy. If you're growing so fast and the customer experience starts to degrade, you're hurting yourself. And so yes, you can grow so fast that it's just a complete mess. You're losing customers because

57:17 You're not servicing them correctly. And at Zaplos we were very mindful that Whatever customer experience that we delivered, it was the best customer experience that At that growth rate. And I think if you ask

57:31 uh Tony Shu at Stor Dash or Brian Cheske at Airbnb, they would probably say the same thing. I was like We wanna grow as fast as possible. With the constraint that we don't we wanna make sure that there's a great customer experience. And maintain.

57:46 The internal culture. Yeah, and the the maintaining the internal culture is one way of thinking about it and you may have to grow the culture over time. Yellow company, it's growing. Do you think the culture that was on day one is gonna be the culture that's gonna work?

58:04 You know. Five years, ten years in. It's not the static thing. It's not a static thing. Cultures should not be static. Every year you do a A strategic plan and a financial plan. You you figure out

58:17 what your next year's revenue is gonna be. Your hiring a plan, your marketing plan, you have All these plans. should also have a plan for culture or how to grow that. I think the best companies think about that. Like how does this How does their company change?

58:31 How do we grow up? How do we become One year older. And better and faster at the same time. How when you're having so much success scaling, like going from a million dollars in sales to a billion

58:46 Do you not Sort of get complacent. I think that 'Cause you were dominating the market at that point in time. You were the leader clearly in that space. You're talking about Zappos or Yeah, or in general either. In general. I think in in for every company the

59:03 Yeah. If you read Jim Collins' book Why the Mighty Fall or It's the first sign is the hubris of much success. And It will You know, at Sequoia we're just never complacent.

59:18 But you have only for the work not to be complacent. We actively work not to be complacent and almost every single company to make sure that you're not complacent. So successful companies just think that way. At Sequoia we talk about You're only as good as your next investment. Oh, that's a quote.

59:38 As Atlas we talked a lot about um About how easy it is to ruin a good reputation. You just would the next order if that's not good for a customer You had you built you built all this effort.

59:56 to build a good reputation with a customer and one bad Water. On an important order. Like their wedding day. And you ruin that reputation.

1:00:06 And so I think a lot of companies have different Ways of thinking about that? And Brian Chasky thinks about what's the next thing, what's the transformation that we're going to create what is the next thing for the customer experience that's gonna be great. Tony Shu type thinks about

1:00:23 the next product that m T. Yeah. the local economies. What's the next set of people that we're going to help?

1:00:32 Um And I think that's a good thing. You know if If you sort of go back in the history of Any business.

1:00:41 You notice that Customers are just enormously impatient. They're enormously Unsatisfied. Everything that becomes that is new and novel becomes standard.

1:00:54 And Basis said this line about how customers are just Always, always dissatisfied her. I wanna kinda go deeper on that. It's almost like there's a natural entropy to create more sediment inside an organization. Toby Luque in our interview used the word sentiment, like you start building up the bureaucracy. And entropy being like that's the natural result of growth and scale. And then you actually have to apply a lot of energy to make sure that it doesn't happen. What are the early signs that you see that

1:01:26 Uh of sediment. Yeah. Well Yeah. There are a lot of uh examples of this. Take a snapshot of the

1:01:37 When I When I go into a company for the first time, just see how fast they're moving. And then I tell them.

1:01:46 You pro Today is a great day. This hopefully You will move. Faster than today. And then hold that to the as a bar. And if you don't have that mentality, it will sl start to slow down.

1:02:00 Um, and so what was the sentiment? Like the process becomes Instead of making fasts. Good, fast decisions. The The thing

1:02:10 that people value is having a good process that slows you down to make sure you have the right decision. You have to make high velocity decisions. At scale. Um and I look for that. Like are we able to make qu high quality, fast decisions as quickly as possible. Would you let the

1:02:29 process determine the decision. How do you judge a decision's quality? You can't necessarily at the the moment in time. Um you can think about things at the moment in time is how reasoned. How reason, how deep have you thought about the problem, how much research have you done

1:02:47 And you can s sort of at least say, Well, you researched the problem, you understood It deeply. And you've picked a course and hopeful that's the right decision. And

1:02:58 In hindsight, you can always look back and look at whether those decisions are right or wrong. And I don't think enough companies look at that. Enough. And instead of projecting next year's revenue and next year's strategic plan. Part of the strategic plan should be about looking backwards. What

1:03:15 Why do we need to course correct? You guys um also had an element of I think it was even specific back before it became popular, but getting one percent better. Talk to me a little bit about that and what it meant practically speaking.

1:03:33 There are two things at Zappos that I um P I I pushed very hard and popularized. One was the Um Once the power of and because I found too many people trying to figure out

1:03:46 Ways to do either or And Uh It wasn't Like okay, we're going to

1:03:55 ship product more quickly, but the website's gonna be slower. You gotta do both. And If you If you think about

1:04:06 the little things that we do at Zappos It was about just compounding one percent every single day. And I used to write on the whiteboard one. Plus One.

1:04:16 One plus one percent to the three sixty five. Yeah. Because if you take a dollar and compound it one percent every single day, you get this ridiculous result which is You get. thirty seven, thirty eight dollars.

1:04:29 And so When I hear about you know Making a leap forward. One to thirty eight is a big leap. Um

1:04:40 And it's on the scale of figuring out what's a Ted X idea. It's even bigger than a tech Ten X idea. I hear founders talk all the time about I only want ten X ideas because that Those are the things that move the needle. And it turns out just simply compounding one percent every single day.

1:04:57 moves the needle even more than a ten X idea. Where do people tend to go astray, right? So you you have a great core product. And I'm just imagining you start building up a team, you start getting out of your focus. Like where do companies go wrong? A number of Places it you if you just look at

1:05:16 great companies, they compound at a very high rate for a long period of time in their core business. Google for a long period of time was search. Amazon for a long period of time was e commerce. And there's a difference I I think there's a difference between Act two and category expansion. So in Amazon they went from books to music to electronics to a whole bunch of they just went category by category.

1:05:42 But it was the same real like core business, which is Project. Getting product to the w distribution center. pick pack and ship the the products that you want and shipping it to you. Um, and it could be books, it could be music, it could be electronics, it could be shoes, it could be

1:05:58 Um tools. Could be a hammer, but But that's one core business. And I'll I think founders start their company because they have novel and compelling insights into the world and specifically for their company. And

1:06:13 They like the new shiny penny. I'm not saying that you shouldn't focus on the new shiny penny that is adjacent to your business. I'm just Saying that you shouldn't focus on new shiny pani that is like way out. Away. From your business.

1:06:26 Eventually all companies need an act to AWS was an app too. That was very different than the the the e commerce business, but even the way that Amazon thought about The Their web services business is like well.

1:06:44 We're very good at building distribution centers. Yeah. Originally the distribution center that we built was for physical things. And here we're building a distribution center for electronic things for bits. Like even the way to sort of think about it was

1:07:00 Quite interesting. They didn't think this was a This is a high margin business. I thought of as like, okay, this will be a low margin business too. And we we like low margin businesses. That was Bees' famous quote, right? Like your margin is my opportunity. I I like the idea of Act Two. For a lot of companies, Act Two is the founder steps down, professional management sort of comes in. Talk to me the difference between as you see a founder led company and a professionally led company.

1:07:29 And I I use the word professionally loosely because founders are professionals, but I just want people to get the distinction in their head. Well, there's a lot there's a lot being said about the difference between founder mode and manager mode, and I would go back to the The questi the question is shouldn't it be and? Shouldn't you want don't you want to be both? I have a concept of fire and ice. The best company is a both. This is huge. fire. They have this entrepreneurial spirit and

1:07:56 They run hot because the idea is so compelling and interesting. But they also have this icy side. It's just cold facts. It's management. It's about getting to the details. And the best companies have both. Um and it

1:08:12 It pains me to see that it you have to choose one or the other. Because the best companies do have They they figure out how to make make sure that both or in this in the company. What are the different strengths, I guess then maybe that's a better way to think of this question between founder mode and management mode. What are the weaknesses and strengths of each? Like how do they work symbiotically together?

1:08:34 I would say that there are many different modes of a founder. Um Yeah. Or a manager. Yeah the

1:08:43 Mm. The beginning days you're you're a creator. You're finding zero to one. You're creating something that the world has not seen before. And the mode there is to

1:08:52 Be a creator. And instead of calling it a founder, you're creating something that the world has never seen. Once you create that. Well sometimes it gets into You know, sort of

1:09:04 Operator mode. And found many founders are fine operating and making their creation. Better. It's about understanding the inputs and outputs. How do I sort of make the system How do I

1:09:16 make the system better. I create something I need to sort of go to market with it. How do I m systematically make the go to market happen. Um And You're trying to just operate the thing in a way that sort of

1:09:31 Scales the business. And Yeah, many founders are very, very good at the scale. Then you get to a mode where you need to manage. You're trying to figure out resources, resource allocation. And It's like a should I invest a dollar in the core business or should I invest that dollar in a new project.

1:09:50 And sort of having a framework on how to make management decisions like that. That's what a lot of Um companies at scale, but the CEO needs to figure out. And then there's just a level of leadership around how do you

1:10:04 lead the organization. And think about it from an organizational standpoint. So some of that is manager mode and some of that is is is um founder mode, but I let's just break it down to what it is and not talk about one

1:10:20 Contrast them over the other. Well, I want to go back to something you said earlier about crucible moments. What are they and how do you identify them? Crucible moments, um is uh is the term we use at stop as at sequoia for things that are Basically Very important type one decisions.

1:10:41 And I've Had uh Do you as an operator before Sequoia, we didn't call them crucible moments, but I've gone through a fair share of crucible moments.

1:10:53 You know, blink exchange. Do we want to Do we want to sell the company to Microsoft? Yeah. Um Tell me networks when we're burning

1:11:03 Sixty million dollars a quarter. How do we get through that and How do we pivot the company from a consumer business that wasn't working into an enterprise business.

1:11:14 These are decisions that Change the trajectory of a company. Um, at Zappos it was what do we do Um After nine eleven.

1:11:24 Um when Sales went to zero, what do we do during the financial crisis when credit became very, very difficult and we were borrowing. Uh sixty million dollars and we had sixty million dollars debt. We did nothing wrong, but we needed to But the banks.

1:11:39 Didn't have the liquidity amount anymore they're calling the loan. And how do you how do you go through these things? at Airbnb, there have been a number of crucible moments as well, one of which started very early on that Brian Chesky talks about a lot, which was the PR crisis with Um A a gas trashing a host.

1:11:58 Um and That led to house guarantees, but there were many of those. There was a fight to win Europe. And a competitor called Window that copied the Airbnb website pixel by pixel. Or

1:12:13 Gorash's decision to go after suburbs and not the cities. They didn't give forego the cities, but we're gonna start with suburbs first. Jordan Ashe's decision to focus on merchants. And selection. Over. Speed.

1:12:27 And You know, you can have a situation where You can Increase speed of delivery by just having a smaller radius which Then I'll you know, if you if

1:12:38 I only showed you the restaurants that are close to your home. you'll get them faster, but it doesn't give you the breath of selection that you may want. And these decisions change a the trajectory of the company bec and their choices that um many of the times they they're one way doors. Once you make this decision you can't go back. And

1:12:59 I think they're very, very important to get right. And so at Sequoia we have a podcast about it. Um Partly because we want to highlight. How to How do founders.

1:13:11 And the management teams puzzle through These decisions. characteristic about crucible moments is Every one of them don't

1:13:21 doesn't look like the other. So you you're presenting with a new problem. And you're trying to figure that out for first principles how to solve That problem. That's the second or third time you brought up first principles thinking. What does that mean? For me, it means start from a blank sheet of paper and you have a bunch of frameworks that you have that help you sort of triangulate the answer. Throw those out.

1:13:43 Maybe you need a new framework for this percular situation. You're the king of mental models. To me, they're they're frameworks. We love them because it Yeah. instantly helps us think about the world and narrow down the options. Some situations you want to generate more options. And more more ideas. And in those particular situations you don't wanna narrow your thinking, you want to broaden your thinking.

1:14:07 If we're on board together. And we get a problem, imagine and it comes up. And how do you think through that in first principles thinking? Like how would you do that in that setting? I'll give you I'll give you an example from from Airbnb. You know, when the pandemic had Uh you

1:14:26 You can decide to do a variety of things. And Yeah, there there's all these pressures. There's uh investors who wants you to raise enough capital so that you can Yeah.

1:14:40 You can go through and weather the storm. There are employees that want to know that they're going to be employed. There are hosts that want to Uh no that's uh even though guests can't travel that They non refundable cancellation policy, they're gonna get the money. You have guests who want to

1:14:58 Uh figure out how to get their money back because they're not travelling. You have a business that went from A business that was growing uh twenty, thirty, forty percent a year to a business that

1:15:13 declines and you lose eighty percent of your revenue. There's all these pressures. It's a complete mess. And the solution that you had yesterday doesn't work for today. Because Airbnb before the pandemic was a lot of cross border travel and today

1:15:32 After the p the pandemic, there is no cross border travel. How do you think about this problem? Where do you start? That's a mess. Everybody is yelling at you from all these different angles and Brian just One of the most important things is to stay calm.

1:15:47 And look at the problem that we have at hand. And The most important thing. Proms to solve first, second, and third. And he had principles that he had outlined. He you know, we we used to have these emergency board meetings and it was just always discussing

1:16:02 What's the emergency this week, this week, this week? And then he leveled up and decided to say, Hey We need principles to decide. What we're going to do. And

1:16:13 He decided that Yeah, I mean we have a once in a generation. Pandemic. One in a hundred years. That's

1:16:24 outside the building, there's nothing that he can do to fix the pandemic. But what he can do is to make sure that Airbnb survives for the next generation. And he had principles by which he wanted to make sure that Uh We are

1:16:40 when we get out of this, we're seen as someone who created Airbnb for the next generation and not Not something that uh wasn't going to s survive this generation. Then he went to work. And it had these great Um

1:16:57 plans of like we're gonna reduce our burn by doing all the things In this order. We're gonna cut marketing. Nobody's traveling anyway. Easy decision. We're gonna cut contractors. We don't need

1:17:10 We don't have enough work for that. Easy decision. We're gonna have to raise money. And we're gonna do it in a way that doesn't burden Previous investors.

1:17:20 So we're not gonna raise money at a low valuation, we're gonna raise debt. Why do we need to raise the money? This crazy situation where both the The guests and the hosts want their money back.

1:17:33 We have three billion dollars of capital on the balance sheet of Airbnb. But We we we have three billion dollars or four billion dollars of customer deposits. We can give all of that to one side and what The gas will be pissed.

1:17:50 If we give it to the guests, the host will be pissed and we won't have a business when we When we uh emerge from the pandemic. So he goes out and raised four billion dollars, uh two billion dollars of debt. So two plus our Three is five. We can cover both sides and then t told both sides. Okay, we can put we can pay both sides.

1:18:10 Instead of Pay it out. Why don't you just Calm down, you'll get this money, you know you can get this money. And let's see how the system works itself out. And so

1:18:22 He had to sort of project. confidence and imagine your way out of this thing. And you imagine a solution which is okay, well We're in New York right now. Not not a lot of people wanna stay in their apartments in New York. They're traveling upstate. In San Francisco where I was, not a lot of people wanted to be in San Francisco. They went to Napa.

1:18:41 Until slowly but surely And Didn't happen in March, it didn't happen in April, but in May You found r resilience in the business model where people started to Travel again. Just in their own

1:18:54 backyards in their own country. And That allowed the That company to come out of that. And the thing that he did last was to lay off employees. He knew that the employees were ha were gonna have a harder time finding another job during that time.

1:19:11 during the pandemic. And so that was the Just had these principles of how he's gonna go solve this problem. Nobody would have told them to do that in that order. That's an incredible example, thank you. And then on the flip side, this is the craziest thing. So because

1:19:28 You know. Airbnb was the poster child of the number one IPO possibility for twenty twenty and they had seen their revenue go down eighty percent. And then they came out of that and then went Um

1:19:41 went on to be the number number one IP of that year. Um In December and Tour dash. You know, sort of I had the opposite experience of George Ash, which was

1:19:53 Boy, you know, they were also going trying to go public that year, but instead of being beaten down by the pandemic, they uh really accelerated during the pandemic and Also there are t. Tony Shu had a lot of principles behind what he wanted to get accomplished. Um

1:20:11 Like anything else during the beginning of the pandemic, it was very, very scary. Um, because around the world There are some places that were completely shut down, including restaurants. And if you shut the restaurants down. Because of his experience having worked in a restaurant with his mom

1:20:28 Why is Mom side? Washing distress. with his mom, he knew that restaurants wouldn't survive. They had less than thirty days of cash. And You know, that's less than thirty of cash when they actually are running at full.

1:20:41 Speed. So now There's They have less c they have less cash. Um

1:20:47 But Restaurant ish. uh is uh shut down for a period of time. people didn't know whether they can order food and it would be okay. As soon as we figured out that the restaurant shouldn't be shut down. And the restaurants can remain open for

1:21:02 delivery and takeout. He went to full force and Making sure. that the business could Help merchants. Bridge the gap.

1:21:12 You know, this is not something that's Other companies. I really respect about

1:21:20 Tony and the team is they decided it's like these merchants are going to be hurting and we need to help them. And so they proactively went out and Uploaded. menus from different merchants. onto DoorDash and said, Hey, I know you guys are hurting, the only thing is delivery. We're here to help you. We've uploaded the

1:21:42 menu, your menu. We found your menu, whether it's on the internet or we got a copy of your menu, we uploaded it or it's ready to go. Just let us know if we can turn it on for you. And that allowed DoorDash to grow very, very quickly during the pandemic. I thought that Jordash was a well run company in twenty nineteen. Um

1:22:02 And it was a it was a process by which they they grew very fast. They probably grew too quickly. Um The unit account. Nomics wasn't great. They had a few f hard fun raising rounds for the C and D.

1:22:16 They fix the the unit economics. So in twenty nineteen it was a walled oiled machine and I saw this wall to oiled machine push to another level In twenty twenty, during the pandemic, when they tried They really did help. um restaurants. Um

1:22:33 when they were in a world of hurt. So the pandemic. Is a crucible moment for every business. It was a crucible moment for every business. What differentiated The founders.

1:22:45 In Sequoia. From the ones who took advantage of that opportunity and sort of came out of it stronger. And the ones he didn't

1:22:58 I think we were you know, I hate to say this and it's maybe try, but going through the pandemic, we all came out stronger. It was a shared experience. Sometimes when you go through crucible moments In crises you don't have the sharience. But it's To answer your question more.

1:23:15 Um More succinctly. There are People who New that the crisis

1:23:24 Uh was an opportunity. And then there are those who Just thought of it as a crisis. And I think it was Andy Grove that says that, you know Good companies are

1:23:36 get better and they're defined by a crisis. Wh whereas Mm. Yeah. There are a lot of companies that are destroyed by a crisis. And

1:23:46 Many great companies. Would. defined and they changed the way they did things in a way that you They found solutions that you would not have imagined. uh when the crisis didn't happen.

1:24:00 I know it Think the founders that are They realize they're in a crucible moment. They're They need to do something differently.

1:24:10 And they stay calm. They look they stop, they look around and they figure out, they look around Three hundred and sixty degrees and say that's the direction I'm going. Even though the whole world is like revolving around them and it's a complete whirlwind. And they imagine why they should go into that direction.

1:24:30 And In most cases. They're fileing. different solution, a different product. A different way of operating.

1:24:38 And then scale down and Into that direction. Those are the ones that come out really, really successful. You know, in Airbnb's case they had to re They had to change

1:24:50 cross border travel to local travel. They change the long term status. They changed to having Experiences. In Geordash's case,

1:25:01 I simply had to sort of do things that they've never done before. It wasn't a new pro it wasn't a product. change but they had to imagine a different solution. Wait until merchants call them and say negotiate a deal.

1:25:16 They said, look, we've uploaded your your menus onto the website, into our app. These are our standard terms. Do you want to go or not? That wasn't a product that they had designed.

1:25:28 Before the pandemic. Often you need to find a completely different solution to I mean they seem so simple. After the fact but at that moment is completely unclear.

1:25:39 That that was the right's decision. But that's why you need to stay calm. That's why you need to look around. You need to stop, look around and and find the right direction that you want to go in and then accelerate. Yeah.

1:25:51 I think that's really an interesting approach, right? Where you you sort of stop, you don't panic. Evaluate what's going on. As rationally as you can in the moment, despite everybody wanting things from you and all this pressure that you probably have from investors, but you also put on yourself to take care of your employees, to take care of your customers.

1:26:11 To care of your family. And everybody's worried about the same thing. So you're operating in a very Amplified environment to begin with. Yeah. And the Beth's founders are doing this day to day.

1:26:22 But here the time frames are much, much shorter and much, much more compressed. And people's voices are Very much. Louder. Um Right.

1:26:33 Just recently Tony said that it's about uh m many good decisions about sequencing. We all know what we need to do. But sequencing it right is is actually what matters. Um And the sequence of how you do something often determines whether

1:26:49 Remembered or not remembered. In the example that we talked about s for Airbnb, there's a sequence of like what is easiest What is the What is the values that I have for the company? And let's go through the

1:27:03 Sequence. That most matches The values. So Brian wanted to take care of the employees the most. And so

1:27:13 The layoff was the last thing that I did. You try to do everything else before the layout. In Tony's case. Um The sequence was to make sure

1:27:23 Because he had a heart for merchants. The sequence was take care of the merchants. So Yeah. There wasn't um It's just when you have these

1:27:33 Well understood values. It makes the sequencing a lot easier. And often people forget. They write down their values for For a good reason. Because when you don't have a playbook anymore. All you have.

1:27:46 Left. Yes. the essence of what the company is, which is the values of the company. Often that's the essence of the founder, the values of that founder and how they want to f operate. But you forget that because it's noisy. Lots of people

1:28:00 Lots of different parties. Um Wanting your time and your attention. Work from home has become Somewhat contentious uh topic. But w I really want to hear your thoughts on the pros and cons and

1:28:15 And how you see it. Uh I think it's very, very hard to build an early stage company. Remote.

1:28:27 And the reason I say that is unless you You've worked with each other before. I have you I view there to be a well of trust that is created when you work together in the Yeah, so

1:28:40 the reason why people who have worked together for a long t period of time can like Anticipate each other's movements and what they're gonna do next is because they've been around each other for a long time. And as you know that Most of our

1:28:53 Communication's not verbal, uh there's body language, and how you said, how you Re aft. There's a lot of communications that we miss uh through Through

1:29:05 Work from home. And you just Can't read it as well. Uh on the screen versus in person. 'Cause there's only your you know, on screen in a Zoom, you only have your head. There's the rest of your body.

1:29:17 Um that you don't see. And so I think it's quite important for early stage teams to work together. I mean they don't have an office, they find a cot the coffee shop to work together at. Why do you do that? You can all work from home, but why do you get together at a coffee shop to work together?

1:29:34 It's noisy. There are a lot of people around There's a reason why you want to do some of these things. And I think Yeah. Does it mean that every single day I'm more productive in the office?

1:29:45 No, there are days when I'm writing a memo. It's probably better if I sit in the office or I'm at home and just cranking. Um It's also hard very, very hard to build culture if you're all separate and apart from each other. There's no ritual. Culture is the values, but the how do you express those values. They're Yeah. They're your behaviors. They're the rituals.

1:30:09 They're the narratives that we tell each other. And those things are just a lot harder to do over Zoom. So I think I think all companies should go back to being in the office a certain a certain number of days a week. It doesn't have to be five.

1:30:27 I think that we can't put the genie back in the bottle on remote work. But at the same time You know, we thought the world was gonna be different. When we were all online. And it turns out we actually enjoy See each other in person.

1:30:42 We enjoy having dinner together. I don't enjoy having dinner over Zoom. With someone? I enjoy it when we're we're breaking bread right off right next to each other. Do you believe that you can Please both sides.

1:30:56 And that that's sort of the hybrid model where people are gonna work at the office two or three days a week and then you can work from home to Or three days a week. Do do you believe in that being effective, or do you believe you have to pick a predominant one? and focus, like'cause your operational back end, your company culture, your cadence, they're all gonna be determined by what you pick. And if you pick in the middle, You're probably making trade offs on both sides and and not getting maybe the advantages or'cause you don't want to make trade offs. I think it's best if you

1:31:27 Take a stance. Take a side. Hybrid. I would cribble with the fact that hybrid doesn't work at all. I I think you can

1:31:36 Be in person, you can be remote, you can be hybrid, you just need the systems around it to To make up for the fact. That you're gonna operate in this. Well. Eric.

1:31:48 Every multinational corporation, when they have multiple locations, was doing some form of hybrid. Right. You have some people who are in this office, some people in this office, they're connected through Tell it you know uh telecommunications Um and some some people were on the road and

1:32:06 Okay, any company that ha what gets a certain skill. the salespeople in the field, they're not actually at headquarters and you're having an all hands. Those people call in. Um but When you have an important all hands, you call everybody in. You have an important off site, you call everybody in.

1:32:24 Um, and there are just certain things that should be done in person and there's certain things that are okay to do Over Zoom, over Um over telecommunications, over email. I think that there's There's uh

1:32:38 Different medium to do Different. Jobs depending on the objective is. And you should understand what the drawbacks and the advantages of each one. That's a quiet.

1:32:50 I mean we take a lot of First meetings I resume. Um And During the pandemic when we were only doing

1:32:57 Um meetings over Zoom. You just never got the right texture for the company. the cadence of the how the company operated. And Yeah, we might still take first meetings or resume, but we're gonna meet

1:33:11 The team. You know, at some point in person. And did you analyze your investing during that period where you're meeting more of resume versus more in person? when it comes as approaching the investment decision? Yeah, it w we can make those assessments, but the hard part is the environment is also different. Right. So twenty twenty one valuations were nutty. Was it the issue of Making those investment decisions over Zoom or was it the environment that drove valuations higher, so therefore the returns are gonna be a more difficult, more challenge when

1:33:42 Welluations are higher. Why do you play when the valuations are higher? When when sort of like the the The game is loaded against you in a way. Like why choose to keep playing? Why not back away and then come back when it When you the odds are in your favor. Well historically valuations have gone up.

1:34:01 But if they keep going up then you you How does that work? Like I think our LPs Pay us to make money. Between good times and bad times.

1:34:11 And and here's the thing that is most interesting to me. Um You can decide to shut down But then you won't get the texture of those companies being Developed.

1:34:23 And sometimes it's Y you gotta keep meeting companies, right? Like so you don't shut things down. You can decide to invest fewer Dollars. Uh when when things are hot and you could decide to must

1:34:37 More dollars when things are cold. But The market is also smart. So when things are hot, it's usually because something new is happening. And things are called. Maybe it's just not a good time to invest too.

1:34:52 If you could identify one it's irrational exuberant Yes, you decide not to invest in the irrationally in superior situations. But in nineteen ninety nine. Which was one of the If you are go back in history

1:35:06 And look at megatrends in investing. Yeah. I'm fifty two years old right now. When I was in junior high school One of the things I did as a business was to build PCs clone PCs because

1:35:22 The IBM P C X T A T. They were really expensive. And And so there is one that was m one mega tr

1:35:32 megatron, which is the PC revolution. Then in then there was the internet revolution and then more recently the cloution, the mobile revolution. Some right now we're in the AI revolution. In the Internet Revolution, when I first started working professionally after college was the Ed Lake Exchange. And then we started investing in nineteen ninety nine. Oh, that's one that you're

1:35:54 Frog started. And if you decided not to invest in that time, you would have missed out on Google, Salesforce, PayPal, Zappos, open table. There are a lot of great companies that were still founded during that time and Paying market prices for those investments. Would have been just fine.

1:36:14 And you can better than just fine. It would have been better than just fine. You could have you know But you could wait until two thousand and one. And maybe you could invest in lower valuations, but often Uh

1:36:25 And up. Public markets you can companies are available when the multiples Or low.

1:36:34 In private companies. Just because the valuations have come down doesn't mean the company that you want to invest in is looking to raise around. Maybe You know in nineteen ninety nine. You wanted to invest in

1:36:47 In Google in two thousand one they happen to be public. You could invest in Google, but if they were private, maybe you wouldn't be able to. Yeah. John Bragg said this thing in in my recent interview with him that I I never fully appreciated it, I don't think which was He had a reputation for overpaying.

1:37:03 for all of the land he was acquiring. And I said, Why do you do that? He's like, Well, if we're easy to deal with, people want to deal with us. And he's like, These assets only go for sale once. And he's like, So maybe it takes twelve years instead of ten to get our payback, but it doesn't really matter because there's no opportunity ten years from now to buy it again. Yeah, I think the That's an example for us. It it's the same is true in the pro in investing in private companies. It's still not a

1:37:30 Much better to pick the right company. And Slightly overpaid. Then to In us in something that is

1:37:38 Cheap. You brought up AI as sort of like the next revolution. Where are we going with AI? Where do you see that? And obviously the longer we go out on the horizon, the harder it is to predict. So maybe let's start with like what do you see as the next Twelve months. In AI

1:37:55 And where do you think we we sort of like how do you envision Sort of twelve months to five years. It's funny, because I think in the history of technology changes it's in Oh. I think Bill Gates said this. It's easy. We own we almost always

1:38:11 uh overestimate what things are gonna happen in a year and we ought to underestimate what's happened in ten years. Yes, it's harder to imagine ten years out, but Yeah. in the business I'm in at Sequoia. We are paid to make investments and to hold them long term and we do have to sort of imagine ten years out. Um I mean the next year again, these foundation models are getting so

1:38:38 Good that you can see certain things being automated that we used to do that we're not gonna do But I think you know, the next step after that is if you think about Lots of people talk about customer service and how we can automate some of the customer service. Emails or calls or and things like that. Okay. Let's say we do that.

1:38:59 What's next? Well, then you should reimagine the customer experience. And so AI will help us Automate some of these things and there's be massive cost savings.

1:39:09 But AI should also allow us to reinvent the customer experience. And That's why we're very excited about a company like Sierra. They're not just going to help you automate customer service tickets. They're going to help you reimagine what customer service looks like. Yeah, just similarly to how what happened in the internet. You could And the internet happened we could book.

1:39:31 Um Things we can put. Travel on the internet. We didn't have to call a travel agent. It changed the experience. We could search. That changed the experience. It broadened

1:39:42 No. You know, I had to imagine where I wanted to go and also want to get me a tech air to get a town. Now I can search. So my my imagination could be broadened and that just changed my my experience of of travel. Um And you know the

1:39:59 The airlines didn't allow you to change tickets once you bought them. Because in that was in some backend system, they didn't want to open up that system. Now we can change flights on the website. Well the same will be true with AI, like Start with automation, start with new experiences, and the experience will completely change over time. And it always takes a little longer. I mean I I remember

1:40:22 We talked about autonomous vehicles probably ten years ago, and today we have autonomous vehicles working in a few cities with Waymo. Yeah. People imagine that that would be solved very, very quickly. But um Where we going? I think we're going in a world where Uh many of the problems that we have in the past will get solved through automation. Many of the

1:40:45 Things that Many new problems will get solved through AI. Because they're gonna be as good as we are in doing analysis and doing being creative and things like that. And so I think it will be a very, very productive Mega shot. One way to explore this topic is to ask you what you're looking to avoid with AI investments. And I I'm thinking, you know, maybe something that comes to my mind is like it's a wrapper over chat GPT or something. What are you what are you trying to avoid when it comes to making AI investments? So the wrapper is a good example of something.

1:41:19 It just It's just a different user interface on on top of a foundation model. But Yeah. I think we're trying to make sure that something persists and what if it persists, it has its unique distribution, it's embedded into your workflow.

1:41:35 Um it has true ROI for a long period of time and it changes the the experience. Um Other things I You know, I'd say we try to avoid is Um

1:41:48 Things that are Moadkill along the way of A company like OpenAI or Google or Amazon or Meta. So small refinements into what the model doesn't do well today. That's just gonna be real kill along the way.

1:42:04 And then Um I think we're trying to avoid Things that are That sound good.

1:42:12 But they're not good businesses. You know, back to you know, nineteen nine nine, there were a lot of things that had lots of usage. That not had no revenue. And so right now there's There's a different example where lots of there's a lot of test revenue.

1:42:26 But the churn is very high because people don't stick, so There are a lot of things where You see very, very fast adoption, but the turn rate is very, very poor. Uh so we're trying to avoid those kind of companies. Do you think

1:42:40 Google and Microsoft. Like how how do you think you compete with them on a foundational model basis. Like they A, they can scale into enterprise overnight. B they can spend a hundred billion dollars on GPEs. How do you think about that? Are we gonna end up in a world where there's like Only a few foundational models and we're all gonna plug into them. To be honest, I don't know.

1:43:03 But I'll tell you this, in the history of an Technology. investing that I've been involved with. If you're Afraid.

1:43:13 You should just punch out. But in nineteen ninety nine you could have been afraid for Microsoft because they have lots of money and lots of servers. And yet they didn't win search. Someone else won't search. Microsoft.

1:43:28 It won the browser war for a hot socket. It was Netscape Netscape against uh Internet Explorer. I don't know many people use Internet Explorer today. Most people I know use Chrome. So

1:43:41 This is not a static situation. I think you just have to sort of have an open mind on why You will win. Um and Often the reason why large companies don't win is because they have their own internal issues.

1:43:57 That slowed them down. So when Microsoft joined the internet it was It was Okay. It was the antitrust situation.

1:44:05 And that slowed them down. They could no longer bundle I. into the operating system And so they had to break all those things apart. Um Google has its own regulatory challenges and so does Microsoft. So I don't

1:44:20 presume that they're all just gonna win because they have a lot more money and they have more a lot more capital and they have a lot more people. Um And but besides, if you thought that then I would be out of a job. So how important do you see what Facebook's doing then where they're spending, you know, fifty to a hundred billion But they're making it open source.

1:44:40 I think open source is a very, very important aspect of um What has happened in technology and Yeah, you have these religious fights between closed and open and you have religious fights between Apple and Microsoft, yeah or uh or Apple and IBM

1:44:58 Get him let's go back to and. The world is built on end. Um And You know, open source in the Internet days, there are lots of things that were built on open source and some of it was closed source and some of it is open source. And I think the same will be true with

1:45:13 With uh with um AI. There are gonna be things where you just wanna host it on Um a close source model because you know it has the breadth of functionality. And there are things where you can only make it work if you use your specific data. Train it very specifically for you.

1:45:32 And you're gonna use open source models for that. Um And just like Yeah. Google built

1:45:40 A great business. That is pretty close source on open. On open source software. Like Lytics. I think the world of AI is gonna be and as well. There'll be closed source and there'll be open source.

1:45:53 I want you to imagine for a You're in charge of let's say Canada and the US and maybe the UK. And I tell you that we are optimizing to be the best in the world at AI.

1:46:08 What are the policies that you think about? How do you approach this problem and how do you encourage us to be The world leaders. Um Maybe overly optimistic about human

1:46:22 Nature. And so I believe that you want to have Ezleal Uh regulation is possible in the early days. Let people experiment, let people try things. And is is it all gonna be good?

1:46:39 No. But If we had over regulated the internet, it would not have grown to the scale that it is today. And do we have problems on the internet? Absolutely. Um

1:46:49 And so I believe in sort of having regulation that is more open than not and then slowly Close off things. that you know is not good. Or The behavior is not good. Regulators often worry about the fact that if you wait too long you won't be able to regulate it.

1:47:06 I don't know if I Believe that. And then the on the on the flip side is It's always been I I don't know of a time.

1:47:17 That is ever worth to fight against technology. And to overregulate technology. You could have overregulated the fact that the scribes were gonna no longer have jobs because we came with the printing pass and go all the way back in time like that. Or figuring out. Uh

1:47:33 have a plough so that you need fewer people to s sow seeds because the plough could do the work of three or four people. All the way up to a tractor. How have we done trying to regulate or over regulate or control. uh things that sort of make human beings much more productive. That's what we're talking about with technology, that's what we're talking about with AI. Um

1:47:57 And then You know, if you wanna start Applying regulation there's There's maybe a slightly different framework that I would use, which is you want

1:48:08 Yeah. As an example with the combustion engine, nobody regulated the engine. We regulated what engines can go on the streets. What can go into a plane? You right?

1:48:20 regulated how is applied. But in a lab. And people were, you know, sort of doing Research. And trying to make the combustion engine even more powerful. You be more

1:48:33 fuel efficient. You don't regulate that. You regulate it when it gets in the hands of a consumer. So that was a a like removing barriers almost, but like what about amplifying? What about the push? How do we encourage more? How d how would you embrace this as a as a country? The market is

1:48:53 Pretty good at pushing. When they see opportunity. Yeah. More and more capital goes into it, more people go into school to No, and almost every single

1:49:04 Technology revolution I've been part of. There are too there are too few people will understand. That's Technology. So When

1:49:14 When there was uh when it was the PC industry, there are few people there are some people who understand Ray France, very few people understand PCs. More and more people more and more investment went into PCs, more and more people bought PCs, more people started using PCs, more people started building applications for PCs. And so over time Uh there was just a lot more people, a lot more investment in it. People went to school to sort of write software specifically for the PC as opposed to framework. The the main frame. That happened in the internet. Most people didn't know how to build um

1:49:44 A website. More and more people learn how to program in HTML and Python and road and Linux and why how you use Linux. To build. Uh today. And that happened with cloud and mobile.

1:49:56 Like So w today we have probably too few people who really, really understand the technology and its application. But you have so many people going into it today because they see The future is going to be powered by AI.

1:50:11 And so Wait a year or two. I bet you there's plenty of push today. There's That's why. The valuations are high for AI companies. Um

1:50:20 And wait a year or two. There's gonna be a lot of In fact, The hot take is that Many things will be overbuilt. So maybe we we're building too many.

1:50:32 GPUs for a year or two years out. Maybe there are too many data centers that have GPUs a year or two years out. Yeah maybe those things will get cheap. And when they get cheap, we'll find new applications when it gets really, really cheap. That would be sort of the history of markets. Actually it's interesting that you brought up don't fight technology. There's a saying in investing, don't fight the Fed. It's sort of the same sort of thing.

1:50:55 And and then what is way more powerful in many respects. Then technology? No. I think Mm-hmm. The Fed can constrain or can loosen

1:51:07 money in a very dramatic way. So it it applies Throughout the whole economy, as opposed to just about technology. Historically businesses have cycles. We tend to overbuild when we're optimistic.

1:51:21 And then you know, you go through that phase you just talked about. Out of the large technology companies today, who do you think is best positioned? That's hard. Well, I if you wanna use Don't Fight the Tape, when I when I started my technology career, Microsoft was the largest technology company and today they're the largest

1:51:44 Company. And so they seem to have figured out Through their ups and downs. How to stay relevant and stay on top. Um

1:51:57 I think Google or Google's having some challenges with their own regulatory issues. And Apple.

1:52:07 Don't ever count Apple out. Because back to they weren't the first to come up with the PC. They weren't first to come up with the mobile phone. They weren't there's so many other mobile phones. They just wait until they can create a great customer experience. And then when they do they pounce. They weren't the first to come up with an MP three player.

1:52:29 Or a phone. More fun. Well how do you Uh I think of NVIDIA. Of

1:52:37 I've I think NVIDIA is uh is a very great company for a variety of reasons. One of which is It went from a Graphic processing company.

1:52:52 To being The way we power all of AI And They fought. For so long.

1:53:02 about this idea of parallel processing. Well the CPU worked a certain way, the GPU worked a different way, and the GPU is Dell shown to be more powerful but after we sort of Uh

1:53:14 Got to the edge of War's Law? The G GPU is putting out. Because they can pa they can process things. Much more efficiently. But I worry about um

1:53:25 It they've only had one leader. In their whole cycle. I worry about what happens when Jensen decides not to I'll be at the head. I third video.

1:53:37 Yeah, that is the question, I guess, right. I think that's the question a lot of people have. Jensen's a remarkable. Sort of CEO. Jensen's a remarkable CEO and he does things very differently than anybody else. We had him speak at our base camp, which is our annual retreat for our our founders, and he just came how with so many great stories about NVIDIA, about his personal life, but also about his management style that is so different.

1:54:01 I remember being there and that was that was awesome. Yeah. Sometimes You you've said in the past that sometimes the path to greater efficiency is doing things sequentially and sometimes it's doing them in parallel. Can you explain that? Well, I think most people are trained to do things in serial. They they take a problem, they break it down into pieces and they do one piece at a time. So step number one, solve the problem number one, pro solve problem number two because we need

1:54:29 the solution's a problem number one, the feed in's problem number two. They eventually Uh go down the path and A lot of Like if you're an individual contributor you just

1:54:40 You write code, you just keep writing the code and you finish the code and you submit it. Um But if you're managing a team You need to break down this piece of software into components so that you can give it to your team members. You now have all ten of them working on it.

1:54:56 Um As opposed to You write it. Write it yourself and it's Even if you're really good.

1:55:04 Software writer. You literally have to be a ten X engineer on top of your ten X engineer. So you have to be a hundred X engineer to do it in the same time frame, but Ten ten X engineers can do it. And Sometimes it's just more efficient to just break the problem down so that you can

1:55:21 Put'em in parallel and then stick'em all together. How do you think about companies And time span, and specifically maybe with an angle towards positioning yourself to rapidly adapt to whatever the future brings versus trying to predict the future and running ahead of it. I think the

1:55:41 Consensus would tell you that it's very, very hard to predict the future. And you're Une your ability to predict the future is uneven. Because In the world that you know.

1:55:56 You may be able to be very good at predicting the future. But the world is not stationary. And the world changes. And in this new world Trying to predict the future when you don't have many facts or many patterns that you can go against.

1:56:11 Uh it's much better to have a machine that knows When to pounce? than to try to project what's going to happen. Go deeper on that a machine. Well, your company is in some sense a machine and so you're trying to figure out when you should pounce on an opportunity

1:56:28 Um You're building, you're building, you're building. And You decide. I'm gonna take this path now.

1:56:37 And you're gonna make your company go in this direction. Because you see the opportunity in this in this path. Um Maybe make it.

1:56:47 Perhaps, you know, as an example. Dorash Dor was Food delivery. W but specifically restaurant delivery.

1:56:58 And they waited until they figured out an advantage that they could have in grocery. Yeah. The mechanism by which to deliver Restaurant. Food and grocery food.

1:57:10 We're pretty much the same. And figuring out when to enter the grocery market had a lot to do whether the company was ready. The customers were ready. The market was ready. The groceries were ready.

1:57:24 And You can predict that customers want this. before they want it, or you can just wait until you see lots of customers. Bang on the door. Writing into

1:57:38 My groceries. And so it's a matter of what Do you want to be pushing the customer to do what you want, or do you want The castle of that.

1:57:49 to pull you in the direction that they want to go. It's the biggest risk there that you try to tackle two problems at once. Like they I'm assuming they knew they wanted to get into groceries. So part of the risk at the start is like if we're focusing on restaurants and groceries, all the time we're spending on one of those two things. And not all of it, but a lot of it's coming at the expense of the other. Or do you see that as as no, it's not.

1:58:13 It's a very Sharp insight that you have. I think the one the one thing that you'll find is that there are lots of examples that um That I could use. To support your conclusion there.

1:58:26 Because Before DoorDash. Um happen. There are plenty of other ser solutions. And most notably there was Grubhub.

1:58:37 Mm-hmm. That was just the website. And then they pass the order to the restaurants. And the restaurant delivered. And

1:58:48 Tony's observation was that's not deep enough of a solution. And so why was it not deep enough? Well, there are a lot of restaurants out there. that don't have their own delivery staff. Yeah. And Why don't we just

1:59:02 You're creating problems for them in a way. Exactly. And so the only restaurants that would be on Grubhub's website. Where all the companies that already had delivery.

1:59:13 So What DoorDash did was to expand the market and By expanding the market they were very focused on that problem. Because Like, really? You'll you'll deliver

1:59:25 You'll take the orders. I cook it and you'll deliver it for me. I've never heard this before. So you just like educating the market for a period of time because you're f just focused on that problem. As opposed to Um, besides Grub Hub, which didn't do that, there was Postmates.

1:59:42 Originally Postmates wasn't just in um restaurant delivery. They were doing anything. They were picked up from anywhere. And they would deliver it. to anywhere. And they will even pick up something from

1:59:55 I don't know, Bloomingdales. Or from Walmart. In that example. There's just Too many different things that you could be

2:00:03 you can do and it wasn't focused. And even more broadly than that, there was Task Rabbit where you can run errands. Well one of the errands you can have them run, uh Someone who's on Task Rabbit is to go pick up food. From any restaurant. So simplicity of the solution is the reason why I think Um

2:00:23 You want to start with a very focused problem. There's much easier to tell. People. This is what Dornash does. And then over time you expand that. You expand the remit because you've earned the trust of the people.

2:00:37 customer to allow you to do more things. One of the problems when you were saying that is like how did DoorDash find drivers in those early days? Yeah, it was hard because if you um the the one thing that Um you know, i if you sort of believe that it was more profitable to to

2:00:57 Transport humans then Deliver food. Have we Then you would come to the conclusion that Uber and left.

2:01:05 we get all the drivers and DoorDash would not get any of their drivers and it turned out that well A there's some people who would prefer to deliver food or a package over delivering people. They didn't know what to have to have social interactions and then There's other people with Perfectly fine cars.

2:01:22 But they're not perfectly fine cars. Just to transport humans. And so Um early on We thought it was gonna be a problem, but it was less of a problem than we in We had it originally imagined.

2:01:35 One of the the problems that I anticipate or Maybe from the outside looking in I can be completely wrong is When you sign up a grocery store customer, they want to work with you in a particular way, but it might not be a standardized way. And then you might say yes because you wanna sign up that customer. Maybe it's like Albertson's or something, but then you go to the next largest grocery store chain and they wanna work with you in a different way. How do you think through the standardization, which is like no, we work in this way.

2:02:02 versus creating all of these one offs. And I see a lot of startups do this uh where they want to sign a customer, so they'll violate sort of like their standard procedures and they'll create these one off contracts and technical solutions and then they go to and they're trying to get revenue so that they can still exist. How do you think about that trade off? It's a very it I think it's a I I use I use the accordion. Example.

2:02:27 Um often, which is It is You you you pull the accordion too far, then you have to push it back in and You know, at some level if you are super rigid Yeah.

2:02:40 You're not gonna win your first few customers. beginning the accordion is completely folded and you you you do pull the accordion and you allow things that you may not have allowed You you may not want to allow in that very early days. And then it gets super far stretched. And then you're like, Oh shoot, I need to standardize a bunch of things and then for a s

2:03:00 You're not gonna go back on these Customers so you or Or merchants. So you're gonna go back you're gonna go into the next Or you break up Your

2:03:14 hundred customers into three personas or four personas and try to have four different standardizations. But trying to be overly standardized at the beginning is generally not a great idea. Um And

2:03:28 The the opposite of that is have a standardized product And then Allow customization on the edges. Um, and I think a lot of software companies try to do that. Why build a platform What?

2:03:42 The platform is not changing. You're buying the platform. But on the edges we lock for customization and you allow you do it at the beginning, you find other uh developers who are willing to do the professional services on the side. Um and

2:03:57 And go from there. It's almost like you earn the right to do standardization when you're sort of trying to be the back end where you have to accommodate at the start and widen the accordion and then as you get scale and network effects and and more and more benefits to the a merchant or partner that you're partnering with you. You sort of can more standardize. Is that true? That is true. And I also just

2:04:20 think it's very uh there's a lot of hubris in thinking that you can standarise the beginning when you don't even know whether that's the right solution or for everyone to standarze on. And so Bring some customers. They'll tell you your standardization doesn't work for not only just because it doesn't work for them. Maybe that it doesn't work for many people. And at least learn from that.

2:04:42 What's the difference between working backwards and working forwards? So working backwards there's this um idea that Amazon Um popularized which was You start with the vision of the world that you wanna imagine.

2:04:58 And You You Think about if everything goes right, what is the What is the world that we live in and what does this product become that you're trying to build?

2:05:08 And Well, it's at Sequoia we'll call that the preparade. And You know, if everything goes right with this company, what does it become? And

2:05:18 Then you work backwards from there. What what is you know, one One year before that. What is it? Look like. Two years before that one.

2:05:27 Does it work? look like and Amazon popularized by working backwards meaning that go from the future all the way to today. Um and I love that concept in a sense, um, but I've also seen Lots of founders struggle to take it from the future, which they have this great vision of the world, and really map it all the way back to. today.

2:05:50 five years out, ten years out, but they can't map it today. And I also tell founders, okay, we're th that's the future that you're aiming for. Hear the realities of today. What does it look like one year ahead, two years ahead, three years ahead? That's working forwards. And if the two don't match.

2:06:11 Probably you're not on the same trajectory. And so I believe in having founders work both backwards and forwards. Often when you don't When you work backwards and you think you have a great plan And then you miss executes. And you don't know that you don't

2:06:26 You don't you're not executing it's because you haven't work forwards on what the year one, two and three look like. to be on that trajectory. What are the two or three mental models you keep coming back to most when you're making a decision? Yeah. I'm gonna ask you that question. This is your interview. Nobody's here to listen to me. I wanna know what your three two or three mental models that you use.

2:06:54 I I think the one that I learned from Amazon is whether this is a type one or a type two decision and you know, if it's a Type one decision I've learned from Crying. Chusky to run out the clock. Because you can't go back.

2:07:07 as a type two decision and you you know you just move the move forward, make a call and of course craft along the way. Type one being irreversible. And type two. Yeah. So if it's irreversible, run out the clock. Meaning like get all the information, make sure that that's a high confidence. Decision. Type two, if you can always change it

2:07:31 Make a fast decision and keep iterating. That's one model. mental model I think about is um Yeah, working backwards, working forwards that's also Top down versus bottom up.

2:07:48 There's a similar sort of idea. Some problems are better solved thinking top down, some problems are th um More easily solved. Just Working bottoms up. Uh another one. Generally is

2:08:02 Tabric. up hard problems into smaller and smaller bite size problems and solve each of those individually. And just the way I live my life, this is not a mental model, it's a lot about consistent compounding. And just No just

2:08:19 Every single day doing the little things that sort of improve Myself. or oneself for the company that I'm working with. Talk how you think through the the breaking problems thing because some you mentioned Um

2:08:34 bringing it into smaller problem solving those and then you get the solution. How do you think of that versus The individual Like the optimal solution. for that particular sub problem might not

2:08:47 lead to the optimal solution for the bigger problem. Mm. Yeah, so I think there is local optimization and global optimization you're talking about. That's a much better way to word it. Yeah. If you wanna solve a global optimization problem you need to Pop up? And if you're trying to solve a local optimization problem you wanna go down.

2:09:08 And um Yeah. So I think the problem first and foremost has to be at the right altitude. And then you can break the problem down. From there. Is there an example that comes to mind for your your thinking?

2:09:22 If you're trying to climb a mountain. And Yeah. The top down problem is

2:09:30 What's the path? So even before you climb the mountain you're you're gonna plot the path before you get onto the mountain. But once you're on the mountain. then you have a path. You're just going one step in front of the other.

2:09:42 on that path. And if you find that the path is not right. Hopefully you've had some back up paths and back up plans that you can go One foot in front of the other. Path A doesn't work, well path B might be a little better because

2:09:56 I plotted the alternative plot. To path it. To path B. So that's an example of like planning top down. On your path.

2:10:06 And your alternatives and doing a bunch of scenario analysis and then When you're executing on a data, they Period, you just literally just go execute. Um and I don't see that any differently than a company. You have a plan for the year. You have some scenario planning around it.

2:10:23 And so the more scenario plans that you have, the more easily you can course correct. Uh you know you're You're supposed to be on path A. You decide that you're still going on path A, you're slightly off, let's go back on path A. Path A turns out not to be the right thing. We're gonna pick path B because that's the second alternative. We're gonna go right.

2:10:44 One foot in front of the other. Plotting against plot um Happy. We always end these interviews with the same question, which is what is success for you? I know that this c this question was coming. And um

2:10:59 Yeah, to me the But Success is Just the process. And having a good process.

2:11:08 Because If you live the if you have a process of consistent to who you are and your values and you live that every single day and you get up every day and follow follow through on that process, you're already successful. Um

2:11:25 You know, lots of people talk about success is not the destination, it's the journey. I think it's just the process before the journey. Which direction are you gonna go? Wha why did you decide to go in that direction? How fast do you want to go in that direction? Before you can Go on that journey.

2:11:42 Hopefully you've planned things out and you have had a process to sort of plan that out. And if you did that right. You know you're gonna be successful. Thanks for listening and learning with us. For a complete list of episodes, show notes transcripts and more go to fs.blog slash podcast or just Google the Knowledge Project.

2:12:11 Recently I've started to record my reflections and thoughts about the interview after the interview. I sit down, highlight the key moments that stood out for me, and I also talk about other connections to episodes and sort of what's got me pondering that I maybe haven't quite figured out. This is available to supporting members of the Knowledge Project. You can go to fs.blog Slash membership. Check out the show notes for a link and you can sign up today.

2:12:37 And my reflections will just be available in your private podcast feed. You'll also skip all the ads at the front of the episode. The Fernham Street blog is also where you can learn more about my new book, Clear Thinking. turning ordinary moments into extraordinary results. It's a transformative guide that hands you the tools to master your fate. Sharpen your decision making.

2:12:58 And set yourself up for unparalleled success. Lear more at fs dot blog slash clear. Until next time.

What you see above is a preview of the first minutes. One unlock costs 10 credits and covers this episode forever: full segment and word-level timestamps on this page, plus .txt, .srt, .vtt and word-level JSON downloads, as many times as you like.