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Hello acquired listeners. We are coming at you with a new experiment called acquired replays We are releasing some of our greatest hits. Yeah, this idea came from talking with our good friend David Centra over at the Founders podcast He made point to us that it the great acquired is grown over the past few years Most of you actually haven't heard a lot of the episodes older than a year or two and there's some particularly Good stuff we think in the back catalog that we wanted to share with you all So we're not doing this instead of making new episodes We're gonna keep doing those at the same rate every couple weeks as always But we thought this would be a good way occasionally to bring everyone in the community up to speed on the best parts of the Quote acquired canon regardless of whenever you started listening I love the notion of an acquired canon if you were born 10 years ago Your parents would be irresponsible to show you the Mandalorian without a new hope or you know introducing you to the originals first You keep comparing us to George Lucas. Are we gonna end up being like reclusive harmits in Marin? Wouldn't be so bad. Yeah, wouldn't be so bad So today we are starting with our very favorite series that we've done on all of acquired the legendary Sequoia capital. This is a two-parter that we've edited into one episode here today The first is the story of Don Valentine and the history of the firm and really the history of Silicon Valley And the second is our interview with Doug Leoni. Oh where he says one of the very Best acquired quotes of all time quote in his Doug voice, which I can't even try to do You could burn cigarettes on our arms and we wouldn't flinch We got to put that in the merch store along with we got a bunch of feedback from the last episode that we need to put Bezos's market size unconstrained about AWS in there too if we ever do an acquired billboard It should say market size unconstrained. Yes. All right. Let's get to the episode Let us know what you think about this experiment for a long time listeners hop in the slack and let us know which episodes You think we should do in the future to get all of the newbies up to speed with that enjoy Welcome to season five episode four of acquired the podcast about great technology companies and the stories behind them I'm Ben Gilbert and I'm the co-founder of Pioneer Square Labs a startup studio and early stage venture fund in Seattle And I'm David Rosenthal and I am a general partner at Wave Capital and early stage venture fund focused on marketplaces based in San Francisco and we as you know are your hosts Today we are talking about the absolutely legendary Sequoia capital and because it would be inappropriate to try to cover Sequoia's Immaculate history in just one episode. This is only part one And typically I try and throw out some stats in this section about why the company that we're covering on this episode is important Well today. I'm only going to throw out one Since it's founding in 1972 the firm has helped to catalyze companies that now represent $3.3 trillion of public market value and for context the entire NASDAQ is $10 trillion It is frankly absolutely unbelievable that a single firm can be responsible for helping to create so much of our modern economy David, this is bananas. Yeah for comparison sake. What did we say next? Which is one of our A-plus's We said generated a trillion dollars in market cap value the next acquisition So here we are talking about 3.3 trillion dollars Obviously it's a venture firm not a company, but this is one of the reasons I've been so excited to dive into this new category here on acquired and can't wait to tell this history of Sequoia capital Absolutely For our presenting sponsor this episode we have one of our most important tools that we use for research here at acquired Tegas is the world's leading company intelligence platform providing a database of thousands of interviews with experts on companies and industries for anyone trying to understand basically any company Their approach to this is super novel disruptive and way better than the way this used to work Totally so any of you who come from the institutional investor or hedge fund world know about expert calls This is where say you're an analyst at like a bridge water or a black rock and you need to learn about a company or space you're looking at They're consulting firms you can hire who will go find people who know a lot about that space Maybe like a former employee or a customer or a partner and they'll pay them to get on a call and talk to you about it It gives you these amazing insights, but there are a few problems with it one Only the super super large usually public investing firms have this like I don't know any VCs or operators who did these calls in the traditional way Whereas everyone I know now uses Tegas too Even if you do these commission calls manually They're all one-offs and they take a ton of time to schedule But when you're looking at a space when we're looking at a company on acquired We want to see everything now all at once. We don't want to wait a week to schedule a bunch of calls And three Because these consulting firms have to focus on the widest common denominator for their clients You can typically only get insights on a few of the biggest companies out there Definitely not startups and definitely not new and emerging spaces like crypto and web3 Where a ton of alphas So Michael and Tom the founders of Tegas looked at this broken landscape and their answer was Well, what if we do something totally radical we take all of these individual expert calls that used to be proprietary We record them and transcribe them and make them searchable and on demand for anyone who subscribes to the platform It is literally like the company research equivalent of peloton versus soul cycle and as Barry McCarthy puts it best On demand wins where you can think maybe like zilla with public real estate search versus the sort of old locked up way It really solves all the problems you get instant access to a huge depth of perspective and for context There are over one thousand calls on Tegas on Tesla alone There's 285 on Nvidia There's 125 on Salana. There's just no way you could ever amass that much unique information and insights from all these different perspectives Doing one-off calls anyone who wants investing insight or just to make more informed business decisions whether you're a venture firm A founder company corp dev team or even just an individual all of the folks in the network who join Tegas and start adding their own calls Contribute to the whole corpus of information. There's even up and coming companies like friends of the show Vanta motor treasury brex pilot all of them have multiple calls on Tegas We use it all the time for acquired and it makes the show hugely better You can go learn more at teacus.com slash acquired. That's t-e-g-u-s And all acquired listeners if you use that link you get a free trial so you can check out how awesome it is yourself No matter what you do There's almost no way that having this insight doesn't help your business immediately Totally. All right. Our thanks to Tegas So lastly our limited partner bonus show this week was kind of a fun flip for me David interviewed me on what is a startup studio and how does it work? And I dove into our process here at Pioneer Square Labs If you want to listen and become a limited partner you can get started with a seven-day free trial and listen right here in the podcast player of your choice By clicking the link in the show notes are going to glow.fm slash acquired I promise it's very easy I like that. I like that. Yep. All right David. It's time. It's time. Let's do it So one thing that is Often forgotten these days because it's just a name and is like you know reminds me of the quote about Fishism water Where you ask a fish like how's the water and fish says what's water and that is that silicon valley is called silicon valley Because of silicon Even though it is mostly software these days and the internet so to set the stage for this episode We need to rewind back to the origin of silicon valley and Indeed silicon so we go back to 1957 When and this is really the moment I think you could argue when when silicon valley as we know it both in terms of silicon and in terms of the concept was born And that was when a group of eight employees Leave a company called shockley semiconductor shockley semiconductor laboratory and start a new company that ends up being called fairchild semiconductor and this group of eight employees goes on to be known as the traitorous eight and will We'll link to in the show notes to this amazing photo. We'll link to the Wikipedia page Of these eight individuals It's just so great so 1957 in all the best ways. Why did these eight folks Leave shockley and and start their own company and this was a radical thing to do at at the time well Shockley semiconductor was started by bill shockley and bill was a genius He was the co-inventor of the transistor That he and helped him and when he was at bell labs and for that he won the 1956 Nobel Prize I mean he literally helped him in computing But he did have a dark side and that dark side was that he was a terrible manager and people hated working for him And to help you kind of get the picture at this point in time and then for kind of the rest of his life He became a white supremacist and was a proponent of eugenics So this is the sort of a person we're talking about that would prompt people as brilliant as he was and as amazing as the innovation that was happening at Shockley would be prompted to maybe leave and do something rash So who would the traitor's eight? Well among them there are some names you might recognize Starting with Gordon Moore of Moore's law and Bob Nois who of course the two of them would go on to found intel Although that's a story for another day and Eugene Kleiner who would go on to help found Kleiner Perkins Which is another retro firm story for another day But what was interesting is when they left and they started fair child it wasn't Actually a startup in the way that we think about it today It wasn't an independent company It ended up they had a really tough time getting it financed and so how it ended up being organized was as the west coast semiconductor division of an east coast company called fair child camera and instrument corporation So fair child was located back on long island in New York And they owned the company So funny I always assumed that fair child was like one of the traitor is eight no not at all Uh, yeah, they didn't actually own the company believe they had equity in it But no, uh, so how did this happen a man named Sherman fair child at this point in time who lived in Long Island was the largest Shareholder in IBM because his father had helped finance Tom Watson in forming IBM Many years many years earlier So when the traitor is eight we're trying to get their new company off the ground They intersected with a man named Arthur rock who's gonna come up again in a minute here Who is one of sort of the early proto venture capitalist in California And he was a former investment banker and he was trying to get financing It was really hard and so he ended up going to Sherman fair child because he knew Sherman was the largest shareholder in IBM He was interested in technology and Sherman agreed to set this up as a division of his camera and instrument corporation Wow Creative yeah, yeah, which is which is crazy. So the way it happened They Loaned one and a half million dollars to the company in return for which they got an option to buy All of the stock of the company for three million dollars Imagine if VCs structured deals that way today with founders It wouldn't wouldn't quite set up the the right Set of itself No, but you got a you know crawl before you can walk Yeah, yeah, you know fair child would lead to many many things including of course intel And we'll we'll get into that a little bit later. I mentioned our thorac so what was the financing Environment for Quote-quote startups in in California at this point in time knowing how markets work I think we can assume that there wasn't much of it given the terms of that other investment You just mentioned it dude So as you might guess from how fair child was financed the quote-unquote venture capital industry or the proto venture capital industry That existed in California at this time was pretty much nothing like we know it today for one it was so small That the individuals who were doing it all of them in California They would meet for lunch once a month at the Marcopkins Hotel in San Francisco at like a table regular table And they would sit around and talk about like the various companies that they were working on That was that was it that was the entire industry and for two None of them actually came from a technology or a startup or company background So Arthur Rack who we mentioned he was an investment banker and a few other folks that were kind of instrumental at this point in time Pitch Johnson and Bill Draper that a draper might ring a few bells for folks They had worked in the steel industry and come out to California and started financing companies There was another gentleman named Tommy Davis He was a real estate developer who developed an interest in this this sort of thing So that was that was really the state of things and you know as evidenced by fair child You know here you have eight of the most talented Scientists and engineers working in the highest growth industry in the world And it's literally impossible to finance them They have to get essentially bought by an East Coast company to even get their company to file It's so interesting like venture capital falls under the Broad asset class today of alternative investments Which always seems a little funny given you know how much Especially today with all the late-stage Money coming into startups how much money is really invested there and silly to call it alternative Now when you look at it in these days is very much You had to be a very alternative counter culture person to believe that this was the best way to go and invest your money So it's right at this moment in time that a Quite a maverick what might say Individual comes on the scene and basically Basically single-handedly writes The playbook of what modern venture capital and alongside it What a modern startup would look like and that man's name is Don Valentine So don of course goes on and starts to say quite a capital and we're gonna tell this story here I cannot recommend highly enough Anyone whether certainly if you work in our interested in venture But even if not if you're just interested in technology and startups go do two things one Watch the youtube video of a talk that Don gave at the GSB at Stanford in 2010 and to read This wonderful wonderful oral history that Berkeley did as part of the history department there with Don And you will get a sense for what an amazing character this guy is and and a lot of this show is a lot of the history of this show Is taken from those two documents Yeah, and listeners the way to think about part one and part two of the Sequoia story part one that we're gonna focus on here This is really Don's story Yeah, and it's really cool actually the the talk that he gives at Stanford he holds up Towards the beginning of it the resume of an individual who had just joined Sequoia capital that week That individual is Alfred Lynn of course friend of the show and former guest This is a kind of amazing. He printed out Alfred's resume and brought it to this talk I also love that Alfred like had a resume at that point like he was you know C.O.O. and chairman of his apples that had just been acquired for over a billion dollars, but always hustling Okay, so who is Don so he was born in 1933 in Yonkers, New York Back on the East Coast His father was a teamster So a delivery truck driver and a union member If you can imagine it which Don took a ends up taking a very very different path in life Um his parents were completely uneducated both of them Neither of them had finished grade school Um Don was not like not like heading to college like hadn't finished grade school No, literally like had not finished elementary school But in good Catholic fashion Uh, they do value education and especially Catholic and religious education And so Don grows up in in New York going to Catholic schools And then he does he ends up going to Fordham University Uh, Jesuit University graduates in the early 1950s and promptly as most folks did back then at least most men gets drafted into the army This is I believe rape either during or right before when the Korean war is going on According to Don, he quote had a terrible attitude about the military He didn't like and doesn't like regimentation and this is going to become very clear Don does things his own way But one thing that he loves is electronics and technology And um he ends up getting put in charge in the army of in his words trying to teach senior officers To use modern technology instead of the way that they were inclined to fight wars You know, which was with like horses and you know in cavalry All that said the army and Don still don't really mix So he transfers to the Navy And this is a major major moment for him because he gets stationed in California He comes out to California and he steps off the boat and he's like I have reached the promised land It doesn't snow here in the winter I'm never going back to the east coast. I love this place His goal is he wants to find employment at a west coast electronics company Um, so he gets out of the Navy It ends up taking a little while he first gets a job at Slovenia electric Which was actually based in Pennsylvania I believe he was working for them in New York Is that the is that the vacuum cleaner company? What's the vacuum tube company? So this is how he gets into technology because this was still you know the semiconductor Believe had been invented by chocolate and others at this point Most computing such as it was was being done with vacuum tubes You know remember the any act and like this is what we're talking about back in these days I guess I know Slovenia is a lighting company I think did they make light bulbs? I've like seen the logo around like home deep. Yeah, they make light bulbs now I mean who knows what the corporate structure of the company is these days at the time they're making vacuum tubes and selling Them as as computing components mostly to the defense department and of course downed come from the military So Don ends up jumping ship to Raytheon and moving to Los Angeles So here he is he's finally he's achieved his goal. He's living in LA out in California Love in life surfing. He was a big water polo player and he's working in What at the time was the high technology industry selling Computing solutions to the defense department in the military He starts taking part-time courses at the business school at UCLA focused on sales and marketing because he was really interested in Of course sales which is his job, but also the marketing component like who are we selling to and why and he has a great quote He says you know, uh, where is the decision-making process integrate company? The answer is it's in marketing in a well-run company the marketing department in conjunction with the science department Science being engineering at the time decides based on what their capabilities are What the problems they can solve what sequence they should solve them in and how much money they can suspend They they can spend on building that product and how big is the market who's going to buy this stuff and all that happens within marketing in a primary position This really becomes Don's life passionate and that ethos, you know ends up informing Everything he does and everything. It's quite a capitalist. We'll see So after a short-standing at Raytheon He ends up getting recruited to move up to northern California and join a fresh start up in a really hot semiconductor company up there Fairchild semiconductor was was fairchild independent at this point where they still a part of the the bigger umbrella No, they were they were this was still very early. They were part of uh of camera and instrument as we'll see So Don joins. He's not part of the trader's eight, but he joins. He's like employee number 40 or 50 They're doing a couple million dollars in sales, but still really small and um at first they put him in charge of Of selling fairchild semiconductors to defense firms back in southern California So they sent it back down to southern California Which is kind of funny. It's it's exactly what is doing in the army, right? It's educating About modern technology the you know to people who had been doing things in older way and trying to basically do a very complex sale Yeah, I mean, it's kind of amazing that like You know Don's history from youngers, New York everything basically, you know sets him on it's like the Steve Jobs quote of like you can't connect the dots looking forward But looking back everything you've done, you know prepares you for what you're doing now Don you know basically Knox it out of the park selling selling to defense contractors down in LA he takes the company from this couple million dollars in sales when he joins To over a hundred and fifty million dollars in annual sales in just a couple years and And it's over that time he gets promoted ends up running all of sales and marketing for fairchild And he starts using everything that he's learned in his passion for marketing to Tap into like hey, maybe we should be selling to other markets too and which other markets should we be selling to and Are there things that we can do to customize the chips that we're making to make them more applicable to these other applications and other markets The Quote has here is business was so good. I mean, this was like got to be at this moment in time It was like it was like to be there in you know The mid mid 90s when the internet was taking off or the mid 2000s when web to 2.0 was taking off And it was literally just like you could see the roadmap of what all the applications were gonna be and it was just like Go build them first and best Yeah, not only did the semiconductor have perfect product market fit, but it scaled horizontally across Tons of industries. I mean everybody was going to need Equipment that required semiconductors and I think you know that now we sort of like take it for granted Who actually we're in this phase where we're sort of moving forward from IT departments into you know companies that don't have IT departments But this was the development of IT, you know This was every company that was starting to embrace technology would you use something with semiconductor products in it? Yeah, I mean we're gonna see this here in a minute with the personal computer and Apple But then with the internet then with web 2.0 then with mobile like you have this tectonic shift and then it's like okay We know what the applications are. Let's go build the applications and Donna's really the first person In in technology to recognize that these are this is the dynamic of how the broader technology ecosystem works So he says business was so good that we had more opportunities than we had engineers And we devised a bit of an ad hoc technique for evaluating different companies companies that fair child could potentially work with and and sell to you Before we would commit our engineering resources to work on them on a specific project We had to understand the nature of the application and understand the size of the market There a number of kind of highlight things that we did before we committed engineering and you know You could think about that and think felt like gosh man. That sounds a lot like writing an investment memo for Adventure capital firm It's also what a what an incredible privilege to to be in a position where you get to pick your customers based on who you think is going to be the most successful with your product Yeah, yeah totally So remember though Don's working up fair child he's taken them from a couple million in revenue to over 150 million in revenue one This is like you know the Early 19 late 50s early 1960s so 150 million wasn't just a hundred and 50 million back then Remember though fair child, you know, it isn't an independent company It's a subsidiary of this long island based east coast you know conservative camera and instrument corporation So every time that Don is you know working on building, you know a new customization and application new market that fair child wants to enter He has to go to the board of the company and get their approval for what they're doing and Don starts you know That goes well enough like incentives are aligned of course fair child wants wants the company to grow and do well Um, but Don gets this idea. He's like, you know we could Really accelerate our market and our partners that we're working with a lot of these Applications companies are new entities that are Integrating our technology into a full solution for a given industry They're getting off the ground. We could really accelerate things if we invested in these companies and help to them Help them build themselves because of the bigger that they get and the faster that they get bigger the more sales They're gonna have the more sales. We're gonna have Right. It's this ecosystem mindset, you know, we need to we did to help invest to build the ecosystem around our products and totally So he thinks this is brilliant. He takes this idea to the board and the board is like Absolutely not that's a crazy idea. Whoever would want to do that So you know Don in in typical Don fashion. He says well screw it like if the board's not gonna do this I'm just gonna start doing this on my own with my own money when he would Be working on the on the technology and marketing roadmaps for for fair child and working with startups to help build applications He would just start investing small amounts of money personally in these startups That he knew that he was gonna make them into big companies Um the only problem though is like he's doing this personally He doesn't have enough capital to really get these companies all the way to working You know, it's so funny how like we do care a wave that like Uh, you know, you're you're raising money for a new startup and um, they do even today in 2019 like the answer for how much capital You need always comes back to like you know somewhere between one to three million to get off the ground And that was the case even back then is this is totally amazing This is like my one of my biggest tech themes, but it is crazy looking at their first five investments Two of them were at two million and one of them was at two and a half million and it it like it is today's seed round And yet what they're doing is they're building freaking you know semiconductor physical applications like they're they're using Semiconductors to make another product physically manufacturer like it is yeah, they're Manufacturing like totally yeah, so even back in the 60s, you know a couple million back then was a lot more in today's Dollars, but you had to do all this really hard stuff Don's to starts doing this fast forward to 1967 and there's another company in the valley Uh, that it'd been around for a long time. It was kind of foundering called national semiconductor and National makes a big play. They're already a public company I believe they poach a number of people from fairchild including Charles Sprock who becomes the CEO of national and Pierre Le Mans from A name that's gonna come up again very soon. Pierre Le Mans from Fairchild who becomes the chief chip designer and head of engineering there Um, so Charlie Sprock is CEO. He does a couple really interesting things First is so Everybody in Silicon Valley at this point remember it's called Silicon Valley because they're making Silicon chips They're making the chips there in northern California fairchild's producing them there All these companies that don's investing and they're doing manufacturing right there Charlie a national he offshores chip production to Asia and he he reasons that like hey the intellectual property that We're building here. We can just do all the design and building here and we'll just outsource the actual production of these These chips of the silicon as a commodity um, so that creates a huge price war in the industry and massively lowers the cost of silicon Which then ends up enabling all the things that come shortly thereafter including the PC We should also say that the incredible growth and demand for silicon is fairchild's fault because fairchild Was the one who pioneered the idea that silicon was actually the most effective material to use for semiconductors That wasn't the case before I believe before fairchild people were using germanium to make semiconductors Which is a rare precious metal Yep National would actually go on later to acquire fairchild and Ben do you know who would ultimately become the CEO of national semiconductor This is you know, this is like the beginning of the valley being a small place and And all of these dynamics enabling the personal computer Gil amelio Oh, what yes of apple fame yes future CEO of apple Uh, this first I've wondering CEO of apple. Yeah, I believe his first CEO gig was taking over for Charlie as CEO of national Yeah, so all of this is going on fairchild is on the ropes uh in 1968 Gordon Moore and Bob noise leave fairchild, so Don Valentine's still there at fairchild Uh, and they start intel and Don sees the writing on the wall and he's like oh man fairchild is cooked Brain drain. Yeah, brain drain I mean, it's just like silicon valley today these things start happening like the the key leaders and really smart people start leaving You know the writings on the wall He leaves he moves over to national as head of sales and marketing at national now this is where Serendipity completely strikes uh if Don hadn't made this move I'd seriously doubt that there would be a Sequoia capital and there may not be a modern venture capital industry as we know it today So Charlie um is obviously brilliant and this move of outsourcing Production of chips is revolutionary to the industry and quite prescient and quite prescient um But there's one thing that he's absolutely terrible at and that is public speaking And that's one thing that Don is not afraid of So uh remember nationals a public company um and they have to do earnings calls with Wall Street even back in 1968 Charlie's terrified of this he doesn't want to do them And so as soon as Don shows up he says great Don your head of sales and marketing you lead the earnings calls Uh, so which would be unheard of today for I mean it's your CEO and your CFO and your CFO basically without you know without exception Yep, yep, and you have other executives on there from time to time but uh sure but not leading it Don starts leading the earnings calls Through that he gets to know a lot of the shareholders of national and it turns out that one of their largest investors is An enormous public investment fund based in Los Angeles back in Don's old stopping grounds called um at the time called the American funds And that was part of this institution called capital group Which I think a lot of people don't know about but capital group still today is one of the largest uh Mutual funds and pools and mutual funds and money managers in the world I might believe they have well over a trillion dollars in capital undermanagement across many many funds Capital group They had been seeing what was starting to happen up in you know the new proto silicon valley Uh, they'd seen the intel IPO that had happened Uh, which had you know was the first and intel was the first true Mentor backed company that had gone public and all the wealth that had created and who originally backed intel Uh, I believe it was Arthur rock right the rock organized us and to get that backed intel with equity Well, it was a convertible instrument. It was like convertible data Uh a story for another day So capital group they'd seen this and they actually funded AMD Uh, and AMD also came out of fair child which I didn't know until doing research for this for this story So yeah, both intel and AMD both were fair child alumni. I mean the Really all goes back to the traitorous aid in this legacy of like hey leaving dying companies and starting new ones out of them that Propels silicon valley to its day to this day That is so much like all these other industries we've talked about I mean Verizon and AT&T basically both coming out of the the original Massive AT&T company. It feels like chip companies are not unique in this characteristic of uh of you know both Modern giants coming from the same source Yeah, yeah, so capital group they've invested they privately funded AMD They're a big investor in national. So they're like you know, especially as a public investment vehicle They're at the forefront of being um investing in silicon valley and its growth Uh, they get to know dawn and they learn from dawn about all this private investing he's doing and so they approach him with an offer How about he do this full-time leave national and come and start working with them a capital group They'll give him you know certainly capital and they have more capital than probably just about anybody in the world at this point in time Uh, or access to capital and take him from you know the couple thousand dollar personal checks That he's able to write to finance these companies up to enough that he can actually support them to get to uh get to a public offering where they need to get to Um, so dawn jumps at this chance, you know, this is his true passion. He loves this and this is a chance to um, you know take all of these Romaps and marketing and market analysis this skills that he's developed and just have this be his full-time job This is of course the birth of the illustrious and uh and name we all know today capital management services ink Yes Well, it was part of capital group so we'll get into the structure in a second I want to throw in a few great quotes from from down here. He talks about why he had the Courage to think that you could do this full-time. I remember this is crazy like nobody is investing full-time in private technology companies at this point time It's it's you know a bunch of folks who made money in other industries having lunch at the markovkins hotel Remember and dawn is gonna make this his full-time job So he said I had a sense that my system of selection would work far more than it wouldn't But I didn't have the resources personally to play Texas hold them and put up more chips Um the opportunity to have a large discretionary pool of money to continue to support the investment ideas Was the difference in the environment I was in and the environment I was interested in going to and after 12 or 13 years in the semiconductor business I had a very high profile reputation in this community and again he was already doing the investing privately Uh, so he says so people who are interested in starting companies often Gravitated to me to help them start their companies from their point of view I had some money. I knew how markets worked and how to help them position their company in the market So I had a bit of an unfair advantage in those two respects But the most unfair advantage I had was I knew what the future was and very few people knew what the future was Nobody else nobody else in the venture capital industry at this point was from the semiconductor business Nobody else knew marketing and nobody else knew the microprocessor So it's kind of amazing like Don has this as we've talked about it's three pretty valuable things to be good at at this point in time Exactly exactly so like if you think about what what he's saying so It maps pretty exactly to the core functions of a venture capital firm. So on sourcing He has a network of super talented technical people and scientists with the right experience to start technology companies You know, he is I mean his name is Don. It's perfect. He's like the original silicon value mafia Don That's one that's like top of the funnel that sourcing But then too he has this unique experience that he knows all the roadmaps of you know fairchild and National and the whole semiconductor industry he knows what markets to attack So he has like the selection judgment of which founders and ideas to invest in and then he has the ability to actually Help them unlike anybody else in the industry at the time actually help them build their companies through you know Certainly recruiting management teams, but also strategy and decisions in the early days because he's lived through it So he can help them build their companies and now finally through capital group He has access to essentially an unlimited pool of capital which again nobody else in the industry had People were having to go back to the east coast of fairchild to finance their companies So David you're saying an unlimited pool of capital. How does that really break down and how much money from the capital group could don really invest in startups exactly So this is 1972 Don leaves he starts working with capital group and capital group sets up a new five million dollar fund For their clients who want to invest in this high risk high return start up in the semiconductor industry and in In northern California and capital group calls it the quote-unquote Sequoia fund And this is the beginning of capital group came up with the Sequoia Well, I don't know I don't know if capital group are down did but it is it is within capital group this 1972 five million dollar fund is called this coia fund and so Don starts Working on this on behalf of capital group and capital group's clients But you know again Don's kind of like a maverick and he does things his own way He really he's not super interested in just working for capital group forever He really wants to do this himself and and capital group totally supports him in that So he starts making investments on behalf of them But he also starts working in parallel on creating his own fund and own firm That he's going to call Sequoia capital and raising an outside fund and you would think this would be easy, right? I mean Don has this amazing track record He has a brilliant strategy that nobody else can replicate. He knows what's going to work He has the he has that there are no LPs Well, he has the stamp and imprimatur of capital group. You know one of the most storied money managers You know in the world at that point in time and Don He learns a lesson that you know generations of people who start new firms have learned again and again We learned it wave which was that even with all that starting raising a first-time fund is really freaking hard Like really freaking hard Yeah, and what Don was doing was raising a first-time fund for an asset class that didn't yet exist So for Don there weren't a group of investors who were used to putting money in this risk return profile It was going and convincing them hey like there's not really historical data on this But you should take a fly or not only on me, but on this entire concept Yeah, totally. I mean you got to remember this is pre you know for for listeners who know about David Swanson at Yale The chief investment officer at Yale he really pioneered this This approach that large Pools of capital especially tax exempt nonprofits or pools of capital should should put a lot of their assets in alternative investments Where they can get extremely high returns over a long time horizon and because they're tax exempt They can compound those returns at a much higher rate than than ordinary folks This concept didn't exist so most pools of capital you know university endowments Foundations family offices and the like you know all of capital is clients bonds It's treasury bills. Yeah, it's fixed a little bit of stock. Yeah, they're investing in you know and and these folks they're targeting across their investments a 10% IRR Which you know it is great and better than like the you know average market returns But it's nothing like what Don thinks he can generate and what the venture capital industry promises So he goes out and he makes this pitch about like hey, I think I can at least double 10% IRR and if you look at my personal track record Like it's much more than that and indeed Sequoia's first few funds would be well well above 10% IRR many multiples above that The reception he gets is like Well, this doesn't sound like the investing business, you know, this isn't fixed income This isn't you know and and Don's like yeah, you're exactly right This isn't the investment business. This is the company building business. I'm in the business of starting and helping build great companies And and he's so right. I mean that is what true early stage venture is it's not you know Investing allocating money and seeing what happens. It's really digging in and helping start something from scratch And that's where to this day, you know the deep That the true outlier returns are But the LP community is just like they don't get it. So don tells us great story We goes to see Solomon Brothers in New York the story of investment big which I believe it was Solomon Brothers That was the subject of Liars poker Michael Lewis's first book and And he sits down with the folks there. He gives them the pitch and they say I see that you didn't go to Harvard business school And he says right. I didn't go to Harvard business school. I went to fair child semi conductor business school And they didn't like laugh at all and they're like we're not going to invest with anybody who didn't go to Harvard business school So it ends up taking him Almost three years while working with capitol group to raise the first independent Sequoia fund But finally in 1979 and that that was like single digit like how big was that fund? I couldn't get the exact data Well, I saw a couple conflicting sources, but I believe it was somewhere between three to five million So quite quite small and that's with three years of work on it Just think about the tenacity. I mean most people would give up. Yeah, totally think of Sequoia capital today And then think back to the early 70s and one man, you know Don Valentine scraping together for three years just because he believes so deeply in this vision of the future To put you know three to five million together and start investing like it really just like tells you a ton about You know you look at their ethos today, and this is where it comes from once he gets started He sets what he calls a few ground rules for investing. So these are this is the original Sequoia capital investing checklist one must be in a very big market the the potential investment Two must be in northern California that's changed Three must be in advanced technology four must have high gross margin ability That is also changed and five must have the potential for Sequoia to make a hundred million dollars on the investment I mean that's incredible like a Three to five million dollar fund, and he's still like he's only aiming for shooting for the moon Sequoia alone could make a hundred million dollars on these investments Which is basically by today's standard saying it has to be a unicorn because in general an early stage Call it a series a investor is gonna get diluted to around 10% ownership by the time there's an exit It is sort of the finger in the air way you would think about this stuff Sequoia's Had some examples where they've bought up more think drop box And there's also examples that we're about to go into where The terms were much different and you didn't just buy 15 to 20% of a company you bought much more in these early days Well, then these companies most of them weren't raising multiple rounds So Sequoia was financing that was the only private capital that they were raising and then they were going Achieving profitability and going public But still like you know you think about today people talk about You know, oh VC investment you got an underrate to 10x returns You know even from day one don's underwriting to 20x plus returns And if he doesn't see that and still to this day, I mean I think one of the things Sequoia is really known for is they will only Attack markets that truly have the potential to be large like a billion dollar market is not enough for them You need a multi billion dollar You know ideally 10 plus billion dollar market because again like they're aiming for each of their investments to make 20x plus And then the final I love this the final item on the checklist for for downs criteria for investing is Must be positively responsive to our active participation You know, which is great no Ed. No, you know, obviously don develops quite a reputation as we as we talked about with trip on the A episode Being very active and being very active not only governance, but Influencing management of the companies. This is really critical like Don he has the credibility to be very active in these companies because he has helped build the previous generation of You know of Defining companies that are setting the roadmap for everything that's going forward The other thing that he develops is Is a methodology for kind of assessing entrepreneurs David But before diving into the entrepreneur side of things the thing that struck me on these ground rules And as we've danced around a couple times here Don plays by his own rules and he sort of has this ethos of This this early stage investment business is a subjective business. It's not a Highly analytical data driven business like it's a it's a feeling business And yet in these ground rules it's interesting to see what hard and fast financial things jump out So even in this high area of subjectivity and gut feel Must have high gross margin ability is in there as one of these precious few rules You know as an early stage investor that's that's like really Bringing home to me and and thinking about how important that is in the ability to to sort of of course scale a company But but generate outsize returns the only number that you see in here is that that hundred million And then the only other thing that sort of close to resembles a number is high gross margin ability It's interesting to think about what makes the cut Yeah, well at this this also leads into The his methodology for assessing entrepreneurs, but um Don you know As as so many other things in pioneering the venture capital industry like I think he I don't think he would put it in these words, but he recognized that this is a business that is both art and science And that is what is so Incredibly awesome and fun and rewarding about working in this industry and in early stage venture capital But again, you know if you think back to the folks that we're doing this before it was all art You know And if you think to a lot of the entrepreneurs who were starting companies like the trader is eight It was all science like they weren't thinking about the art of like how do we make this into like a huge wealth generating vehicle for ourselves and for the ecosystem It was like we just want to get to do science, you know And let's like find some way to do science and and Don is really the first person. I think to bridge this gap The methodology for assessing companies and entrepreneurs He kind of goes back to and I assume this he was doing this when he was working in companies too You know remember he has this Jesuit education and bad you know catholic school up upbringing background and he goes to He goes to the secratic method, you know still to this day. I think this is a lot of how Sequoia runs their interactions with entrepreneurs they ask questions and then they just listen to the answers this is such a Key to being a great VC one thing that I struggle with a ton is like you can the temptation is always to insert yourself into what's going on Don recognizes that like what you need to do is listen to what the entrepreneurs are saying You made agree or disagree or like understand or not understand but like you need to understand how they Think about things not how you think about things Yeah, and it's and it's not about their answers, but Why they're thinking that answer is the right answer and how they arrive there and what the thought process is yeah And so you know down talks a lot about And if you watch the the YouTube video of of him at Stanford how Formulating a question he believes is the most important thing in his business And so he has a rule that questions can only be 20 words or less and Yeah, what do you when he solicits questions from the audience at Stanford he says 20 words or I'll kill you It's great But that's how he approaches things because he's really interested in the storytelling technique of the entrepreneurs because He says it's about the building of the idea the size of the market the degree of technical risk to get this product finished Who's going to care and explaining that in a very simple way We can tell that that person who can do that explain it in a very simple way is somebody we want to be in business with people who Are instead Complex rambling all over the place. They're not you know Donna's realized that the value The only competitive advantage that startups have is focus and speed and stealth and so if you're all over the place You're not going to be able to execute on those things and that's still true today So David how do you square all of this with don's sort of off-stated principle that he invests in markets not founders Yes, how does this assessment of founders fit into that notion? Well, you know I'm asking you as a technology historian not. Yes, obviously you're not in don't don't say Yeah, exactly well. I think of course they're interrelated and like all investing it is it is Early stage investing it is about both the market and the team But I think that's this is the key is like the market is the important thing But you need a team that gets back to Don's last point on his checklist of must be receptive to our active participation You need a team that's going to be focused and able to quickly get the right solution into the market And so he has this this really great quote that I think encapsulates this says so our view has always been preferably Give us a big technical problem Give us a big market when that technical problem is solved so we can sell lots and lots and lots of stuff Do I like to do that with terrific people? Sure Are we willing to invest in companies that don't have them? Sure, you can augment management. You can help them with more people that are highly qualified We invest in the size and the dynamics of the market I don't care if gingas Khan is running the company. We'll give gingas Khan some health Give me a giant market always But I think you know Steve Jobs is going to come up in a mini here But I think you know his point about gingas Khan is that gingas Khan may be gingas Khan But he was focused on you know winning and Speed and conquering and that's what they're looking for And that to just beat this metaphor to death and the gingas Khan also has weaknesses And therefore must have a team that surrounds and compliments and I think Don has some quote I don't have it exactly but about how The most critical thing for an entrepreneur when sort of listening to these questions What are you listening for is is really this self-awareness of what they're good at and what they're not and exactly point number six How receptive they're going to be to to being helped with those weaknesses? Yeah, I mean again think back to this moment in time the people that were starting these companies They were engineers they were scientists by and large and Don's Superpower was he was able to augment these companies and these teams with folks like himself who were able to do Sales and marketing and go to market and then Sequoia could help argument augment with Finance and accounting and everything around that and and the outsourcing of all that What he couldn't have was folks who thought they knew everything So what actually did they end up investing in once they closed this the first Sequoia capital fund in 1975 So it turns out Don makes his first investment in indeed a quite giant market enabled by semi-conductors, but one a little off the beaten path and certainly different than the Defense contractors that he started his career selling to and that was a Tari And we're going to talk much more about Atari later in the season here on acquired But it was the very first independent Sequoia capital investment Don invests six hundred thousand dollars in the company in 1975 And the very next year the company ends up getting acquired by Warner communications for twenty eight million dollars At Sequoia makes a quick four x return, you know, which is great great IRR Uh, but uh does fall short of the twenty x that Don is hoping to underrate too Did I find a different source on that? I thought it was a two million dollar initial investment Uh, or was it did you do a follow-on for two million? I believe the initial investment was six hundred. Okay now Atari had also already been around for quite a while when uh I think and don't mean three years they had gone without before raising Yep, and Don had known no no no no in bush now the CEO for for many years So I have to assume this was one that he had kind of waiting in the wings Until he closed the fund which whichever good venture capitalist should have went out raising their first fund is Who's gonna be your first investment? Oh, yeah, we did that too. We have it's amazing. It's amazing. How much the industry is still the same So then in 1977 Sequoia makes What could have been Perhaps their biggest and most important investment ever and unfortunately becomes perhaps their biggest and most important lesson Just to pile one more thing on before the big reveal which everyone probably already knows Is responsible for about a trillion of that three point three trillion number that I quoted of public market value today Yeah, yeah, well, it's good thing they still have another two point three trillion that they're part of So in 1977 as trip alluded to on our year episode So koia invest in another little company that was founded by an early former Atari employee That was apple computer So Steve jobs had worked for Nolan Bushnell at Atari uh, and uh don had had gotten to know him a little bit then and They'd so jobs and was had started the company and they brought on Mike Scott as the first president of the company Yeah, we should say Doug got to know Uh jobs a little bit at that company, but did not have the impression that this was a venture backable guy at this point in time I believe his quote on Steve jobs was that he looked like Ho Chi Minh yes Uh, uh, so Mike The the two steves had brought on as the first president and it turns out Mike used to work for Don back in Fairchild and national And uh, so Don gets wind of the company You know he meets with them and Don also knew a very important guy in apple's history Mike markola Also used to work for Don back in the semi conducted days and Don quote quote sends him to the company with the intention that Markola is going to replace Mike Scott as the president run the company ultimately though You know as trip talked about markola makes a brilliant decision says, you know I don't actually want to run this thing day to day. I'm going to be the chairman and really help these guys But regardless with you know this is a you know kind of perfect example of Don's company building at work and management team Recruiting on the back of this Apple raises their first venture capital round of just over half a million dollars Interestingly um the lion's share the capital comes not from Sequoia, but from Venrock Which does a little over $250,000 Don and Sequoia do a hundred and fifty thousand dollars and Arthur rock does the balance So Apple is off to the races and they really you know as we've chronicled many times and will continue to chronicle in the future Really invent the personal computer and usher That wave of technology in two years later though, and this is this is the David side there comes Oh, this is just so painful So painful and clearly has left its mark on on Sequoia Two years later I couldn't find all of the circumstances around this but to the best of my understanding So uh the first Sequoia fund did not have only uh tax exempt nonprofit LPs in it uh it also had I believe feet of individuals and and maybe corporations and You know not Solomon brothers, but other folks like in certainly capital group as a result of that Uh those folks needed to pay taxes and apparently some of these LPs were encouraging Don To make a distribution of some of the gains in the fund so that they could pay their taxes on the gains And so Apple had grown quite a lot. It's now 1979 and Don before the IPO sells Sequoia's stake which they had invested a hundred and fifty thousand dollars for six million dollars Uh to make this tax distribution to LPs now That's a enormous return Phenomenal return yeah phenomenal return, but oh my goodness six million dollars Compared to what Apple you know would shortly become and then ultimately in the long term of course become And it's this lesson, you know that drives Sequoia in subsequent funds to take uh to take their capital only from nonprofit tax exempt sources which becomes you know really uh not uh certainly the norm across the industry, but uh a goal and and the lion's share of money that moves into venture capital is Ends up being university endowments foundations folks that are super long-term impatient and aren't going to Force vcs to make uh these terrible decisions like this Yeah, and another uh you can sort of check me on this David, but my understanding is Sequoia More so than your average venture firm holds the stock in companies longer after they go public and often Sticks with the companies for a very long time. I think probably also inspired by this lesson This and others that we're gonna that we're gonna talk about here in short order You know we're gonna talk about Sequoia's playbook in a little bit But one of the key lessons that they learn is like when things are going well go long You know like value creation in these companies that are building and creating enormous markets Takes a long long long time. I mean just look at you know Airbnb look at Google look at it. It'll look at Apple You know you can still be getting enormous enormous value creation a decade plus after these companies are founded regardless of whether they're private or public Yeah, so it's fascinating to think about you know the first couple of investments or first two out of a handful of investments being Apple and Atari In total Returned a profit of about 10 million dollars or a max of 10 million dollars It is wild to think that that is the some total of of Sequoia's return on those two companies. I know I know but at the time I mean like even you know If I pulling it into context today like if we within you know two to three years of starting wave if we could be sitting on two x-cash distributed like I would feel great about that you know But the lesson here is like that's not the game work the business we're in or the game we're playing The game we're playing is like 10x plus cash distributed and to do that you really need to be in it for the long haul especially when you're investing early Yeah, the other thing to know here and and David as you as you foreshadow and you've been smiling a little bit We'll get into this much more later this season But with Atari The Atari boom that we all sort of know of in the 80s was after it had sold to Warner and so you know It's a quay didn't even have an option in participating in that upside unless they were gonna block the sale Yeah, yeah totally and that also leads to another part of the Sequoia playbook which is like when things are going well Really try and Convince these companies to stay independent and not sell I mean look at Instagram, right? selling Instagram to Facebook was Was a terrible terrible mistake by the founders and the investors even though you know it netted them great returns at the moment And was interesting sequoia ended up investing right before that deal happened That is a debatable topic, but we can know you think that's debatable girl I think if it had gone a lot longer than Facebook would have had to pay a lot more like in the dozens of billions of dollars to acquire purely because there is a very very high user count Social network that is a threat to them However, do I think that Instagram would develop the business that they have today that is billions of dollars of revenue flowing through them by advertisers? Maybe but that's not a sure thing. I mean that's all yeah Maybe because of what Facebook had had done funneling all their existing advertisers there. I think that's true And certainly they helped accelerate it grow it more quickly, but at a minimum Instagram should have waited you know longer and then had a what's actually acquisition at a bare bare minimum Yes, you know, I get it's so hard to you know, it's easy to arm check quarterback this now and hard to be sitting in the seat of You know Kevin and Mike when they have a billion dollar offer in front of them Uh, but this is the value. I mean Sequoia's learned these lessons over so many decades and seeing a time and time again So the other lesson that they take from Apple is what Don and Sequoia call an aircraft carrier approach that they start taking to these big markets They realized down realizes that Apple has created this PC market And it's not just going to be Apple that's going to succeed in the PC market They're going to usher in all of these other enabling companies that you need around the PC So like Apple is the aircraft carrier, but you need all the destroyers and the you know The ships around it and like all the planes on the ships and all that stuff So they start financing component companies around the PC industry Apple and Don help start a company called Tandon Corporation that makes disk drives They are first investors in Tandon Tandon goes public after a couple years reaches a market cap of over one and a half billion dollars This is in the early 80s A company called Printronics that makes printers a company called Priyam that makes disk drives a company called Dyson that makes magnetic discs for the disk drives All told I believe Sequoia ends up making about 15 investments Kind of in this aircraft carrier strategy around Apple and it drives Much of their returns in these early funds some other notable investments that they make during the 70s and 80s In 1981 they invest in a company called LSI logic Which makes they do again around PC and competing them storage and networking products In 1983 so just two years later LSI goes public in the largest IPO on the Nasdaq in history at that point raising 153 million dollars in the IPO Which is you know I mean 153 million dollars. That's like a solid you know soft bank size around today This is two years after Sequoia invested in the company And yeah inflation adjusted. I mean that's in the sort of 500 to a billion range totally in the way to think about how much they raised Totally 1982 as we chronicle they invest in trip and electronic arts or amazing software in the beginning They also invest in three com in 1982 folks might remember three com Which is made networking gear and eventually bought palm and and the palm pilot Three com I didn't realize came directly out of Xerox Park So that's the other thing that Sequoia you know kind of on the back of Apple starts doing is they started Rating Xerox Park and IBM's west coast division and all of these old school East coast companies that had been training these technologists and developing You know advanced technology and they just start commercializing them left right in center 1983 they invest in Oracle and also Cypress semiconductor both of which become massive successes And then in 1980s The one one point I want to make on on Oracle before breezy because we of course we need to do an episode on Oracle Larry at some point But there's a crazy thing here that Oracle went six years before raising money from from Sequoia and I think They had bootstrap off of two thousand dollars and if you think about it like Oracle was really one of the first True software companies They were wildly capital efficient and Larry was very outspoken against you know Pushing back against this rising venture capital industry and Speaking all kinds of ill tongues of the venture capitalists and what they do and come in and try and control companies and raid Then all these things and of course ends up partnering with with Sequoia six years in but Very different start than a lot of these other companies which required much more capital to get going Yeah, and the reason I didn't want to dive too deep into it is that I might be speaking a bit out of school Not having done the deep dive on Oracle in their history yet, but To jump in and speculate a little bit. I think part of the reason why Larry that said I'm gonna speculate wildly I think part of the reason why Larry was so anti-VC was VC was anti Software and anti-Layer like this was like they didn't understand don didn't understand software You know like he was a semiconductor guy all of these companies were talking about with the exception of EA our hardware applications companies and so I don't think Oracle could raise venture capital when they got started They were the first real you know real software company. It's the highest gross margin of them all You know, I know I know it fits that thesis so well But it wasn't you know the the venture world hadn't woken up to that just yet They would they would and Sequoia would too of course, but but so much of the DNA comes from this hardware world The last kind of great and first Sequoia certainly the greatest Uh hardware investment that they make is in 1987 done invest two and a half million dollars in a little company called Cisco for 30% of the company started on the campus actually at the GSB had at Stanford started on the campus The Stanford a sanny and land where um I can't remember which was which one of them was the IT administrator for GSB and one I think was was elsewhere on on the campus and Networking was just becoming a thing and they were married. They were sending messages to one another and this is this amazing Romantic story that they had had Jerry rigged the network to be able to send messages to each other I know and that turns into Cisco and that turns into Cisco I mean it just goes to show you how these companies start and and you know done having learned the lesson for a map Of like you know, hey, well finance ginkgo's con you know, he doesn't care like most VCs would look at this team I'd be like we're not gonna finance this team But he cares about the market in the application at the time there were no routers So networks like local networking was just becoming a thing But networking networks was impossible and so sandy and lenn Developed the first router and just you know such a brilliant this quiz still uses this example today of like the very Very best most elegant Expression simple expression of what a company does. It's three words for Cisco. We network networks That turns out to be Not just an enormous enormous market, but really the enabling Technology for the internet Cisco stock was the tracker for the internet hype in the in the dot com era I mean it was like if you wanted something that was emblematic of people's excitement about this new technology It was Cisco and so now we're in 1987 we're 12 years after the kind of independent constitution of Sequoia capital Don has learned all these lessons. He's not letting this one go So not only does he fully finance the company Upfront with two and a half million dollars gets 30% of the company the company and then goes public shortly thereafter I believe there is 160 some odd million in the IPO don stays on the board don doesn't distribute the shares He remains chairman of the board. I think until the mid 90s and they ride Cisco up and Make enormous enormous returns on this company and that is that really becomes the playbook for for Sequoia capital going forward Amazing run Also just such a great example of like Sandy and Len were thinking about the internet nobody was thinking about the internet when they started Cisco but Things just kept the market kept evolving and kept getting bigger and expanding and don again You know, it's quite being so focused on the market They knew that like even though this company was public there were still enormous returns to be had because the market was nowhere near penetrated So alongside all these investments that they're making the funds kind of steadily grow in size from that first fund of three to five million It stabilizes at around 150 million per fund in the 1990s that Sequoia is raising every three years or so And and having that be their investment period Along the way there of course to do that you have to not only build these companies, but you have to build Sequoia You have to build the firm You can't do you can't invest in all these companies and give them the time and attention that you need to do true or at least age company building alone So Don starts adding partners to Sequoia and and he talks about the process of doing this and again remember Back when they start like the the number one requirement for being an investor quote-unquote was going to Harvard Business School Ha ha ha not fair child semi conductor business school to be clear investor in this sense was Generally a public market investor or or perhaps some other alternative investment But not investing in startups. I mean that the Solomon brothers folks probably looked at this more like gambling Like what you're doing is an investing and you're not a person that looks like an investor So what are we even talking about here? You know, I think that I already of it all is it's the exact opposite of gambling. It's building Yeah But yeah, so okay, so Donna's this great code says adding new talent was and remains a continuous process conventional education was never a high priority You know plenty of folks have gone to Harvard and Stanford Business School, you know worked at and work at Sequoia But that's not what they look for we look for people with functional experience in a startup i.e. design and application engineering product marketing sales aspects of outsourcing manufacturing Our investment decision making process requires very self-confident people able to be challenged publicly I look for people that are as far different as possible than I am Because we do things here on the basis of consent among the partners And I don't like having a marginalized set of opinions don't want people to be He says I want as much confrontation and different thinking as possible and he wants people that are gonna be confident and comfortable enough to put Their thoughts out there and debate as part of the group one of these lessons that Don's learned is that sometimes the most amazing Companies like apple like Cisco they look crazy and so you need somebody that's willing to see The potential behind the craziness and stand up for them And oftentimes that's not folks who are coming from Harvard Business School I believe the first partner ironically that joins Don at Sequoia Does come from the investing world in 1979 Gordon Russell joins joins Don he had worked with Don at capital group so he comes from capital group comes in and joins Sequoia And he builds Sequoia's healthcare and biotech investing practice so kind of in parallel Even from the 70s back in Sequoia They're not only investing in technology and hardware and semiconductors They're also investing in healthcare and biotech But of course it's it's technology that the firm finds it's it's true success in and In 1981 we mentioned Pierre Le Mans earlier Don convinces Pierre Already had an amazing storied career as a chip designer and architect at fair child and at national to come in and join him at Sequoia as a partner and uh, Pierre has an amazing run he stays as an active investing partner at Sequoia for almost 30 years And then this is incredible. He moves to Kostla Ventures and joins Benode over at Kostla in the mid-2000s and then he goes and he joins formation eight and he's now after formation eight out of clips He is still an active general partner Making and leading investments today. He just turned 89 years old This is incredible. He was born. I believe in 1930 in France He is a true true legend in the industry But that's the kind of folks that you know Don is looking for is people who are Literally going to die in the seat because their their lifeblood is Building technology companies And Pierre absolutely fits that to its e so then in the late 80s Uh, two very very important people uh, joins Sequoia from interesting backgrounds So in 1986 a gentleman a true gentleman by the name of Michael Moritz now Sir Michael Moritz who uh was from the UK and had come over to America And it become quite a famous journalist for time magazine. I believe he he wrote um book on Apple while he was still at time Right? Mm-hmm the little kingdom. I think it was called Sounds right And that's how he gets really interested in Silicon Valley and Technology and sort of the people behind Apple and venture capital He leaves time and he starts a VC newsletter with the goal of he wants to break into the venture capital industry What's old is new again? I know Mike is never you know other than this VC newsletter companies never built a company or worked in technology at his life But remember Don's looking for these mavericks and he has a soft spot for people that kind of do things their own way Don decides to take a chance on Mike and invite him into Sequoia and to join the partnership and That ends up being just an incredibly incredibly present decision that leads to Yahoo and Google and many many other companies. Does this Count as how to hack your way into VC? Is it like the first example of Start a VC newsletter. Yeah, that actually probably still worked today Yeah, I think there's a quote about Moritz which is he had the journalist instinct to go for the jugular and not hold back And a friend said that about him David we've started a podcast and have a love for media But I have this sort of reverence for really good journalists who who not only are able to to really tell a great story But sort of get the truth out there You know, it's a special talent for someone to be able to cover an industry and yet have their respect in this way You know, we talked about the Socratic method of questioning that Don holds so dear and I think this is what he saw in Mike I'm gonna say a lot of this for part two of our Sequoia journey here too But but that's what Mike was so great at as a journalist And and Don actually says you know, he says the two people that he's met in his life who are the best questioners are Mike and Steve Jobs High company the other very important person who joins Sequoia capital in the late 80s is a relatively young Brasch sales guy comes from He'll it Packard and Sun that Also as an Italian immigrant Decides that he wants to work in venture capital. He just calls Don up one day cold calls him and says hey I want to join Sequoia And if you know anything about the person that we're talking about this is exactly in character And this gentleman is Doug Leoni who today of course is runs All of Sequoia and all of their operations globally and I believe will be the person that Ultimately advocated for and took Sequoia into becoming a global firm We're going to talk much more about both Mike and Doug next time on part two But just to wrap up part one here to kind of really you know the story of Don and I mean you can't extricate Don not only from Sequoia, but from venture capital and the whole industry and total in 1996 after it had become clear that that Mike and Doug were amazing investors and not only amazing investors, but Um had internalized all of these things that it meant to be Sequoia and then built on themselves Don does something pretty amazing He literally hands the keys of Sequoia over to Mike and Doug Doug talks about this in an interview with with Dan Primack and Axios That um, I don't know if the exact quote here, but he says Don one day in 1996 invited Mike and Doug into a conference room and he sat them down and he said I'm giving this firm to you and There are three things one you're going to run the firm. I'm not gonna run the firm anymore Two you get to decide what I do you can keep me around I can continue making investments or I cannot it's completely up to you And then three if you do want me around here's the things I'm willing to do and not willing to do but Women things I'm not willing to do is run the firm So like you guys make all the decisions about what's gonna happen from now on and that's just like even today That's so rare. I mean this is the first Very successful well not the first in the industry, but the first successful generational transfer at Sequoia Most venture firms and most founders adventure firms Don't have the ability to do this And it's so hard. I mean Don created all of this and he's willing to say you guys of the future Change is part of not only what we invest in but part of the venture industry too and like you guys are the people that are gonna leave the change It takes a lot to do something like that. It reminds me a lot of Another great venture firm that we may also cover benchmark. It was a very different way of doing this Very different. Yes, but you know equal partnership There's a great sort of Interview with Andy Rackliffe and Patrick Oshan to see on Invest like the best where Andy talks about how at the peak of their power the original partners Handed us the keys and I think it's a well done very differently There's definitely common elements between both of these these great firms Yeah, and if you look at the firms that have managed to survive you know generation after generation and wave after wave of You know the technology industry and venture capital is evolution all excited It's the firms that do this well the firms that don't don't make the transition and and Donna's a great quote about this You know When Sequoia was started the positioning was to LPs was we're gonna deliver vastly superior returns to anything else you can get out there and that proved well We'll talk about it in grading, but I think that proved true But the positioning of Sequoia is now two things and he says this It's this stability that comes with generational transfer. He says this stability is part of why we have had the same limited partners for almost 40 years When Donna saying this now almost 50 years Stability and returns is how Sequoia is positioned for the type of LPs that they're trying to attract which are patient Very very long term capital you actually need both of those things returns isn't enough You need the stability that accompanies those returns so that people will have confidence that like Hey, you can get your returns, but if the firm blows up then you're your useless to me Do we want to go into what would have happened otherwise? Yeah, let's do it All right, so listeners the the way that we want to do this section on this unique episode is What would the world be without Sequoia? And there is a very Sequoia centric view of the world which is all of the technology industry looks very different and without building this sort of aircraft carrier strategy around apple And and financing all of that in a very scarce capital environment like there was then Uh, we we may not have you know the apple that we have today We may not have some of the other tech giants that we have today There's a Alternative view that you could take to that that says look capital is capital and the the 99% of the value or maybe Maybe 110% of the value that comes from receiving investment from a venture capital firm is the capital itself And everything else is either holabaloo or value detraction and capital will always expand to fill all attractive opportunities Exactly exactly that we despite some friction points we live in an efficient market and if it's truly a great opportunity Then capital will flow to to go and fund that thing and so um the world would look no different today if uh You know if there was no Sequoia um, I think I fall slightly toward the former part of that scale and I'm not willing to say that we you know We wouldn't have some of these amazing technology innovations without Sequoia But I do think in just pouring over the hours and hours of reading that you know that we found about Don and and really learning about the history of this firm done played a very active role in Building a lot of the companies that they invested in and deserves a lot of the credit for that Well listeners, let us know how you like this type of episode focusing on venture firms We of course love it as you know venture investors ourselves But we've been talking all about Sequoia on this episode There is really along the exact same timeline. There is a Um, perfect example of what would have happened otherwise and that is Clacken Perkins Which over this time frame that we're talking about was equally if not arguably more successful than Sequoia But what's really interesting and we'll dive into when we ultimately do an episode on on Cliner Their philosophy was quite different and uh was a lot more Interested in the entrepreneurs and the backgrounds of the entrepreneurs than necessarily Don and Sequoia were so I think To my mind what would have happened otherwise of course Silicon Valley would have happened Of course the modern technology or modern venture capital industry and startup industry would have happened You know even though Don helped to catalyze all of it somebody would have and certainly Cliner would have been did Cliner Perkins would have been did But I don't think there would have been as many chances taken an opportunities given To you know the quote-unquote Ho Chi Minh's out there that Sequoia was willing to fund And you know it wasn't just in those days. I mean look at Airbnb in the early days and Sequoia's extremely Prussian early invest investment in you know the three Airbnb founders They didn't look like what you know a prototypical founder looked like at the time far far from it You know, I think it's Sequoia and Don's DNA coming from a true, you know Incredible marketing background and markets focus That You know Maybe wouldn't have developed in the same way with out Sequoia Yeah, and one way to look at this is like If you're the Cliner Perkins in 1978, you know you are Backing founders and outsourcing a lot of your judgment to them and you're just saying you run you know Obviously, they weren't hands off, but you run the company and the reason I'm investing in you is because I trust you to You know figure out how to run this company and what Don was looking at is You're really onto something in this killer market. We're gonna go build this thing together And I'm gonna help you do that and the the downside of that that we haven't painted yet is if you're a founder that believes that You need to be the CEO of that thing forever and you're in a market that deserves a team to really go and and value Maximize the way to tackle that opportunity like It the terms of these investments especially at this time were that you know often firms would own 33 to 51% of the company they would have the right to buy the rest from you They would have the right to replace you they would have I mean all these rights of course much of this still exists today The job of a board is to hire and fire the CEO, but it was much more prevalent back then especially within Don's view of the world is that I'm building this company With you in it right now and like this company may outlast your leadership Well the unspoken words in Don's you know quote with the recent earlier about management can be augmented is Management of course can also be replaced Now you know there's upsides and downsides there right like if you're focused on if your focus is building a great company Sometimes that's the right thing to do And you know sometimes of course Don and it's going we get that wrong But sometimes it is the right thing to do Thinking back to our conversation with trip and what attracted trip and EA to Don Was this knowledge you know you were getting what you saw with Don and he was going to Force you to build a big company one way or the other you know with you or without you All right, we are in tech themes now, but to officially call it that and and and move through it here The thing that really jumped out at me, and of course, you know being in this industry knowing folks funded by Sequoia knowing folks at Sequoia you you know some of this tangentially, but it's worth taking a fresh look When preparing for these episodes to really ground yourself and in what assumptions am I making the thing that jumped out at me Was Sequoia and all of their copywriting it never says investment, but rather partnership Well, it's not we let an investment, you know, it's not it's it's we decided to partner with that company And they have a statement on their website called their ethos which says we're serious about our work and carefully choose the words to describe it Terms like deal or exit are forbidden and while we're sometimes called investors That is not our frame of mind. We consider ourselves partners for the long term It immediately jumps out at me as David you so often say company builders You know, we are partners and the way that we do that is we've got this you know huge fund that we manage that of course We have a fiduciary responsibility to our LPs to maximize the value The way that we decide to partner is through investing in you, but you know, we are your partners in this business five six seven years ago I always thought that was when I heard we were so excited to partner with this venture firm on this thing I was like oh god here it comes They invested money and you just say it. I finally am sort of like seeing I think what Firm's like Sequoia and it's you can't really say firms like Sequoia because there's no firms like Sequoia But what Sequoia means when they say partnership rather than investment it is a very different frame of mind It's not I'm looking for opportunities to get a multiple in my cash this looks pretty good So I'm gonna throw it in and hope that I get a multiple out of it It's for some reason I believe that this is going to be a society defining company in the next you know Coming decades and I'd like to be a part of that with you Well, it gets back to I think I've talked about on the show before But when we were starting wait if one of the first people we talked to was Greg McAdoo who was a long-time partner at Sequoia and Led their investment and initial investment in Airbnb and and was on the board for many years And was a big part of the reason why my partner Riley joined Airbnb And he said to us something that always stick with me. He said that Doing venture extremely well and at the highest levels early stage venture. It's all about alignment and I think this is what you know through this history We've told how Don and Sequoia came to understand with this alignment man The alignment is around building long-term Big great companies and so if your focus is that you need LPs Unlike the original set of LPs who wanted a tax distribution and forced them to sell their stake in Apple You need LPs who are willing to sign up for an essentially infinite Not infinite, but decades to multiple decades long time horizon Because when there's true opportunity The mass the the lion's share of the value gets built at the end You know think about the run that Amazon's had or even apples had in the last 10 years in their market cap Relatives of the first 10 to 20 years of the company. So that's the LP aspect But then to this company building aspect like if you're truly aligned around that you're optimizing for those outcomes Which means you aren't just like sitting on the side and letting things like play out You are helping make the decisions and build the company and build the culture That is going to enable a super long-term Great company to be built like that. And I think that really is there ethos Now that's that's not the only way to do investing and well We've talked about and we'll talk about many more on this show But it's a really really unique one that I think it's been cool doing this episode to see like exactly how this was developed All right my second second tech theme Is that it's called Sequoia not Valentine capital or valedine and co and valentine Exactly the way that Sequoia thinks about Themselves is that Sequoia exists behind the founders. It's not about Sequoia. It's about the founders I mean, no, it's no it's more importantly about the companies. Yeah, and yeah, not the founders Right, right. It's and even more so it's not about the person, but it's about Sequoia So even when you pop up that one level it's not high. I'm Don and you know I'm you know extremely public and loud and writing op-eds all the time and doing all this kind It's if you want to talk about the investment company Let's talk about the investment company and that's Sequoia and I happen to be a part of that But you know, it's it's not all about me all the time and it's interesting You know, you talk to people and you say do you think Sequoia's low ego and people would say no absolutely not like that That is not the way that I would use to describe them But I think you talked to folks at Sequoia you talk about companies that have been funded by Sequoia And they do take that very very seriously where we're one of the best firms in the world But it's at this level. It's about the firm not the not the partners Well, I think it all comes back to this super long term orientation like You know, does Sequoia have ego around that? Of course they do go look at their website like you know But it's all about long term. It's not about like look at this deal. We just did It's about like look at this company that was built over decades Uh, that we were part of And look at all of these companies and look at Sequoia itself which we're going to get into much more in in our next part of this uh of this series here So I tried to for this section kind of catalog and crystallize like what are the elements of if you had to distill the Sequoia playbook from this history and from from Don's experience I think these are the these are the points that I would put in it. You know one First and foremost of course is focus on the market both the size of the market and whether the dynamics of the market will lead to Rapid adoption by a new entrant second is that change equals opportunity This also didn't make it as much into the history in fact But Don has this great great quote about this So he says one of our theories is to seek out opportunities where there's major change going on a major dislocation and the way things are done Wherever there's turmoil there's indecision and wherever there's indecision there's opportunity when it becomes obvious to anyone who reads time magazine That it's useful to have a disk drive on a computer Then it's already too late in the cycle to invest in disk drives So we look for the confusion phase when the big companies are confused when the other venture groups are confused That's the time to start companies the opportunities are there if you're early and you have good ideas Which I think that is just like such a perfect way to frame it so hard to do in practice, but a really perfect way to frame it Next I think is when you find one of those opportunities Don't get caught up in overly focusing on the team like of course you want the team to be great But like if the team doesn't look like a traditional team that you would pick from central casting to do this like don't worry about it You better to pursue the opportunity and you can augment the team if they're receptive to working with you on it That gets to the next piece which is be a company builder not an investor You know to really do this at the early stages. You've got to dedicate the time and effort You have to have a partnership with people made up of people who have actually built these companies Whether that's in their career as investors or their career as operators But people who really know what they're doing and can help the companies make good decisions and recruit great management teams around them Related to that you can only do that at the early stages like sequoia now Of course and we'll talk about this much more invests at all stages of a company's life cycle But this type of Company building investing that we're talking about you can really only do it at the outset once once the DNA is set and it's interesting I think sequoia used to have a one of these quotes on their website and their ethos section I don't think it's on there anymore They believe that the DNA of a company is set within the first 90 days of operation and after that It's really really hard to change it and Having lived through that and now you know making the whole focus of my investing at that stage of the market and YouTube And like I completely agree with that just reflecting on How crazy it is that this asset class exists We all take for granted that there's early stage fundraising that like In mass a couple million dollars are going to get deployed into ideas Hundreds of not thousands of times per year And that there's a whole asset class of investors that are willing to do that and now it makes sense Because we've seen this the handful of those become so so valuable that you know you index the whole asset class and like Sometimes it overperformed sometimes it underperforms, but like it it sort of tracks other asset classes in terms of of risk adjusted return It's a pretty special thing that it exists And this is this is probably an ethnocentric statement, but that it exists in our country Like if you think about the impact that it has had on GDP the access to early stage capital From a large group of people who it's their business to take a flyer and their business to underwrite a tremendous amount of risk By you know having a 20 plus company portfolio I think it's a really good thing that that this system got created And that this type of capital is is available today and surely it is not deployed in the best way that it could or certainly the most Far away that it could but the fact that it exists at all is Intensely value creative and and we take it for granted that it exists today and it's it kind of mind-boggling how difficult it would have been to convince people At this point in history that they should plow money into it. I mean I guess remember the Solomon Brothers meeting that we talked about the time had you know One of the other reasons I was so excited to do this episode is we deeply believe it wave Something that I think Sequoia also believes in this history shows which is you know You mentioned this asset class exists now and you know You can have an index on it and it works because like you know a few companies out of these you know many many seeds of small companies We'll get built into you know giant Sequoia like trees. That's true But I think there's a there's a faulty logic conclusion you can draw from that which is that we should have an index fund on this Because what this history illustrates is that That defeats the whole cycle like the reason that you know Sequoia size trees get grown from seeds is because of you know careful Watering and feeding of them from people who are experienced gardeners who really know what they're doing You know, I really want you to change your Twitter bio to experience gardener Ha ha experience. I love it Experience far as keepers. Let's put it that way, you know That's a big part of you know a change that we and I think you guys too like hope to be in the early state ecosystem now is getting away from this like Watering a million seeds and into like Tending a garden. Yeah Yeah, I mean we thought long and hard about that with with PSL when we were first getting started and I think Uh, should we be doing sort of more companies, you know, should we be doing this in like an accelerator style way and I mean we talked about the studio model on the LP show, but it's it's very different and it's it's much more concentrated bets and um I think Sequoia is a great example of especially you know in the era that we're talking about it of incredibly concentrated bets and a lot of work into them After the investment. Yeah. Okay, so my last two for this quay a playbook are you know Ha ha one let your win is run Everything we've been talking about like if you if you've got something that's growing into a Sequoia size tree Like most of the growth is going to become after you know decades plus into the company Let your investment in them run and then the last one, you know, which is what Don did that we ended history in fax on which is Hand over the keys before you fall asleep at the wheel, you know, if you're running adventure firm So much easier said than done All right, should we move on to value creation value capture? Yeah, let's see. What's the best way to do this one? Well one thing we talked about is we don't have the Exact data on the returns of Sequoia's early funds We have a general sense from a few sources that we can talk about but compare that to to How the NASDAQ performed over a similar point in time, which is kind of the closest you could come to like Approximating this type of investment as a as an investor at this point in time Yeah, and I guess what we're doing here is we're sort of rolling together value creation value capture and and grating To touch on what we do in the section with value creation value capture normally when we're covering a company We say, you know, hey Shopify Enable $250 billion of sales or something like that. I can't remember the number Um last year how how how effective were they had actually capturing that value that they sort of created? I would say Sequoia has been surgically good at capturing the value that they that they create in the world With I think few misses. I don't think Don had any trouble capturing the value he created in the world Well, I would say yes, yes, no certainly no one's quiet today. No Uh, but I think it took them many years to learn, you know, how to do that right even Don coming from the background and the personal investing he did I mean, you know the Apple decision was such a huge mistake You know, Sequoia captured six million dollars of value from Apple Uh, and you know lost out on Dozens two hundreds of billions like uh, so yes, I think they said few mistakes few mistakes One very costly one, but yeah, I think that's I think that's fair The real testament here would be to ask the entrepreneurs that uh, that Sequoia worked with Do they feel the what the successful ones that the value that Sequoia and their limited partners captured from Uh, the value that was created at those companies Did they as entrepreneurs feel that it was worth what they got in return acquired FM at gmail.com. Yeah Well, I think um We didn't ask trip that directly in the EA episode But I think he probably would have said yes, right? Oh, yeah. Yeah That was my I mean that that was definitely the sentiment I got from him Good point. We were mixing grading and and value caption value creation So we can move on the game. Yeah Yeah, so I mean grading the the way that we traditionally do it for folks that are new to the show is Big company buys little company and we have history as our guide was that a good use of capital by big company to buy a little company Dave and I were talking before the show on how to Uh, think about grading for this episode and I guess the way we sort of landed on it is opportunity cost for LP capital So what you know if you had just put money into The NASDAQ to try and and do some technology investing um, you know from 1975 onward sort of how how would that have looked Just interesting to know the NASDAQ between 1975 conveniently when it was created um and 1990 We grew about 6.5 x with a couple of pre-serious hiccups in the middle where it lost 30% of its value and then took a long time to To creep back up so a stock market like any other and so that's sort of the basis that that we decided to compare it to David how do you think Sequoia sort of stacks up against um You know that that public market accessibility It's hard to compare exactly because we don't know the returns for any given fund little on all the dollars in aggregate But I believe Based on some quotes from from done and in some of our research and another data We have that Sequoia was probably averaging a 50 to 60% IRR on their funds during this period So if you look actually I haven't done the math of what that would be over 15 years, but it's well well well above 6.5 x and so now if you assume Sequoia is taking as carried interests, you know Probably in the early days 20 and I believe now they're at 30% carried interest that they Take on their funds So taking that out of their returns. I still believe net you're performing well, I believe you're performing much much better than that and There's a great quote There was a Forbes profile that they did on Sequoia in 2014 and there's a great quote in there from The the CIO at Notre Dame, which is a great LP One of the most sophisticated endowments out there and they say that Sequoia is the single best performing manager that they have had in their entire portfolio For the last 30 plus years and that is across all asset classes, which is pretty incredible Wow Okay, so how do we assign a letter grade to this one? Well, I mean Clearly it's an a right like I think the question is like is this an a plus? I think it has to be an a plus, right? Like if we're Looking at a whole bunch of funds bundled together is like Too difficult to like assign a single letter grade to you know, I think like Were we looking at one that had it was of significant size and had the highest IRR of all time then we could go Oh, that's an a plus um But like it feels reasonable for me to say that like the first 15 years of Sequoia's existence were but an a Relative to other venture for I mean yeah The reason I make a case for an a plus is Too fold one How much Done Really was a part of inventing so many things about the way the whole not to venture capital But startup ecosystem works today and two is is that quote from from Notre Dame now Maybe there are other great managers that Notre Dame is not invested in But um but man to be the single best performing manager over 30 plus years in a marquee and diamonds portfolio Like Hard not to a hard not to assign that an a plus All right, I'll go with you All right, well with that this has been a blast for us Audience hopefully you guys have enjoyed it too certainly hit us up in the slack or acquired FM at gmail.com If you have stories to share thoughts or other areas you want to see us dig into especially on our continuing saga of Telling the story of Sequoia from Doug and Mike Uh, well their generation when they were coming up then taking over and taking sequoia into the now 12 billion plus dollar global growth behemoth that it is today Yep, we'd love your feedback All right carveouts carve outs. Let's do it. Uh, you want to go first? Yep mine is an episode of the daily the podcast by the New York Times From a few weeks ago called what American CEOs are worried about They report on an event that happened last month where nearly 200 executives Got together at something called the business roundtable, which I didn't know is a thing It's not like a governing body of any sort, but it's like a 200 of the fortune. I don't know 1000 CEOs that get together and make proclamations and one such proclamation that they made Uh, this year was that they are going to not just think about their stakeholders They're their only stakeholder as their shareholders, but also their employees their customers their community Um, a broader set of stakeholders and in my head the the thing that first occurred to me was well that feels like illegal in some way It feels like the purpose of a corporation is to maximize shareholder value And I just have taken that at face value call me a capitalist, but like that that is my understanding of of you know It's a relatively recent phenomenon Yeah, and I didn't realize and like it got me thinking because I've always thought like well you should do all these other things You know that's bending the rules of the company to to potentially sacrifice shareholder value to go and and you know Do things that you don't think long-term will accrue to shareholder value So obviously like you should be active in your community and you should take care of your employees But I always thought with this lens of like oh companies do that because it's going to accrue to shareholder value at some point And it's fascinating to Number one, listen to this proclamation and then they dive deep into exactly David what you were talking about the fact that It's it's a relatively new phenomenon one that sort of grew up in the 70s and 80s in the sort of professionalism of Wall Street and companies changing their bylaws to to basically say We exist to be a publicly traded security and then we are at the sort of mercy of that It's this interesting if we actually drift its direction that they brought up It's much more of a return to sort of the the business as a pillar of the community from these sort of early 1900s and I'll be very curious to see if this sort of comes of anything and if this stirs more more sort of simple sentiment. Yeah Yes, super interesting And you know definitely reflective of the times we live in in terms of corporations and the world at large so I hope things go more in that direction It's interesting to see we have one of our five portfolio companies is a B corporation. Do you guys have any B corporations? Oh awesome, we don't yet, but we're super yeah super sort of that. Yeah, it's been really cool to see that You know emerge as a way to Institutionalize some of the governance rules Um around this idea we invest in B corporations as in C corporations, but No preference necessarily for one or the other but we're we and many other VC firms are super open to it and support it Okay, my carve out as listeners may know for some reason that I even I don't understand I use Amazon music instead of Apple music or Spotify I'm actually yeah, I'm definitely gonna change that because Amazon does so many things great, but music is is not one of them But one thing that popped up on the homepage of Amazon music last week Which may be worth the whole thing is I have no idea last week was the 25 year anniversary of notorious bi g's first album ready to die So like speaking of mafia Don's on this episode and Viggy it's so good and and so Amazon did this cool thing where They have a bunch of tracks from the album and then in between each track they have like a commentary from you know Journalists and people that were there producers puffy, you know, everybody part of making uh making big east first album Just listening to it all again just man, right like it's so good like you know Maybe some of the content and language he uses you know haven't aged too well, but um, but like he was so good Like I've never heard anybody that can rhyme like biggie and just the music and the tracks and like what did he did producing it? Like it was uh it really cool to rediscover and and be listened to that over the past week David I love the incredibly eclectic collection of carveouts that you have it's this like You know crazy place in France. It's this really hard to get through You know thousand page book that like I will never have a prayer of actually and then oh yeah Well, it's this you know it really takes me back to when I was really into biggie, you know Ha ha ha ha uh well Well, the secret is I keep a little uh note. My apple notes of uh anytime someone strikes me I just put it in there as a potential future carveout. So yeah, that's awesome. It's a good idea Alright listeners before we leave you a big thank you once again to our presenting sponsor for this episode Teagueis if you like this episode and think the depth of research that we go into on acquired is interesting or helpful for you you really should thank Tegas and go check them out. 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All right, listeners, we'll see you next time. See you next time. Welcome to season six, episode two of acquired. The podcast about great technology companies and the stories behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today, we tell part two of the Sequoia Capital Story. We are going to pick up where we left off in 1996 when Sequoia's legendary founder, Don Valentine, turned the firm over to Sir Michael Moritz and Doug Leoni. In this modern era of Sequoia since 1996, Sequoia has been the investing partner behind an absurd number of the industry defining companies of the last 25 years, including Yahoo, Google, PayPal, LinkedIn, YouTube, Reddit, 23andMe, HubSpot, WhatsApp, Dropbox, Airbnb, DockerStripe, Instacart, Uipath, DoorDash, and Robinhood. Woo! No kidding. And while David and I spulonged into part one of Sequoia's history on our own, we have the very best person in the world with us today to help us do part two right, Doug Leoni. Now, David, who is Doug? Doug is the global managing partner of Sequoia Capital in charge of overseeing the firm's many diverse businesses, which we will get into, from seed to global growth investing across the US, India, and China. Doug first joined Sequoia in 1988 after famously cold calling Don Valentine and was the champion of Sequoia's expansion from a single $150 million early stage fund to the multi-billion dollar global powerhouse it is today. Welcome, Doug, and thanks for joining us. Thank you very much for having me. It's my honor to be here. It's great to have you. We're gonna talk a lot about Sequoia during your time and its evolution, but before we do, we want to ask you to tell your story a little bit. Your family immigrated from Italy to New York when you were 11 years old. What brought your family here? So we had a bit of a World War II heritage where my dad's sister got married to a lieutenant, ended up in America, had a child, call mom. And so now we had grandma for me and aunt in America. And we were the Italian family with the American Ben. My first name was Douglas, but in the church, you cannot be called Douglas for the simple reason that you need to have a name from one of the 365 saints. So in Italy, I was Mauro Douglas Leoni, or Douglas, as my mom called me and my dad called me. And in school, I was Mauro. When I came here, I just flipped the two names, but a long story short, my dad's so an opportunity maybe his career was not going so great in Italy, so an opportunity to come to America. He came here. It took me about two years and my mom to come here. I went two years without seeing my dad. And then we finally came here in August 1st, 1968. Wow. What did your dad do in New York? In New York, he was a service engineer for a marine equipment company. And the most you ever made, I remember, was $25,000. Wow. That's amazing. So when you arrive finally in 1968, in like America in 1968, by boat, I'm in Michelangelo, past the Statue of Liberty, to the west side of Manhattan. Do you remember the first time you saw the Statue of Liberty? Absolutely. I remember being outside. I remember crying day one, day two, and just being in a fog for the next five days when we did the crossing. Wow. That's amazing. So America in 1968 must have been pretty different than the world you left in Italy, right? How was adjusting in high school? So it was really interesting because it is what I am here today is really a product of those times. I was an only child with aunts and uncles with no children. So I was over loved, very warm, very warm upbringing, lots of trust, lots of love. And I came here and it was a shock to my system. And it was abusive in high school. Imagine, you know, it's not like being school where right now everybody preaches. You have to be good to your fellow kid and all these wonderful things there. You get the crap beaten out of you emotionally, physically, and so on. And so this with Jan and what's that? Yeah. Same grade in high school at the same experience. And so that makes up the two sides of me, which is the very warm side, the very big heart, and the super tough side where I just don't give an inch. So you've talked about in other talks you've given that we've listened to that you do the Myers-Briggs test. Here it's a koia. How do those combine into what your Myers-Briggs type is? I'm not sure those affect a Myers-Briggs, but this is how I tested early on and how I changed. People think of me as an extrovert for the simple reason that if I have to turn that on, I can, especially as I get older, I went from insufferable to charming. It's amazing how it happens. But what I really am, I'm halfway between an introvert and extrovert, exactly halfway in between. And early on, I was tested as a process-driven person, meaning my whole mind is a tree structure. There's a lot of logic to it and so on. And in 2012, when Mike Moritz stepped down in the relationship I would mic, he was the intuitive one. He was really the leader of Sequoia. I was 1A. I was the COO, if it helps. I understood that would not be a winning formula. I always thought that great COOs would make lousy CEOs. Now I'm not the COE, but you get the point. And so I took myself completely out of the comfort zone and understood I had a relying intuition. And when I was tested in my as Brigh by a lady that tested me, she was shocked by the transformation. And she said, you and Michael Dell are the only two people that have ever tested that have made that change. And when I hear people can change, I chuckle a little bit because I felt like I changed. I felt like I had to rely on my gut. And I can't have all the answers in tree structure prior to letting people create. I can't manage every inch. I just have to let terrific people do their thing. Well, I can totally imagine the things that we're going to talk about that you championed here at Sequoia. Doing that is, I think, led to a large part of your success. So you finished high school. You must have been a pretty good student. You go to Cornell and then Columbia at a study engineering, right? So I was a great student until I grew up. I went to Cornell. I got thrown out of Cornell after my first year. My first two semesters. That's not your bio. My first two semesters grades were 134 and 122, which is not easy to do. I did not see half of my professors because I just never went to class. What was behind that? And I'll mention in a second. What was behind that after being abused in high school, I was never abused when I was in Italy. I was a smart kid who was athletic in high school. Oh my god, that was rough. At Cornell, I became normal again because when I went to Cornell, I could speak English. And no sudden, I was one of the very accepted kids. And I kind of lost my mind. In some ways, I lost the opportunity to learn, but I became normal again. Now, for a fall term, I went to a two-year school to make up a couple of classes where I got Fs, mainly math and physics, which are my strongest classes. I mean, I love math and physics. And I also was working part-time, doing the deliveries, talking to truck drivers. And it just showed me a range of life of what life could become. Nothing wrong with truck drivers. Don't get me wrong. Was it right for me? Probably not. So a little bit of the carrot and the stick. I went back to Cornell. I did fine. I graduated and I went to work and I decided that I needed to do something. And that's something you end up in sales. Was prime computer your first? No, the first job was selling computers for Hula Packard. I remember there were three people, there were two people in a room, age 45 to 50. And they said, quote, kid, don't worry, we'll split Manhattan into thirds. And I didn't know anything, so I trusted them. Seriously. One got all the Wall Street. One got from Wall Street to 96th Street. Midtown. And by the way, this is 1979, where it wasn't safe to walk north of 79th Street. And that's your territory? That was, my was north in 96. I didn't even get 79th Street. This is pre-Julyani in Bloomberg. Oh yeah, pre-Julyani. Well, pre the fact that we became urban and so on, burned out buildings and so on. But that was a lucky break because one thing that's up there is Columbia. And I remember there was a dean of the School of Engineering, Dr. Trial, but still remembers name that came from CMU. And he explained to me what the ARPANET was. And he explained to me what open systems were. And yes, I went to prime for a year and a half because I wanted to sell computers on Wall Street because I knew that's what the money was. But that was with a short term money was. Was there a prestige associated with that? Or was it just that? Selling money on Wall Street was money. It wasn't prestige. It was money. And prime was the second youngest company to be invited in New York Stock Exchange. It was a go-go company I chosen well. But I realized that was only a sales career. And I was beginning to crave for something more. I wanted to quote, make it. What does that mean? I remember walking on sixth avenue and seeing all these buildings. I said, how do people become successful? Clearly, there must be more. And so I said, probably I want more risk. So I co-call Vinod Kosla. Well, actually, it was Owen Brown, which was the CEO at Sun at that time. I got a job because. You heard about Sun because of our finance. Because of open systems. I went back to Columbia Open System, call Sun Microsystem, employee number, I don't know, 50, 60, I can't remember. First people, the first person in five states. And I started doing volumes of business. So much so that the board wanted to know who this kid was. Vinod Kosla wanted to know. Scott McNeely wanted to know. That was a good sign. And I had an idea to open Wall Street. And the reason I did that, I learned of a machine called convex, which back then was a high processing math processing type of machine. And I read in business week that PhDs were dropping out of Yale going to Bear Stearns on Wall Street. What does that mean? And I don't know if you want to hear the story. But the story was, I got a call from Bear Stearns. They said, can we get a budgetary quote? A budgetary quote is, somebody you haven't met just once they know how much. And my quote was 2 million. I gave someone a budgetary quote. I hadn't met for 2.8 million. I went on vacation for two weeks. I came back and there was a purchase order on my desk for 2.8 million. I said, truly, holy cow. I think that is the definition of product market fit right there. Exactly. And so what I did is I poured all my time on Wall Street. So much that my office was a depot, because son could not support these systems. So my office, my desk was a print of stand that I had a hole in it for the paper with messages all around it. I had computer systems that were missing out of son all around me. Because if you were down, I'd brought you back up in an hour and a half. I just drove to Wall Street with them. And Scott McNeely, your support and your addition is there. I was doing all this volume. Oh my god. What's going on? Scott came to see my office. He was impressed and horrified at the same time. This is the CEO's son, microsystems. And we just did lots of business. And long story short, I met the node cosla venture capitalist. What the heck is that? And I want to be one of those. Boy, 1, 3, 4, 1, 2, 2. How do you get into business school? So I went to get a masses of Columbia. I got in luckily. And I did extremely well, which padded the resume a little bit so I can get into business school. And I went to business school. And then I co-called my way into the venture industry. Yeah, from what I could read, you sent and called 80 different firms. So there was back then, there was a big green book called Prats Guy to Venture Capital Sources. Oh, wait. Somebody should publish that again today. Actually, pretty well. And I took all the venture firms in three states. Connecticut, none of four. Connecticut, New York, Massachusetts, California. And I just actually wrote letters. Because you wrote letters during those days. And in California, I would say things like, I'm going to be in California. Of course, that wasn't going to be in California. Follow up as if you know God knows it was coming to California. How many entrepreneurs do that to Sequoia now, too? Well, I'll be down in the Bay Area in case it happens to work for you. Well, I pushed a little. And in the case of Sequoia, there was an assistant, a spicy New York person called Barbara Russell, that work for Don, did the distribution, may have been a reception. You know, it was at a time when somebody did it all. And so I sweet talked my way with Barbara. And she tells me she's become a very good friend. She's no longer here. She's retired up in Seattle. She said she went into Don's office. And she said, this kid may have something. You may want to spend some time with him. That's a big thing. So on a five o'clock on a Monday, I was interviewed by Don. What did he ask you? One question. What's important? And I talked for three minutes. And silence didn't bother Don. He could just speak. We could be quiet for an hour and be OK with him. And he waited 20, 30 seconds, would seem like an attorney. Terrifying. And then he said, what else? And I laughed. I said, what do you mean what else? I just told you everything. But he liked how genuine I was, I think. He loved the sales approach because a great company has product from the inside out and sales from the customer from the outside in. And he read correctly that I'd be a hustler, but not in the word hustler, that I would hustle, that I was smart, I was human. And he knew the question was, can we reprogram him? Can we break him down to pieces and will he build himself up? Doug, what do you think in retrospect are the differences between what has made you an amazing technology investor versus what you thought would make an amazing technology investor at that point in time? It's a difficult question for me to answer because I don't think I thought. I didn't do anything about what would make a technology investor. What has led to my success is I hustled a lot. There's people like Jim Gets who can product manage with a founder or a product. There are people like Mike Moritz who have incredible intuition. Guess what I did? I bet you can guess. I made thousands of cold calls. I get in front of everybody. I am not kidding when I said I went from being insufferable to sufferable over time. Charming was maybe the last five years. It's a dirty. And so exactly was complete journey. And so I just worked and build knowledge. And I developed a network. And there's always some luck. Lots of hustle, some brain, some skill. I was able to generate some of the right deal flow and had a very lucky good start. My first three investments were IPOs, which was good, but it also built a false sense of confidence. Because after that, I thought I knew something. And I woke up one day in 2001. I looked at my 10 boards and I said, oh my god, there's not a winner there. And so it was an early success. Go through the abyss. And I see investors here go through the abyss. And when someone goes through the abyss, you got to let them pull themselves out. If they come out the other side, they're terrific. And so I went through the abyss. And then I went. What were those first three that were IPOs? There was Arbor Software, which is a darling software company that went public and then merged with Iperian. When in when public, it was the largest win Sequoia I'd ever had. A company called INS, which was a services company, built on the notion that companies cannot swallow routers as fast as they'd like to swallow routers. And therefore, we could have a services company. A company we took public and sold for $7 billion to to loosened $7 billion in 1998 was a lot of money. And a company called Renaissance Software, which was a Wall Street trading system, which was really my strong point. I understood what I was looking there. I did not know that was a coin investment. And a funny story in a case of Arbor Software, if you want to know the real story, I was here for three years. I almost got thrown out. People wanted me out. Don is the one that saved me. Give, quote, give the kid more time kind of attitude. And I needed to get something done. The founders of Arbor were two weeks from bankruptcy, personal bankruptcy. That night they came to my house. I said, you got to get a deal done. I got a deal done. I think you're investable. We created a presentation. Wow. That got presented the next day to Sequoia. And the inside I had and Don Valentine helped with that, they understood the problem. They asked us consultant. They understood the domain of the pain. And they just didn't know how to articulate it in a fundraising pitch. And so we created a pitch. And I say, we, because even though it's a Sequoia, we got to company fund it. The partners trusted me so much that one partner and I won't tell you who the only reason why I did it is because there was a credible coin investor in his mind. Nothing to do with what I knew, instead. But we got the deal done and we got the investment made. Just starting with two people, not a line of code. A seed, if you will, back then, although it was a series eight, two million, and we made it. So we ended part one of our Sequoia history with Don in 1996 calling you and Michael into a conference room and passing the firm over to you. What was that date like for you? I assume these three companies had become winners. And I could imagine the conversation to we should make Doug a partner. I'm sure it wasn't an easy one. In one case, I had a track rate. And in the other case, remember the insufferable part. And the conversation must have gone around. What is he going to be like if he's a partner? So you're going to turn into a monster kind of conversation, which I did, obviously. It's not as black and white as Don turned it over to Mike Moritz and me. I actually went back and looked at Carri location, not because I wanted to see how much Carri got. I wanted to save my memory, serve me right. It turned out that Mike and I had more Carri than the other folks. It wasn't the black and white. It's yours. We were the ones with the track, right? Well, I got promoted to GP. I had one, you know, one tenth of the Carri of Don Valentine in Sequoia six. And I year into the fun, Don said, we ought to change all the Carri, make us all equal. He understood that he needed to make sure that the young people were not going to act like associates, even though they were partners. And so he flattened the partnership and in Sequoia six. And now it's Sequoia seven. It was more Mike and I were the more aggressive ones, the ones that had a bit of a track record. I remember Don set with Mike and I, and he didn't say you are the leaders. He did not annoy us, but he had the conversation just with two of us. And Don had a green shoot of paper with all the things an investor does and check marks next to what he's willing to do. And he pushed a paper as he always would and said, you figure out if you want me around. And this is what I'm willing to do. He wanted, oh, we offered Carri in that fun. We gave Carri Don the next fun, which turned out to be the Google fun. We actually took good care of Don. We gave some Carri, not GP Carri of a couple more funds. Never aggressively asked for it. I remember when I had to walk into Don's office and tell him no more Carri three funds later, and he chuckled. He said, what took you so long? And, but Mike and I were the two, if you will, more senior. We rotated the partners meeting who would write down the company, who was the leader of the partners meeting for a year or two, until Mike stepped up and said, this is not going to work. He offered to be the one doing it. We all agreed. He did it. And so it became that Mike was really one, and I was one age, just two. I don't want to rewrite history. One age, we had exact comp. Mike was a CEO, if you will. I was a CEO, we're a partnership. And that's how we ran Sequoia until 2012, when Mike stepped down for health reasons. And Doug, as a point of clarification, when you say Sequoia six, Sequoia seven, can you explain a little bit about that? Sorry, they had the funds, the success of funds. Sequoia six was a six fund, where I became a general partner, was the last really true partnership where Don was full full time. Sequoia seven, Don was a general partner. He had less, you know, and the partnership was run by five or six other partners. And then Mike, where it took the lead, and I became one age. And give us a sense of what early stage fund number are we on now? We are in 17. Got it. So right when this happens, in the transition to Sequoia fund seven, the whole world is changing, right? Like, because Sequoia originally in Don came from the semiconductor industry, and then there was the PC software wave, but now the internet is here. Yeah, well, not yet. There's actually a few parts. And part was, first of all, Sequoia five was 67 million, because the truly lack of ability to raise more money. We had raised a growth fund for 165 million that we didn't know what to do with. In fact, we invested the growth fund, and the average check size in that fund was $2 million. That turned out to be a 4.5x net fund, which is a terrific performance because we invested like a venture fund. When we raised Sequoia six, which turned out to be the Yahoo fund, the returns from five were not yet visible. When Mike and I went out fund raising Sequoia seven, the limited partner said, who the heck are you guys? And we lost some big clients. And we lost some big clouds. Wow. And Sequoia five turned out to be a fabulous fund. Sequoia six, an incredible fund. Sequoia seven is spectacular fund. Sequoia eight, the Google fund, an amazing fund. So Mike and the other partners got an incredible start. And then 1999 2000 happened. We did not know the meaning of the word clawback. For your listeners what clawback means, is when your funds are doing so poorly, then now you owe a lot of money back to your limited partners. And we had war room meetings here at Sequoia in 2000, where we owed more than our net worth. Oh my God. How do we get ourselves out of that? And is that of the fees that you've already taken as compensation? It's fees and carry. Maybe we had an early win and we took carry. And the rest of the fund is a turkey and we owe not only. Because you assume when you have early wins, you assume the fund is going to be in the carry. But if it's not, let me make things more difficult. And that early win, you're given shares that you hold and they go to zero. So you didn't even have that. So you hold the shares in your account because it's 1999, those are not real companies that shares because zero. So we had war room conversations. And we had a choice to make. And the choice to make is to borrow a line from golf. And I don't play golf called Mulligan. Most of the venture industry considers the funds of that period called the Mulligan. They're crappy. They lost money. But you know what? It's a do over. We took the opposite approach. No one was going to lose money at the point of capital. So we took funds that were 0.3X, meaning if it was $100 million, the fund was worth 30. Or in that case, it was 300 to 500 is worth 30% of that. And we brought them up to close the 2X just by giving up fees, not collecting them, and reinvesting money. Every time we had a game, we reinvested it. We reinvested it because we wanted to have the pride of never losing money. And so those were formative time for the culture. And it would have been so easy for you guys to cost other venture firms. Did say call Mulligan. We're going to take the loss on this. We'll start a new fund that we get fees on. You got it. Well, think about it. Sequoia 4 is the Cisco fund. Don Valentine's. Sequoia 5, younger team, older team, terrific fund. Sequoia 6. Yahoo, and many others. And Vidya, many other. Sequoia 7. Many companies. Sequoia 8 Google. It would have been so easy for us to call it. And we just refused to. And we just refused to. Doug, it reminds me a lot of the 2008 story where Ford refused to take the federal government bailout and say, yeah, yeah, it would be easy for us to do this. But reputationally, it's important to us and all of our customers are your clients for the next decades to come that we don't do this. Absolutely. And while I tell clients, those times won't be chapter one in the Sequoia book. They'll be a chapter. There should be a big chapter. That's the vote. It is maybe our proudest moment at Sequoia Capital. It is not when we've had funds close to 20x. It is not those 20x fund. The most proud time is when we decided no one's going to lose money at Sequoia Capital and we're going to go to work. And we went to work for 10 years to make sure that we're going to do this. Because the other aspect, less listeners think, this is just about reallocating fees or whatnot. It's that you had a lot of work to do with those companies because you still had those investments. It would have been easy to say, yeah, these are zeros. We're just going to do whatever. But you roll up your sleeves and say, no, we're going to turn these into returning capital and minimum. So Mike Moritz is a Brit strategic, one of few words, things 14 step ahead, I'm a gregarious Italian. And I'll tell you, it hasn't always been easy. Mike would say the same thing. But we made it work for 20 years. And I'll tell you, during those times, we thought exactly alike. You can burn us cigarettes in our arm and we're not going to flinch. We're going to bring these funds home. And it was amazing how two different cats with two different backgrounds, with two different styles who got along a lot and really argued some, as you would imagine, which is terrific because that means we pour two different views and issues. That is a strength. During those times, there was no question what we're going to do. Yeah. I don't think we ever had the conversation. I don't think we even said, should we do this? I just think we had to. Yeah. That's a special thing to be able to get in that lock step with another person. Do you feel like that sort of that rare thing that happens once or twice in a person's life? And how do you attribute Sequoia's success to YouTube being in lock step like that? On that issue. Yeah. Look, it happens in sports teams. It happens when people go to war. They never, again, feel, why do people keep on going to Afghanistan? A reason they do that, they miss that sense of camaraderie. I don't know if you study situations like that. That was wartime. Make no mistake. We weren't, it wasn't our lives. I don't for a second. I love in respect to people that serve a country. The things they do are far more important, far more courageous than what Mike and I did. I want to make that crystal clear. We should be grateful to them. But it was a similar sense of camaraderie. It was your business lives. It was, no, nothing to do with business lives. It was, it was the fact that each one of our cells in our body could not do that. Nothing to do, we got to save our career, our money, none of that. It had to do with being a badass and doing what nobody else would do. That's what it has to do with. Do the right thing when it's inconvenient to you. Yeah, that's it. Because yeah, it would have been so many other firms did throw in the towel, get them all again, their business lives were fine. We're talking about this era right around Google's founding and we're talking about your partner, Michael. There's a quote that I've heard you mentioned in the past right, it's something along the lines of Michael telling you a few months after making the Google investment, we've never paid so much for so little. I think that quote is what John Doer told Mike Moritz. Ah. We did know what Google did for a long time. We knew we had smart founders. We knew we were aimed at DNA and we just knew we had to be patient. Sometime patients sit on your hands. I had a similar but a smaller story in Marockie. Smart founders couldn't figure out which way to go. And if you talked to them, what did Sequoia do most? They left us alone and let us figure it out. We hear that from so many founders on this show that partnered with you guys. That's one of the biggest differentiating factors is let us, you know, or in the driver's seat. Let us figure it out. If it's creation time, the founders create. Now, there could be execution time where they don't execute as well in which case you help them. But the thing I tell founders, you get to do product market, you should do product market fit. We can't help you there. If you got product market fit, we can help you with everything else. And so when founders are meandering their way early on and focusing on something that's going to work later on, you just let them create. They're the creators. I think this is actually a perfect transition to want to make sure we dive deep into what you and presumably, you and Michael created here at Sequoia in your time in storage ship here, which is, you know, Sequoia was, I think the phrase that Donald least used to use was you invested in companies that were a bicycle ride away from headquarters here. The decision to expand, not just geographically, but also product-wise in terms of investment products you offer. How did that initiative happen? So the first thing, I don't like the notion of you and Michael. It is, we're all standing on each other's shoulders. Michael stood on down shoulders. I'm standing on Mike's shoulders and Jim gets a shoulder and rule of shoulders. So it is really we. It is really a we effort. And the other thing, when confused, there's only one curve I look at for the decisions I have to make. It's the exponential curve of accelerated change. It's not linear. It increases through time, which means, if you believe in that, which means that doing nothing is the worst thing you can do. It's the riskiest thing you can do. And then we also know that in the early days of the curve, you over-forecast because you're linear thinker in the later days of the curve when the curve is steep. You're on the forecast. So I'm not that smart a person, but I know these simple principles. And I know that doing, do stuff, take the shot and we'll talk more about what that means. But turn the clock back to 2003, 2004. Mike and I are both immigrants. There's other immigrants here. Founders we look at are immigrants, more and more founders. And so I started wondering what happens if the world becomes globalized? They're going to go home. And I thought of NEA's offices with posters from India companies in India. And the US India founder coming here, and we don't have those posters. I thought, oh my god, defense. But defense alone should make you do things. And then you think of the world that's more globalized. The world is flat, blah, blah, blah. And I thought maybe we should go there. I learned that other firms were doing flyover. Going there and flying and flying and making investments. Drinking the brand. Yeah. Or making investment, dual brand. And so a few brain cells said, if we're going to do something, where are the large and growing economies? That brought us to India. So China and India. As I say, they didn't bring us to Vietnam because it grows, but it's small. It didn't bring us to Europe because it's big, but not growing. So those were the two years. So we started making trips in trying to meet teams, trying to figure out how to get there. Investing teams are a founding team. Investing. Founding investing team. And I'm very mindful of a line from an old sitcom, from a scene, that the sitcom is Hogan's Heroes. You know, Hogan's Heroes? So Colonel Kling is the commander of a POW camp. And he's a Puts obviously in the show. And Colonel Hogan is the American who's very smart. And Hogan and Kling have a safe. And if you turn the handle one way, you open a safe, and there's money. If you turn the handle the other way, it blows out. And Hogan looks at Kling and says, Kling, which way? And Kling goes left. And Hogan pulls it right and it opens. And Kling goes, how did you know? And Hogan says, I wasn't sure whether I'd get it right, but I was sure that you would get it wrong. And believe it or not, that scene is the scene that caused me to say, I know for sure Mike Moritz and I, if we make investments in China, we'll get it wrong. We didn't know if the team we found would get it right, but we thought that was the least riskiest thing to do. And so we're shopping for teams. And we came across, it's funny, I made 20 ships to China. And then the team were introduced, what was introduced to us, by a founder of Bill Point, which was a predecessor to PayPal, sold to eBay. She introduces two Chinese nationals that grew up in China, had gone to school here, which is exactly what I want to have moved back to China, had served on the board of the same company, focused media. One was an investor, a DFJ. One was a founder, a co-founder of a company called C-Trip. We met him on a Tuesday. We met him again on a Thursday. And on a Friday morning and a conference in Masecoia, we did a handshake deal. No contract, no anything. There were going to another venture firm in the afternoon that canceled that meeting. By Monday morning, Mike Moritz, God bless him, had a PPM private placement for C-Qoya, China one, and gave it to them. With a notion that you want to delight your partners. When people do a deal, after deals done, you always find out it wasn't as good as you thought. We loved doing the opposite. We weren't want people to be blown away. Holy cow. Wow, it's a good culture. And of course, the second person there was Neil Shen. It was Neil Shen. There were two founders. One of them was Neil Shen. And so we went fundraising. We still didn't have a sign contract. And we raised $160 million in all fund. We were ridiculed by limited partners. We held the annual meeting in Beijing in a brand new hotel with a heat broke. Everybody was freezing. We were slightly abused. That has turned out to be a spectacular fund. And the rest is history. Yeah, what are some of the companies that C-Qoya, China has invested in? Pin Do Do, Alibaba, Maytwan, Bike Dance. Bike Dance, yeah. Dot, dot, dot. We've had somewhere near 50, 60 IPOs. And so I had the idea on a one-page sheet. But if I tell you that, that would leave you with a wrong impression. At critical times where we needed, this is kind of funny, when we needed operational's move, it was Mike that had the insight that we needed to make those moves. It was Mike that made the moves. So I never told Mike this. I was incredibly grateful that Mr. Intuitive, as I had him slaughtered in my brain, became operational at key times, even better than I was, if truth be told. And so it wasn't me, it wasn't Mike. It was also Coya because as we're doing this, other people were carrying the load in America. Right. And so it was truly a team effort. So while you were, and you and Mike were sort of championing, hey, we should be doing this, because we think that the rest of the world's going to hit this inflection pointer, at least these areas, did you have this, this is sort of a basisism that's more recent, but was there this sort of disagreeing commitmentality for anybody who was here that knew that they had to hold down the fort, even if they weren't pounding the table like you were, how did that go? Look, for many years, there was sniping in the troops. Why are we doing this? Why are we wasting time? Because keep in mind that this is not about money. No one's making any more money because we all contribute the same amount, China contributes, we contribute. It is not, we're talking about the mid 2000s when, Tencent and Alibaba exist, but it's not clear that they're going to be, that China's going to be what it is. It's about building a dominant world class global power house that at the same time can act very local, because the foundation of our business is seeds. If you lose seed and venture, you become, as I say, private equity firm, because later on, all you have to compete is on price. And so how do you, at the same time, go global while not losing an inch on the local side? And some of the basis were made during those days. And so we somehow managed to pull that off by isolating. Well, the thing, I initially became the global person. Nobody else had to do that. Somewhere along the line, Mike and I reversed roles, where he was Mr. International. I spent more time in the US. And in 2012, when Mike stepped down due to health reasons, we thought about should three of us run it. And we made the decision that I should run it, but we should have second in commands. And the logical was, with someone from the US, Jim Gets at that time in Neal Shen. Yeah. That makes an incredible story. Thank you for sharing all this. At the same time that you're expanding geographically, you're also expanding the suite of funds in each geography, right? In terms of adding the growth funds, then ultimately, the global growth fund. How did you think about that decision and doing that as separate funds versus one fund together? And obviously, the company needs were evolving with state private longer and everything. So the most important thing, as I said, is to be the first $100,000 to help that founder. So whatever we did, we understood that is the strategic part of the house. We've always done seeds, but we thought both for clarity of thought, marketing, we should do it C-Fund, because we're starting to have a lot of C-programs, such as a scout fund and a whole bunch of others that we don't really talk about. Then the world continued to change, and while it's never been cheaper to start a company. And by the way, I think the world changed with Netscape, or at least it had a major change, which meant that we went from being deep technology investors, where we were only invested in technology, pre-netscape, to being application layer investing across many market segments, travel, shopping, iPhone, internet being part of the reasons. So I think started to happen. It's never been cheaper to start a company, IE seed investing. When you're doing deep tech investing, there's no need for seeds. It takes you two years, a little bit of product. I mean, if you can be seed with 600,000, I think, that your box was 1.2 million. But that's because an app can be built in a month. At the same time, though, it's never been more expensive to launch a company. Why? You've got businesses that have the words due in the economics, the O20 online to offline, Uber, DoorDash, Instacard, and so on. And then, if you don't have those businesses, turn the clock back 20 years ago, we used to launch the US, let's say in B2B, we used to be profitable. Five years later, we used to go to Europe. You can't do that anymore, because if you wait, you have to, but you can't do that. You launched the US. Six months later, you launched Europe, because if you wait, by the time you get to Europe, there'll be 20 competitors, half of which one to come to the US. So you've got to run fast, which means you have to spend a lot of money, which means it's bigger and bigger. So we were at seed adventure when we understood the companies need their more money, and keep in mind, we're the folks carrying the suitcases. We're there from day one, we're carrying the luggage. And we thought to ourselves, yes, we want partners, but why are we letting other people come in and dictate terms to our companies? We were vulnerable and weak, so we got deeper into the growth business. We vertically integrated. And then when rounds became even larger, and we have this incredible portfolio today of maybe five, six, seven hundred companies, we launched a global growth. The global growth is a global vehicle to double and triple down in the best company in the Sequoia portfolio. And yes, we partnered with other firms and so on, but we're able to enjoy the full ride. I view those as being more tactical product versus seed being more strategic. That's the most important one. And then we all sat a hedge fund because we realized that it's way tougher to go from zero to a hundred million in revenues from zero to five billion in market cap, them from five to 25. And so we talked about this a lot in part one of this Sequoia history. The vast majority of the magnitude of gains of returns happen post-IPO. And so we learned to distribute shares to our clients, carefully, not the week after the IPO or the week after the lockup. We learned that a public investment vehicle would help us many ways, including how to look at these companies retrospectively. If you're in a hedge fund, you look back to youth and you explain how youth can grow up. Most of us that invest in seed adventure look up. We look from zero to something, the hedge fund guys look from a lot to something. So we were able to have deeper conversations about companies and what companies could become, dare to dream of what companies could become. And so we found that to be quite useful. And then we launched the Heritage Business, which is to make it easy. It's a family office and downman style. And the reason for that, we have founders and friends of Sequoia who had done quite well and wouldn't that be a terrific way to maintain a relationship for another 30 years. And so that's why we did it. These would just to try to build a global powerhouse, which is what we want, where we conserve founders from idea to IPO and beyond to personal needs. I'll go so far beyond when they have the personal needs so we can have these relationships that will last a lifetime. We all take a equal percentage of our profits. The venture group is Walnuts. China is peanuts. The Heritage Fund is cashews. We blend them and then we redistribute them so that we all get a share of mixed nuts. But no one, but no one gets more nuts. It's just different kind of nuts that financially intertwine us. I see. But nobody makes more money. But we are all that bought in that we're part of this team, this global team, where we help one another while doing the very right things for the founders. Because it is all about the founders. Founders come first by far, limit a partner. Most of ours are nonprofits come second and we come third. And it's not because we're altruistic because if we achieve that, then it's the way to run the business for the next 100 years. An interesting takeaway here is as it became more and more expensive to get to your IPO or to get to be a scale global company because you have to do things exactly like you're talking about launch new Geos faster, grow more quickly to get ahead of your competition in these winner take all markets. A major takeaway is a lot of firms took the specialization route where they say we're purely series A and they stay smaller or we're dedicated seed where this new asset class, we're pre-seed, we're growth where these large public equity institutions come private and just stay growth capital. But what Sequoia said was, look, we're just going to grow with the company the entire lifecycle and take a very different approach rather than specialization, exactly what you're saying, to follow them and have the right products for them along their entire growth curve. It's just a very different approach than a lot of people took and certainly there are other people doing something similar today but it feels 5, 10 years later than when you did it at Sequoia. I'll make two points. The first thing is I will add, I agree with everything you said and to get there as early as possible. To be the first dollar. Second, if we said we're only an A firm, what happens when and no company has a linear trajectory? Remember your Google question. They all have a little bump. What happens when that company is a little bump and you have to invest in that questionable round? If you're an only quote, A firm or only C firm and you own 20%, where's your capital to show to the new investor that you believe? And so because it's never linear, because it's never slammed down from day one, by being there, you can support the companies at times where there are darker clouds in the sky, which helps attract other investors to then get to the sunny skies. This is the perfect time since I know we're running out of time to switch over to Playbook. I think there are two questions. I really want to ask you in Playbook for listeners and for you to playbook is we talk about, let's abstract out some of the themes from this conversation to what's applicable to entrepreneurs running their businesses, to us as we think about partnering with companies. The first one is it's to struck us in doing part one of this Coia history. What actually like at the core makes the Coia successful is some pretty simple things. It's focus on the market, founders come first, listen to what entrepreneurs tell you, don't run your mouth, be a business partner, not an investor. How have you guys and you thought about staying disciplined on those core things as you've grown so much? I imagine that takes a lot of active focus and effort. Yes, there are many answers. I think our little secret is our culture. And when I was young in business, I used to hear CEOs talk about culture. I used to thought it was a talking point handed to the CEO by marketing. Nothing could be more incorrect. And the culture at Sequoia, if I can spend 10 seconds on it, is finding these quirky individuals who've had shocked to their systems, who have something to prove, who as I say, we're not the quarterback or the football team in high school. And you know what I mean by that? They were the shun ones, if anything. Maybe a couple IQ points high or something to prove. Maybe something happened in a family. Put them in an environment of teamwork and trust where relatively flat at Sequoia, so we've taken comp off the table, letting them know it's OK to make mistakes. And instilling a culture that we're looking for the truth, not your truth, not my truth, the truth in the middle of the table that helps the founder. A number of times I set in a partner's meeting after proclaiming a point. I hear one of my young partners making a point. I say, hold on a second. I didn't think of that. His point is better than my point. I changed my mind. And so, and applying that to everything that we do. And realizing that we've done nothing, realizing our worst enemy is the success we had. Realizing that by virtue of a market position, not because people hate us, because who else are you going to attack? Not the number 14 for a number of them at three firm. It's just more fun to attack the number one firm. It's what I would do. You know, it's just more of a sport. No one butch now told us sometimes, or no, it was trip hockens. Sometimes you don't want to be number one, because then there's people sniping at you from behind. I'm perfectly into. I actually argue that Don used to say that. Don volunteers say, let's let somebody else be one. It's better to be two. And so how we do that is making sure we have a mindset that we've done nothing. We have a mindset that we are here from going out of business. If you're Amazon, you've got customers, you've got billions, you've got a relationship. If you're Sequoia, you have 20 chickens walking in the back. That's all you have. 20 chickens and a reputation. So I tell people, take the darn shot. Everybody at Sequoia would know, we'd rather go out of business in a week than in five years, for sure. And so it just have the mindset of take no prisoner. Do the right thing when it's painful to do so. Help the founders recognize when there's no product mark, you know, it's not always helped. It sounds so wonderful. At some point there's no product mark. If it the market is spoken 19 times, then you've got to have a different conversation with the founders of five EPs come see you, and they say see their him or her or all of us. Those are tough times, but that happens once out of 20 times. Some firms do the calculus that says, oh, we don't want to ruin a reputation, let bygones be bygones, we can't do that. It just goes against, remember the 1999 thing? It goes against every bone of everybody. You have to help as much as you can. It's interesting that you talk about how it's a negative all the previous success. And I've heard you talk before about how you pulled down all the posters on the walls here of all these IPOs that you had. Baron. No posters in this room. It's very true. It's still very lovely, but it is lovely. Some would argue that the way that the Venture Model works a firm like Sequoia has massive benefit from this momentum of you've made great investments, which then in hindsight make you sort of look like a Kingmaker. And so then you get all the best deal flow now because everybody wants to be a part of this aura that you've created. Do you think there's truth to that? Do you think that's total? There's a modicum truth to that, but success is a drug. And you can't fall prey to that. We've had investors here that have been successful, made some money and didn't work as hard. We have 10 tenants at Sequoia. Number one is performance. The other not important, but you're missing one. The other nine don't matter. You could have clarity of thought. You could have teamwork, but you're not performing. You're not here. And I tell people, we are not a family. Make no mistake. We are a team. If you don't like teams, we are a sure production. Maybe the investors are the actors, but you know the actors don't look so good without a script, without the lighting person, without a director. And so everybody matters, our team, especially the people that make us lunch and breakfast. They're the ones we have to treat with the most kind of dignity. They are our team members. They're the ones that make this place run. And that's how Sequoia works internally. Michael wrote one of my favorite books of the last 10 years called leading with Sarah Alex Ferguson about his career. Obviously all of that applies to Sequoia as well. But yeah, it's an organization that you're building. It's not a family. That's fantastic. On a grading. All right, so Doug, on the show, when we grade an acquisition, that we big company buys a little company, Facebook buys Instagram, and then we grade how good of a use of capital that was. And that instance, as you're well aware, is one of our far and away A-plus of A-pluses. And we thought about how do we do grading on an episode like this? And the way that we wanted to pose it to you are what are some of the things as you reflect back in your stewardship and all your time at the firm, where you would say that was an A-plus and some things where you swung and missed, or you watch one go by, and you say actually, that's a CD or F. And we made up for it in this way, but this is a way to be critical of a previous decision. First of all, I'll tell you the overall grade I'd give us. And then I'll drill down. Great, great. Somewhere between B and A-B-plus, that is what I would give us. I'd give ourselves an A for the War Room Times of 1999. Those were our best days. I'd give a self an A for the Times when we had those 51, 49 conversation where we leaned the right way. And then I give ourselves a lot of Fs in things that came through this conference room. And we just got them wrong. And we tend to get them wrong for the most often reason is that we overthink things. Sometimes we see revenue growth even early on. And we overthink, well, what can this company be? Well, you know, and at some point, revenue growth speaks for itself. I'd give a self fairly high grade and how we treat people. How we wrap everybody in Sequoia. I'd give us high grades that we bring everybody in in this teamwork approach. When we have an IPO, a big one, we'll send an internal note about how many people touch a company. You would be shocked to see how many names are attached to success. I'd give us grades on how we embrace failure, our failure. It's always us. I'd give us a much less grade on the misses. I'd give us Fs because a lot of them came through here. So my blended grade, if I'm in a mic mood, I'll give ourselves a B. And a Doug Leone mood, I'll give myself a B plus. Well, thank you for that. I mean, it truly is hard to imagine, you know, a company at some point not coming through the halls here. I'd be remiss not to ask you, can you tell us the Facebook story? This has been in a freaking Hollywood film at this point. How'd that actually go down? So my daughter from Cornell told us about Facebook very, very early on. Kristen, George, who's now product manager at Instagram. And I told it to rule off. And for a number of reasons, some good, some bad, some justified, some not. We would never able to get in. And we knew about Facebook for a very long time, which culminated in that presentation at Sequoia, where Zuck mistakenly, any since said that, obviously, you know, we've all grown up. We don't hold it against Zuck. Came to Sequoia. I wasn't in that meeting because I wasn't China looking for teams. But then we had another shot of Facebook. We had a shot of Facebook early on at a very high price. And then we were asleep at the switch when all those eight, nine, 10 billion dollar rounds were done completely asleep at the switch. I'd give us lower than enough. I don't know what's slow in that. I'd give us a G. Well, you did have WhatsApp. So yeah, let's say that we got some Facebook shares. You got some extra credit. Yeah. Fantastic. Thank you so much, Doug, for joining us. This has been really special. Last question. How can people, and especially entrepreneurs, get in touch with you and get in touch with Sequoia? Send us an email. I remember I was in a panel once, and about 10 years ago, and that same question asked to three venture person. And the venture person next to me said, well, we'd like to go through law firms, intermediaries to screen. It was my turn, I said, eight, five, four, three, nine, two, seven. Uh, which was a phone number. Does that still work? It still works. That was the end of the round in the notes. We don't get a lot of calls, but it's an emailless, and make it a thoughtful email. If you send an email to 14 of us, no one's gonna answer. Send us an email, that's, I don't say spend a month on it, but well thought out, you know, I was this, I wanna start a company, would you be interested in meeting? Something like that. There are some emails I just don't respond. There's no chance that, you know, there's no chance we're gonna do that, and there's just too many. But if you send an email anywhere near the viability that somebody may one in 10,000 chances every make an investment, you'll get a response. Love it. Love that. Be aggressive. Fantastic. All right, well Doug, thank you so much. Listeners, feel free to email Doug, and with that, listeners, if you aren't subscribed and you like what you hear, you should. We're available in any podcast player of your choice. If you wanna become a limited partner, subscribing gets you access to our bonus show, where we go deeper into the nitty gritty of building companies in real time. To listen, you can click the link in the show notes or go to glow.fm slash acquired, and all new listeners get a seven day free trial. With that, we will see you next time. Diabilities.