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

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

Mon, 01 Feb 2021 01:49

We cover Sequoia Capital a lot on this show. Not only across our now four(!) dedicated episodes, but across a stunning nearly 50% of recent season companies where Sequoia was a primary or only investor — the most of any venture firm by an enormous margin. Today in this very special episode, we dive into the principles that have led to the firm's 49 years of unparalleled success in venture, and the playbook behind how they identify markets and companies that create outcomes worthy of the firm's namesake tree.

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The Sequoia Capital Playbook:

(also available on our website at )

1. Bring a prepared mind.

  • Founders (as they should) typically think more about solving a problem in the world, and less about the market context around what they're doing. Sequoia has always focused on the market — which allows them to bring a prepared mind to conversations with founders both pre and post investment. Great partnerships and great investments lie at the intersection of these two perspectives.
  • Focusing on the market takes many forms at Sequoia. It includes building and maintaining market landscapes, constantly looking for white spaces, and convening quarterly "blue sky" sessions within the firm.

2. The two questions that matter are "Why now?" and "Who cares?".

  • Early-stage is different from other forms of investing. As Don would say, it's predicated on investing in markets undergoing significant change: today's solutions are wrong for tomorrow. A good answer to "why now" upends the Warren Buffet quote about reputations of businesses with bad economics surviving intact. For example, DoorDash and Instacart had great “why now's” (ability to access a whole new class of labor through mobile devices), whereas Webvan (also a Sequoia investment) did not.
  • Similarly, the key to evaluating market size in the context of early-stage venture is to focus on the opportunity size tomorrow, not today. "Who cares" is a great lens to predict and distill this: if this new solution were widely known and available who (how many people/customers, what segments, with what buying power) will care (how much will it improve their lives or businesses)?

3. The goal is not buying low and selling high. The goal is compounding capital.

  • In a compounding environment, gains from the next few years will always dwarf all cumulative gains from years prior. The goal is to invest in companies that are able to become compounders, help them do so, and enjoy the returns as long as possible.
  • Identifying compounding (and whether it will continue) is hard to get right. The question Sequoia asks is whether the future for a given market, company or investment looks brighter than today. When the answer is yes: 💎🙌

4. Venture is a humbling business.

  • You can make money even if you get the investment thesis wrong, lose money even if you get the investment thesis right, and you realize your losses many years before your gains. (Alfred has been at Sequoia for over 10 years and only just had his first two IPOs: Airbnb and DoorDash.)
  • To succeed in venture over the long run you need all three of high IQ, high EQ, and hustle. (We would also add high patience to the list!) What you don't need are specific qualifications: Michael Moritz was a journalist, Roelof Botha was an actuary, Don and Doug were sales guys and Alfred was a COO. Greatness can come from anywhere.
  • There will always be too much capital chasing too few good deals. It's true today, it was true when Alfred started 10 years ago, and it was true when Michael Moritz started 20 years before that. But the winning companies will always generate outsized returns by using that capital to their unfair advantage. Your job as a VC is very simple, but devilishly hard: invest in those companies.


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I'm Ben Gilbert and I am the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle. Oh, that's me. And I'm David Rosenthal. Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle. And I'm David Rosenthal and I am an angel investor based in San Francisco. And we are your hosts. Sequoia Capital needs almost no introduction. When we did the comprehensive two-part series on their history, we noted that they had invested early in companies that went on to be worth over $3.3 trillion. At the time, the market cap of the entire NASDAQ was about $10 trillion. I'm sure both of these numbers are dramatically higher right now as we record this in January of 2021. At the end of last year, we saw a Sequoia double header in the two enormous IPOs of DoorDash and Airbnb. Alfred Lin, a partner at Sequoia, sits on not one but both of these boards. And as pointed out by Dan Primack at Axios, these were his first two IPOs after his decade at Sequoia. It certainly pays to be patient. So after that, we couldn't help ourselves but reach out to Alfred to have him back on acquired and ask the questions. How does Sequoia identify these investment opportunities? What is the internal playbook for creating their famous prepared mind to evaluate such opportunities when they come along? And today, we dive into what this all means in practice at Sequoia and we take a few lessons from what they've learned in over 49 years of finding and building great companies. So David, who is Alfred? 49 years. It's incredible. So Alfred, as we covered with you on our Zappos episode, Alfred, you are the CFO of Link Exchange and Tell Me Networks, the co-founder of Venture Frogs with Tony Shea. And then of course, the COO and Chairman of Zappos until its sale to Amazon. Today, Alfred is a partner at Sequoia where he manages the early stage business in the US and sits on the boards of Airbnb, DoorDash, Fair House, Instacart, Reddit, Zipline, and more. And of course, I know Alfred, you're going to shrug this off and use the Robert Lewis Stevenson quote that you love about judging each day by the seeds you plant, not the harvest you reap. But we have to congratulate you on those two IPOs, DoorDash and Airbnb last month. Truly amazing. Well, thank you and thank you for having me on the show. I would point out that this is a team effort, many of the companies that we work with. I may represent Sequoia on the board, but it is the whole partnership that brings the weight of Sequoia to the table and helps those companies become legendary companies. And we couldn't have done that without the spectacular founders that we partner with. So the COO does go to them for having the courage to start those companies and wanting to put a ding in the universe. Love it. Well, that is everything that we are going to talk about here today. Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the Founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and Founders. So we knew there's a natural fit. We know the host of Founders. Well, David Senra. Hi, David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how they group us together. And then they say it's like the best curriculum for Founders and Executives. And really, as we use your show for research, a lot, I listened to your episode of the story of Akio Maria before we did our Sony episodes is incredible primer. You know, he's actually a good example of why people listen to Founders and to acquired because all of history's greatest entrepreneurs and investors. They had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence Steve Jobs talked about him over and over again if you do the research. And I think this is one of the reasons why people love both of our shows and there's such good compliments is on acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of Founders listeners. Listeners, the other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did David. It was the third fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them because in my opinion, the greatest entrepreneur to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's my hero. So the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is the people may die, but the ideas never do. And so Edwin Land had passed away way before the apex of Apple, but Steve was still able to use those ideas and now he's gone and we can use this ideas. And so I think what requires doing what founder trying to do as well is find the best ideas in history and push them down the generations, make sure they're not lost history. I love that. Well listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. David, take us in. So Alfred to kick things off. Can you give us a little bit of the sort of history of how this idea at Sequoia of wanting to have a prepared mind going into markets and investments and meeting teams came to be. Well, I think I'll start it with Don thinking about the market. I think the thing that we look for is a combination of great founding team and a great market and great founding teams find great markets or they find a wedge into that market or they find. What's wrong with the market and then they discover that there's a problem that the world has gotten wrong and they want to go fix that problem and we've always had to sort of listen to founders because they come from the problem of solving their own pain and they may not be thinking about the market per se they're thinking about the problem that they have. And so to pair up and to work with and partner with these great founders, we had to come prepared thinking about the market and thinking about what the market can become because nobody's going to sort of wake up one day and suddenly know, oh yeah lots of people were going to share their bedrooms or their couches with a total stranger. Nobody's going to think that if you don't have density in the suburbs that you can actually make a delivery service work, but you do have to sort of think about this from a sort of perspective of being prepared and thinking about both the market and the ability of the market to grow and change. We often talk a lot about prepared mind because chance favors the prepared mind as Louis Prester would say and when Jim gets joined sequa, he had identified a lot of interesting areas to invest in and he was he pioneered some of our thinking of having landscapes and having a prepared mind for the mobile landscape for the rise of the developer and he would work and try to understand the landscape of what was possible. Where were the white spaces? Where were the places that you can actually build a company because the incumbents, the legendary companies of the past were not so much focused on those areas. If you wanted to sort of think about in Airbnb's case, Greg McAdude had been thinking about time shares and vacation rentals for a long time because it was kind of weird that hotels were slowly being aggregated and they were sort of being aggregated onto global online travel platforms, but that wasn't quite true what time shares and vacation rentals to the same extent. It didn't lead necessarily immediately to an investment but it gave us a sort of prepared mind on localized listings didn't really exist. The RBOs and Home Away which made most of its revenue was from advertising rather than booking it and the transaction itself. When we saw Airbnb, it's like a completely different vector and a different way of thinking about the business. In DoorDash's case, since you asked about DoorDash, between 2011 and 2013 with the rise of the on-demand economy, we actually evaluated a variety of investments, opportunities in this space. We met with GrebHub, we met with Caviar, we met with Postmates. And each time we passed, not because we were uncertain about the market size, we actually noticed that this required a very, very operational founder. This business is going to be won by both having a differentiated strategy but also a person and a team that was going to be very, very focused on operations. When we met Tony, that was the combination we saw. He had a differentiated approach and the differentiation for him was the strategy of focusing on the merchants and in the suburbs. The thing that he also brought was his keen eye for operations. So we unfortunately decided to pass on the seed and that's my fault. It took time for us to understand that Tony was a different character. He had both the strategy side, as well as the operational side that brought what we consider founder market fit. And we invested in their series A and in every single round after that. And as you think about the way that you had previously thought about this food delivery market, the way that Greg had been thinking about the time share market and all that was wrong with it and aggregating it, how does something bubble up within Sequoia from someone sort of personal fascination with something to doing proactive work to come with a prepared mind when you do start to see pitches? So I think the answer, the simple answer is there's no straight formula for any of this. I think the way that it has bubbled up has come through because we identify a trend through just reading. We're curious about vacation rentals. We start reading about it. We start digging into it and nothing may come out out of it for that particular point in time. And then later on it becomes more important. It can be a full blown landscape that you sort of plot out and write up a memo about exactly what's going on in the landscape, who are the players, what's going on, where do we see white space? And it could be anywhere in between, mention it to your partners. What do you think about this idea? What do you think about that idea? We have bluest guy sessions every quarter where we search is try to dream this business is about inspiration just as much as about preparation. We need to both hustle, but at the same time we need to be able to sort of think and be inspired about the world. And some of it comes from reading and some of it comes from just talking to founders. Other landscapes have started because we met an interesting founder with an interesting idea. They're actually still riffing on the idea with us. And we go deep with them as well as go deep with other founders who are in that space trying to sort of make sense of what's going on. And so I think the sort of the ways that this has come about has come from complete randomness and serendipity to very, very structured thinking. The great part about Sakura is we have a partnership and we have people who love to be proactive and think structurally and we have partners who love to be in the ecosystem meeting lots of people and riffing ideas with lots of people in an imaginary way. And dream up ideas with others. So this is a business that you can do well with both someone who's an introvert as well as someone who's an extrovert. When you get to the landscape stage, you know, whether that's as you're looking at a space as part of a team at the farm or or maybe you're looking at a specific investment and you're doing diligence on that investment. What are the key things you're trying to understand? I mean, you know, Don and some of the old like the talk at GSB and the oral history with him, you know, he talks about needing to understand what the change is that's occurring in the market, needing to have a very specific problem that the company is solving, needing the timing to be right. What are these key features that you guys are focused on? The simple questions are you've heard before is why now what many of these ideas have people have thought of in the past. It's not the first time that someone has decided that we should deliver food. They're in 1999. There was a company called Cosmo that opened up in New York. So that didn't work. Why is Instacard in a much better position today than they were when Webvan started and Webvan didn't work? I think there are specific good reasons for why now and then there are times when there's not a good why now. And in Instacard's case or in DoorDash's case, the why now has a lot to do with mobile and the on demand economy. People have always wanted instant gratification, but the ability to get a sort of a on demand workforce was not available in 1999 because not everybody was carrying a mobile phone. So there are sort of situations where you have good why now is for a particular company to be able to sort of take off. The other question we ask all the time is in 10 years. Who cares about this company? Don't use the ask. Who cares? And it applies to who cares today, but it also because we're investing early and we partner early, we partner at the idea stage, at the seed stage and the venture stage at the series A. The company has to be an important company 10 years from now. So who cares 10 years from now? And what does this company become 10 years from now? So imagination about that and what happens when everything goes right is really important. So we do ask if everything goes right, what does this company become? In the early stages, it's easy to spot why the company may fail. And it's quite easy to write the pre-mortem of a company. What will go wrong? What are the major risks? It sometimes is very hard to really write about what this company can become. Do you find that founders know this at the seed stage? I mean, David and I know this from meeting with very early stage founders that so much is going to change in the dynamic market over the next 10 years. Do great founders know what could go right picture looks like? Does the Brian Chesky of today, are they able to fully articulate that they all overtake hotels? I think it's easy to sort of look back from now and it was obvious. At the time, it was not always obvious. And I think what they will articulate is that people should do this this way. The way I view the future is a far superior future. And I think that that's the dream that you have to be able to riff on and whether if that's the future, can you build a really large company? And in some cases, it's more obvious because the market is so large. If you get just even a slice of the market, you'll be in good position. In other cases, it's less easy because you actually have to dream that the market gets bigger. That you're going to change behavior. You're going to take away from a different way that people used to do something. And both can happen. And we generally like the more non-obvious markets where they're good tailwinds and the markets could be small at the beginning and it can grow over time. Everybody knows where all the large markets are and it's generally a blood bath when you enter those markets. And so, I'm not saying that competition is not going to happen in any company. In every company, if you're afraid of competition, you should just get up because if you're at all successful, someone's going to come after you. But I think for a starter, if you kind of want some air cover at the beginning, you don't want to go into a competitive market and go head on with a large competitor on day one because they'll just crush you. And so you need areas of white space. You need a market entry strategy where people think, you know, that's that little company. Oh, wow. That's kind of cute. Go ahead. You can take that. You know, in innovators, the lemma, they talk about all the low margin stuff. They owe it. The big company's always give the low margin stuff to the startups because the startup. See, who cares, not a lot margin in that they get really, really good at that because they figured out and make money with low margin and they go up market to the higher margin stuff. And then eventually they overtake the industry. That is one way, obviously, of entering a market. There are other ways of entering the market just with a superior product. So you get more and more people to sort of talk about you. And, you know, if it's 10 times or 20 times better product, then everybody's going to talk about you and will migrate to you. There are other ways by having a completely different strategy. If you think the everybody thinks this is a future, it may be someone else's bug. Not everybody is the same. You're not going to capture 100% of the market and something as big as travel. But it's the ability to differentiate yourself from a current trend. Sometimes that makes you successful. And I think in both Airbnb's case and door dash case, that is exactly what happened. I'm super curious. And I'm sure everybody listening is to right now. When you're debating that question within Sequoia, like is Brian right that like, is this going to move beyond airpads? Like, when every when the conventional wisdom is this is cute. And you're debating, is this going to be more than cute? What does that look like inside the firm? It has a lot to do with the sponsor in Airbnb's case Greg and in door dash case, me sort of painting a picture of the world that and showing the conviction of why you believe that this is going to be the case. And it happens over and over again. Right. Like if you, you might be an investor in the seed like we were in Airbnb. And then in the A, you still have to start paints the picture again. And maybe is it bigger? Sometimes these companies, it's easy to dream with them because they every single point along the way they've outstripped everybody's expectations. Not just because there's more usage or more revenue, but the sort of the way the world has reacted to the company is just phenomenal. You know, we, we just dug Leonie used to always say don't fight the tape. And sometimes the evidence is just in the tape where like they just keep growing, they keep doing well, they attract great talent, people love the service. And they continue to sort of broaden their vision. Every single one of these companies had challenges. Airbnb had a PR crisis with EJ. They also had a crisis where people were fighting tooth and nail with them and copying every single pixel of their website in Europe. And they decided that they wanted to win Europe. And they were either going to potentially buy Wimdo or merge with them or have to go down the path of a pretty expensive ground war. They decided to do that. And one. And so like some of these things have to do with just being crafty and being smart about exactly how you go about winning and coming out on top. I'm curious to dive in on that a little bit. So they decided to do the very expensive ground war with Wimdo. And you know, part of that financing came from you. How did you think about evaluating whether that was a good use of capital versus any other place that you could place that marginal dollar as Sequoia. It's always easy to say in retrospect that it was obvious and everybody talks about that. But it what's obvious at the time is that travel is a global network effects business. And maybe not today during the pandemic. It's more localized. But we're going to get past the pandemic. We're all going to get vaccinated. People will go back to traveling traveling won't be the same as before. But we all love visiting different parts of the world. And what is true is that you want to travel to different parts of the world and more than you do locally. And if you win that if you win the supply, you will most likely get all the demand. And that was the reason why we had conviction on investing more in later rounds. Makes sense. I'm curious in that specific case with Airbnb. You know, of course, we covered it so many times on this show, the Airbnb episode, many others. That global network effect is so powerful. You know, one of the reasons why Airbnb has, you know, been able to build so much power in the Hamilton Helmer sense over the years. When did you guys realize that? That's a coil. Like was that part of the thesis going in like, if this works, if we can build up supply and demand globally, like there is an opportunity for a global network effect here. Or is that something that revealed itself over time as you were saying. I think part of dreaming is that you can create one. It's not that we, it's not that it got realized on the first on our seed investment. If the seed investment, they had a listing service, right. They they had 2000 or so listings. They had a few transactions. It was definitely not a network effects business at that time. But you have to dream that if you get enough of the supply, it should be a network effects business. That's part of having a prepared mind. The sort of concept of a marketplace has been around for a while, pioneered by eBay on the internet. But it wasn't the only marketplace. We've had other marketplaces and a stock exchange as a marketplace. And so having a prepared mind allows you to think about these conceptually into the future, even though it may not ring true. The day you make the investment. That's great. I want to switch gears a little bit here and talk about market size, which for any early stage entrepreneurs listening who are currently in a small market, but are dreaming as the way you put it Alfred could be a big market. They've encountered the experience of banging their head against a wall because they keep getting these past emails from venture capitalists as a markets to small markets to small markets to small. How do you think about as a great investor, whether the market is small today and will stay small or whether the market five, 10 years from now could be enormous. And how do you work that into your investment decision? That's a great question. I think the reason why there's a lot of passes on market size is Warren Buffett famously said when a management team with a reputation for brilliance tackles a business with a reputation for bad economics. It is the reputation of the business that remains intact and it is good advice and it's it's not advice that I often talk about with founders because I think the one thing that is a little different at the early stages is that you're going after non obvious markets. So as you go after a obvious market as we talked about and there it's a very large market there's intense competition because it's it's obvious and then if you go after a small market and it's obviously a small market that's also a bad idea. The question is are you actually in a small market that look small today but it's actually going to be a big market in the future and that's how I kind of would like to have that conversation with the founder. Why is this market going to be large in the future and there is a bit of the founder during some work there's a bit of the investor during some work and we certainly do our own work at Sequoia and then we work with the founders to think about it and some of it has to do with what are the trends that are carrying you in this business. It's not it's not hard to know that mobile is going to be a big trend back when mobile was a big thing but mobile had some fits and starts as well we thought we could build mobile just on a start hack phone but the user experience wasn't great and so mobile really started to take off because the smart phone started to take off and it was a full function in computer that that sort of was what carried mobile through many many years. The move to SaaS was actually identified way before this current wave because as soon as you saw people moving racks into co location spaces you could kind of see that more and more software is going to be written and put in the cloud you know it took AWS coming around where developers are starting to build for the first time right straight into someone else's racks not your own that you're like okay well this is going to carry for a long period of time because it you know what. It lowered the cost of starting a company a developer Jim gets who talked about having a prepared mind he talked about the rise of the developer as a landscape because developers didn't have to rack their own racks anymore they didn't have to sort of go raise a bunch of money to buy the servers and put it in their own co low what they needed was just be able to have a credit card and start coding and put it on AWS and so you could see that that was going to be a great deal. So you could see that that was going to be a trend for some period of time is that amazing moment that we talked about in the Airbnb episode where the YC startup school where Bayza sort of launched AWS to start ups was the startup school that Brian Dayton Joe went and attended before they did YC. Yeah and again like you know those are the type of things that you know these these little things happen and then you realize it's going to unlock an explosion because otherwise Brian Joe and Nate would have had to rack their own servers right like that that's for them that's no fun because they're designers and someone who wrote code and I don't think Brian or Joe maybe Nate would be okay with going into a color and racking racks but I don't think Brian Joe pretty particularly happy doing that they're the one that they wanted to dream about but yeah the company might have been like DLA if they had to do that yeah exactly those trends that carry you are quite important you know I often talk about there are three components of a pitch and some founders do all three well and most founders do the first one which is like what's your vision of the world and so the beginning is you paint this picture of what you want the world to become you've experienced personal pain that this is not the right way to do this you show how passionate you are you have a vision of the future of how the world is going to be different. Then you have the reality is that today paint the pictures of what's going on and why this is broken how you can fix it how many customers you think you can get because they face the same pain that you do and then to connect the dots between those two worlds you kind of have to sort of you won't have to paint the whole picture the whole path of how you get from where you are today into the future but you do have to sort of show us like how exactly you're going to get from a few thousand listings at Airbnb to more than that you do have to sort of talk about okay well if you're not going to focus on the cities where all the volume is and all the density is how do you win in the suburbs if you want us to believe in the suburb strategy how do you win the suburbs and in both cases they had very good answers to these questions the sort of notion was it didn't work outside of New York City because the only reason it worked in New York City is because of the density and that was a false assumption it was not backed up in fact and Tony was very very good at like pushing on that is like does it only really work in New York City or does it work elsewhere and how can it work elsewhere right what's funny we've danced from this idea this question around market size to this this topic in unit economics of you know will it work in a given market and you know dawn among only a few other factors early Sequoia days would say that the the very important things in evaluating an opportunity are the market size because no one ever started a huge business in a small market and the potential for large gross margins and I'm curious as you come with this proactive stance and a prepared mind when you're meeting with entrepreneurs how do you apply that thinking in unit economics and is it still important today to be able to start a business with with high gross margin ability and in sort of your eyes the answer is nuance I think high gross margin as basis would say it's not about margin percent it's about margin dollars if you have large margin dollars that can be okay even though the gross margin percent is not as high if you're going after a low gross margin percent business you just need a ton of volume so you need high repeatability and the notion of gross margin is a strange thing if you look at store- from a GMV standpoints then their gross margin is really low but if you just look at their take if you net out everything else and their margins are decent and the same is true with Airbnb people don't think about this but nobody measures Airbnb's margins off of their GMV they measured off of their take rate and so some of this stuff is a little more more nuance and that software businesses you're paying for just the software you're not looking at all the sort of transactions that happen on the software the reason why you an economics is important is because eventually this has to be a business to be able to be valued highly eventually you'll be valued off of your profits and a multiple off of your profits and the confusion I think is the availability of capital in the last few years a lot of people have complained there's too much capital in the system there's always been too much capital in the system when I started 10 years ago as frustrated there was too much capital in the system I remember sitting my desk was right next to Mike Moritz and I said hey there's just too much money in the venture ecosystem he's like yeah thanks for observing that you know go back to work and your job is to figure that out and I was like that's not a satisfying answer and he's like well there's too much capital in the system I agree with you well you know what 10 years before you there was too much capital in 20 years before you when I started in the venture business there was too much money in the system there always be too much money in the system and the thing that we've learned over time is that the winners get a disproportionate amount of the market cap and if that's true then they also will by just simple logic investors them want to invest in the winners and so the winners get more and more of the capital and if there's more money in the system today the winners will get more money and that allows them to do things slightly differently and I use the sort of case where in e-commerce when I was at Zappos we needed to make sure that the payback on the cat was on the first order well I don't think any company today in e-commerce does that if you have more capital if you know it works on the first order then if I give you a little bit more capital maybe you can extend it to seven days or a month or you know six months or a year I do think that this this transitive property doesn't always work you know it's not like if it works with zero cap you can do it for you know a year two years three years four years at some point it breaks because at some point you won't be able to raise enough capital to keep you afloat but I do think there is more willingness to see unit economics payback over a longer period of time if the market is large yeah that makes total sense so you know unlike the early days of scoyah for sure you have different entry points where you can partner with companies now whether it's dreaming with the entrepreneur at a seed stage or partnering at the growth stage with more established companies that have already answered some of these questions as you're thinking about a given market how do you decide what the right you know is that winner that you mentioned that's going to get the lion share of the market cap in a space how do you decide if it already exists and you should go invest at the growth stage or there's still an opportunity for a new enter net the seed stage I think the simple answer is that we at the coil one identified the most important companies of tomorrow as early as possible so we do want to partner with them at the seed stage and be there for them from idea to IPO and beyond would point out that there's so much going on in the world there's so much innovation that we're not going to get to every great company at the seed stage and so they're going to be companies that we mess at the seed that will do at the a their companies that we mess at the a that hopefully we do at the B and companies that we mess at the B that hopefully pick up at a growth route so in some sense we we can enter at many different levels but also what's an interesting company at the seed is going to look very different than a company at the a or the company on a growth round you know just a simple sort of idea like what's happening at the seed identifying new markets you have this view that the market will be very very different a few years from now is different than a growth round you may be looking for a developing market that continues to grow but it is somewhat established if not already developed when you make an investment at the growth round that also brings up a question I've been trying to ask you guys the other dimension that's changed over the years that's koia is not just stage it with you invest but geography to and obviously you have a very robust practice in China and India and now you're building one in Europe everywhere around the globe how do insights and learnings from each of those geographies influence your thinking back here in the U.S. and each other I think that the fact of the matter is you can start a company almost anywhere in the world and talent is evenly distributed an opportunity is not is is a quote that lots of people said we're doing this we're sort of expanding around the world because we want to be a global partnership and we do learn from each other and so their observations around the world are that people are pretty similar they do things slightly differently because of cultural reasons or how they grow up but we kind of want similar things from a consumer standpoint if something works in one geo it's likely to work maybe not the same exact sort of formation but it's likely to work somewhere else and vice versa and if you come up with a great interesting sort of efficient way of doing things on the enterprise side it's probably going to be wanted in different parts of the region and just as an example with door dash we're investors in Maytwan and in China and there are a lot of learnings back and forth about what works what doesn't how much market sure you need to get how much the unit economics changes when you get to scale etc so so the growth path the sort of viability of the business those things can be learned across the world and indeed the other thing related to the pandemic I think there was a lot of learning China face this virus first and so Tony called up people around the world and we're facing the same issues and Tony realized the most important thing was to keep the restaurants open there are parts of the world where the restaurants are closed so long as you keep the restaurant open then you can fix some of the other issues so they onboarded restaurants as much as they could once you did that then you needed to solve the issue related to drivers will provide them with masks and PPE and also worked on contact list deliveries and if you did that and you got the food safely to the customer the customer is obviously wanted to order yeah I'm curious you brought up this idea that we keep in touch and we learn from each other around the world as Sequoia grew from a few partners to you know several pieces of a larger partnership in these global offices obviously you increase the overhead you could spend all your time communicating with each other you know it's a large organization with sort of communication networks like any other so how do you find that fine line like I'm curious if you have a meeting cadence or anything like that where you do get to learn from each other but you're not spending all your time communicating with each other you know we it's very lightweight Sequoia's structure in a very decentralized way each group makes their own investment decisions each geo makes their own investments decisions and we do that on purpose because what's on the ground is way more important than the global themes in the global trends you can think about the global themes in the global trends on a quarterly basis where you're acting locally every single day so we try to think globally but act locally and that's the mantra that we have inside of Sequoia what are the different operating teams sort of look like just if people get a sense of scale I mean they're not very large right like your like how big is is the US early stage practice the early stage team is about 15 people it's just not a big team but you know the way we think about it is while there's a lot of opportunity each one of us are only going to make one or two seed investments or one or two venture events a year and the reason we keep it small is because what we enjoy is to partner with the founders as early as possible and help them and their companies reach their full potential and that is an enormous amount of work and we enjoy that part just as much as meeting new founders and thinking about the future but once we make an investment want to bring the future to fruition is not just about making the investment we don't really think about buying low and selling high we think about helping founders reach their full potential bring the future that they envision to reality the next thing I wanted to ask in many ways it's Sequoia's history that is sparked me thinking a lot about this over the past year and the Apple investment that we've covered so many times of you know that was an early example of I think buying low and selling high that in the long run probably served Sequoia not nearly as well as it could have I think you guys made six million dollars in net profit on the on the early pre IPO Apple investment how do you guys think about time horizon like obviously you need a long time horizon as you're talking about and that's the way to compound capital at the same time you are a fund structure series of funds you have limited partners they want distributions at some point when do you guys think about the right time to start to distribute out your investments we think about whether the company has brighter prospects in the future than they do today and if that's the case then we continue to hold we don't actively think about distributions from a RR money and money perspective yes obviously we are a fund and we get measured that way but we're very proud of the fact that our as-held multiples are higher than our net multiples of the stock that we distribute it's a deliberate strategy that that's the case and so the reason that that is is because we both pick the right founders who want to build long-lasting companies and we help them focus on what's enduring about their business you're just a lot better off focusing on the long run than on any short run swings up or down in the market and so when we distribute it it's yes it's because it's maybe the end of the life of a fund but it's more about even when we distribute we hope that the company has much longer prospects than when we the day we sort of send the shares to our LPs we distribute shares and let our LPs decide whether they want to sell or not we generally don't sell the stock it's funny it's a nice thing to say to say you know we're longer on focused over short-term focused but in the business that we're in it's quite literally and mathematically just a much much better strategy given how much of the area under the curve of a compounding returns business shows up in those later years and I think I heard a stat recently that was Amazon made as or more money in its 21st year after IPO then in the entirety of the 20 cents IPO and so it's just funny to think about these businesses that were in like the opportunity to invest where you're investing does come early but the real returns do come much much much later it's a testament to compounding the thing that people don't get right and it's hard for us to understand compounding because we're human and we like linear projections as opposed to exponential projections we get it wrong in the beginning and in the end I think the things you get wrong at the beginning is you're it looks linear it's not it doesn't look like it's compounding well actually early years of compounding look very linear and in fact at any single point in time at any point compounding it still looks linear exactly where you are tangent of yeah the tangent of it looks very linear and it's not that far off from being linear or you draw the line wrong it's almost always more obvious after the fact that you're in a compounding situation I hope that people understand that more given what's happened with the pandemic because that is also in exponential growth situation and we always get surprised and then we clamp down after the fact and we still continue to see like cases after people take more precautions over a longer period of time because compounding sticks it's a hard thing to reverse it's such a good point well I've I have one more sort of structural question here before we start to wind toward the end of our episode so a lot of people who are building firms or building enduring institutions of any type look to Sequoia as an example of 49 years high performance at almost every if not every stage along the journey building from a small group of people into a globally distributed team that runs like a well-oiled machine at least perception from the outside and I'm curious what are some of the practices that have contributed to allowing you to learn and get better and become that enduring institution instead of something that flames out at some point and I'm thinking you know do you do post mortems how do you think about learning from your mistakes learning from your successes how does that all happen well this is going to sound right but the it had to do with dawn starting out and saying calling it Sequoia capital instead of Valentine capital he had set the culture right at the beginning and this is a people business we hire partners that then interface with our founders there's very little secret sauce in this business and the simple fact of basically calling it Sequoia capital because he wanted to build the tallest tree inside of venture capital makes a statement it also makes a statement that that the firm is not his that he's around to start the firm and then he's going to hand it over to Mike and Doug and it's their job to sort of keep Sequoia going and at some point they're going to go and they're going to hand it off to the next generation and the next generation after that and you're pointing out that he he didn't put some high value on the management company because it had been so successful to sell to the next generation he literally just said you now own the management company right yeah and nobody owns the management company at Sequoia the GPs sort of manage the management company and we don't view it as owning it we don't view it as we inherited it from the last generation and it's our job to make sure that we pass it on to the next generation in better hands all of us come to Sequoia being able to stand on the shoulder of giants and we want to make sure that this place is better off for the next generation and just coming off of that is a huge base to be able to build upon in terms of like constant learning this business you need three key ingredients and I think I've said this before which is you need you know you need high EQ high EQ and high hustle and then you need to apply it appropriately if you're just super smart but you can't influence your founders or have them influence their management team to do the right things that's not really going to work just because you can identify something wrong with the company this is a this is a business of influence you got to influence people and take your money because your money is just as green as everybody else's but more importantly after you make the investments and you become partners with the founders you have to influence them to do a bunch of things that they may not like because most founders that have strengths and have weaknesses and they're really good at certain areas and then you you have to influence them to sort of round out and build a company and not just the product or feature and this business is high hustle you hustle every single day going after a theme or trend how do I think about that and turn it into understanding the whole landscape of what's going on and then picking the right founder to partner with to build a company in that space those things require enormous amount of effort and time it requires being both a skeptic about what's going to go wrong it also requires a lot of imagination for what can go right and back to there's no secrets us is if you want to be good at this business you don't have to be a constant learning machine you got to think about every single day what you can improve for the next day in terms of compounding that's probably the most important thing if you can just improve a little bit every single day you want to suck less tomorrow is the is the way sort of one way to think about it and this is a humbling business when I joined a remember Mike saying a line which was like drawing that this is a humbling business because you can make money even if you got the investment thesis wrong and you can lose money even though if you got the investment thesis right if you don't get cognitive dissonance hearing that you know you have to be both excited by that and also know that you're not going to get things right every single day and this is why people who are in this business for a long time continue to love it there is the element of meeting founders that they just even if you don't agree with them they're it's infectious to hear them speak because they're painting a future of the world that's just different and then there is the element of like gosh I got that wrong gosh I got this wrong gosh I made money on this but I still got most of everything wrong was I actually good or was I just lucky I always tell people if they want to join venture capital like I'm going to try to convince you not to join and then after all of the reasons why you shouldn't join you still want to join I'll tell you more about it because it will take a decade or longer for you to figure out whether you're good at this business or not maybe you'll find out you're bad at it because you don't you can't get in front of interesting opportunities you don't dream enough you you can find that out relatively quickly but you won't know that you're good at this for a long time you're now in a position where you're doing a lot of hiring assume it it's a quiet in a way that you know done famously in the DSP view from the top lecture he held up your resume then the day you join sequoia when you're evaluating people to join the firm what qualities do you look for they give you an inkling that they might be good at this high IQ high Q and high David weren't you listening at all obviously not there's not there are no real requirements for this job right like you can put anybody's resume up and they can become of great venture capitalist there's a element of those raw ingredients and then there's an element of desire and and sticking to a sort of business that it pays you to be in it for the long run like it you're going to get your biggest gains on day one you're going to see all your losses earlier in your career and your gains take a long time to develop so you know maybe the other elements is just a focus on the enduring which is one of our tenants well Alfred I can't think of a better place than that to leave it I do want to give you the floor and say if founders are thinking about reaching out to you who should reach out and how can they get in touch Yeah just simply email me I'm at Lynn L.I.N. at Sequoia if they want to reach out to me another word of encouragement for founders during during good work and to keep at it keep thinking about every single day about how you can build a sustainable business because your business model and your business plan is the strategic weapon we provide capital which is fuel but you need the strategic business plan first before you can do anything with that fuel I love it well Alfred thank you so much for joining us all right thank you listeners thank you for joining us for folks who don't know we have started codifying the playbook from each episode in some written bullet points which no doubt we will do for this playbook episode with Sequoia and we email those out after we post each episode which is really great if you like consuming content and sort of that quick easy way in written form so if this is something that you want you can sign up to receive the playbooks as a quiet dot FM and if 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