Roelof Botha is a partner of Sequoia Capital, one of the oldest and most successful venture capital companies in the world. Not long ago, he announced that Sequoia Capital will carry out the most daring innovation since its establishment in 1972-breaking the traditional VC ten-year cycle investment model, and creating a permanent open structure around the name of “Sequoia Fund.”
The conversation started from the details of Sequoia Capital’s change, and the content extended to Roelof Botha’s entire career: including his changes in the past 20 years, his days at PayPal, the common ground of legendary investor partners, and his comments on Square and YouTube. And Udemy and other companies’ investment resumption. The content of the article comes from Patrick’s dialogue podcast audio, compiled by TechFlow Friends member 0xtree.
*TechFlow Friends is a volunteer organization of the Deep Wave TechFlow community.
TL; DR: (too long, didn’t read)
1. Today’s venture capital operation model was invented in the 1970s and has not changed in 50 years.
2. The traditional ten-year cycle system will end the relationship between investors and investment targets prematurely.
3. It took five years for a start-up company to realize the value from 0 to 3. After five years, as a listed company, its accumulated value will be even higher.
4. There is a situation that may make me lose interest in investing: the founder is a mercenary rather than a missionary. Mercenaries will languish in adversity.
5. Take Square as an example. Many companies have the possibility of creating again, but most organizations are their own worst enemies, and many good ideas are often stifled in the organization.
6. The beauty of payment is that it helps lubricate the wheels of business. Although it is an overused term. But things of real value do make business easier.
7. I like the promise of smart contracts, where you can embed cryptocurrencies with payment activities to make transactions more seamless.
8. The promise of certain DeFi technologies in enabling smart contracts and reducing transaction costs is absolutely fascinating.
9. The real risk of Metaverse is being controlled by large companies.
10. I will think about the three most important things that will happen to each company I work with in the next six months? This will free you from the troubles caused by the little things in front of you.
11. When I was recruited to Sequoia Capital, I had a feeling that if I succeed, I will be able to play an important role in the future partnership. I don’t just join in working for others, become their servant or lackey.
12. Genius is more about inspiration, and talent is more about sweat. You can have a talented supervisor in a particular category that can help you get from N to N+1. But you need genius to go from 0 to 1.
Rewrite the VC rule book
Patrick: How do you think about this change? What problems is the new structure trying to solve?
Roelof: Today’s venture capital operation model was invented in the 1970s. It was mainly driven by the historical background at that time. It has not changed for 50 years. This is a step backwards for the disruptors who reshape the industry through investment.
The problem with the traditional model lies in closed-end 10-year funds. Traditional venture capital institutions must strictly abide by the 10-year fund duration, that is, fund managers must sell their shares when the 10- to 12-year period (the longest period) expires.
When we look at the existing business, we will find that the longevity of the cycle does not match Sequoia’s original intention to find a special founder who can build a legendary company and stand the test of time.
For example, in seed investment, we help the founder find a market for his business model when he has only a rough idea, recruit a suitable executive team, and then help them overcome the difficulties on the road to success. We have all the background, the relationship with the founders, and the ability to help them continue to thrive.
However, the default setting of the traditional ten-year cycle system is to withdraw from the board of directors and allocate shares shortly after the IPO. This will prematurely end the relationship between investors and investment targets, forcing inconsistent goals between startups and investment partners.
Why should an IPO be a destination for investors? I have now worked for the growth of several companies for ten years or more. Why does an IPO mean that venture capitalists must leave the board of directors?
And we realize that for these great companies, they will continue to compound interest, and most of the value will accumulate after the IPO. So, if you think about it from the perspective of LP, at Sequoia, we work for the so-called great cause. Most of our LPs are endowment funds, foundations and non-profit organizations. Our job is to create returns for them. So many returns occurred after the company went public, why should we sell stocks so quickly? Therefore, the design of Sequoia Fund is really designed to meet two goals: to help founders have a longer-lasting capital base, and at the same time to help LP obtain better returns.
Patrick: Maybe you can review the Square investment process and use it as an example to illustrate the importance of the new structure. After all, from the real numbers, Square is undoubtedly a very successful case.
Roelof: We talked to the company in 2010 and made investment commitments. The real investment was closed in January 2011, when the price per share was 95 cents, and I was still a member of the company’s board of directors. By the time Square went public, the IPO price was $9, which was about 9 times the return. But we chose to distribute it patiently during the three to four years of the IPO, so the final average selling price per share was between $80 and $90, and the rate of return was about 90 times. This kind of patience has a huge impact on LP’s earnings.
Under the review, Square’s total market capitalization at the time of IPO was 2.95 billion. Five years after the IPO, the total value is 86 billion, and today it is worth between 11.5 and 12 billion.
In a sense, a start-up company took five years to realize the value from 0 to 3. After five years, as a listed company, its accumulated value will be even higher.
Patrick: Maybe you can talk specifically about how the new structure will work? Suppose I am a big LP of Sequoia. I have made some investments in every new group of funds or every fund launched by Sequoia. What will happen in the future?
Roelof: The background may be a bit complicated. In the initial stage, the fund we operated was obviously not started within the Sequoia Fund.
In short, the restructured Sequoia Fund is an open fund with a liquid investment portfolio, and also the first full-chain cross fund spanning from seed-stage start-ups to listed companies on the public market. The operation of this fund is to raise funds from limited partners LP, and then allocate these funds to a series of staged small closed sub-funds. These sub-funds are invested in the entire life cycle of the target company (from seed to listing) , You can make venture capital, there is no exit period, the fund’s income will return to the Sequoia Fund, and Sequoia can hold shares for a long time.
In the new structure, Sequoia’s limited partner LP has the right to repurchase and allocate funds to the sub-funds every year. After the companies in the portfolio are listed, Sequoia will no longer allocate its shares to LPs, but allow Investors transferred their shares to this newly established Sequoia Fund with no expiration date and continued to be managed by Sequoia.
This approach radically simplifies the complexity of LP’s capital transfer, so as to better manage cash flow for them.
Then we provided the LP with the ability to redeem in the fund. Part of the problem with the past distribution model was that it made an all-or-nothing decision for everyone. Once the distribution decision is made, everyone gets their shares. Sadly, LPs usually sell securities when we distribute them.
This also makes sense. If you manage a $5 billion or $8 billion endowment fund, and you acquire shares in new companies that you don’t know, and you don’t have a stock trading desk, what else would you do? Therefore, these securities will be attracted to the Sequoia Fund, but if you face a liquidity crunch as an LP and need to fund some new educational activities or medical research, you can redeem part of the balance in the Sequoia Fund so that we can redeem a portion of the balance in the Sequoia Fund according to everyone’s Need to adjust liquidity.
Patrick: In summary, the main fund is a bit like LP’s customizable tools, allowing LP to decide where their dollars go, but also creating more liquidity and options on the back end, reducing the trouble of managing and redeeming funds . Thereby improving the utilization rate of funds.
Roelof: Very correct, but the most important thing is our judgment on holding these good projects for a long time, and the ability to bring high returns to LPs. Square is an example. Therefore, we need all legal disclaimers, because past performance does not guarantee the future.
Patrick: After the IPO, stocks are closely related to the market every day. It is volatile and completely different from the traditional venture capital world. What are your thoughts on this change?
Roelof: In a sense, we have been very patient with distribution for many years. We currently hold $45 billion worth of public securities in our business in the United States and Europe, and I receive weekly reports on the dynamics of the portfolio that the team will deal with. Therefore, we have become accustomed to enduring such daily fluctuations.
The key is that we need to think in a different way, that is, we have to consider the overall decision rather than the distribution decision, because selling or distribution is a very dangerous breach of contract. When you are lucky enough to work with a very good team, you should have different default settings.
Because the only way to get multiple returns is to work with founders who are incredibly ambitious and patiently let them continue to expand their business.
Patrick: What are the side benefits of this new structure?
Roelof: The traditional investment community has been operating under a set of regulations called VC exemptions. Regulatory requirements cannot invest more than 20% of funds in non-mainly issued stocks. That is to say, bets including the secondary market, encrypted market, public securities, and fund investment in the fund are limited to less than 20% of the total fund size.
Many companies take many years to go public, which will limit the fund’s flexibility in certain procedures. In 2001, eBay acquired PayPal. At that time, we accepted continuous bids from eBay. As a team, we also took a little money from the table to make funds more flexible.
Over the years, we have supported some emerging managers, such as through the Scouts program (VC Cavalry Program), we were the first to launch the Scouts program, but all similar ideas are subject to the 20% VC exemption restrictions. This makes us have to re-examine ourselves. Another point is the investment in the crypto field. We have been active in the crypto field for five years and have achieved very good returns. But the same problem is that in the current fund structure, what I can do Things will be restricted. The new structure may reasonably ease the restrictions.
Patrick: In this new structure, what is the fee structure of LP? How will it work?
Roelof: In our organization’s future seed venture growth fund, the fee is constant. But now there is an additional capital flow pool, for which we have adopted the fee structure agreed by LP, and its management fee is very low. And I personally put more than one-third of my net assets into new products. I think what is suitable for LP is also suitable for ourselves. By investing a large amount of our own funds with customers, we have created a fee structure with a wonderful incentive mechanism, which will only reward us when the investment performance exceeds a benchmark.
How the world changes
Patrick: From the perspective of the founder, how do you see the evolving capital landscape?
Roelof: Global interest rates are so low. We have seen a large-scale decline in monetary and fiscal policies due to the COVID epidemic, and various types of assets have been affected, including venture capital.
In this environment, people are truly aware of the scale effect brought about by technology injection.
Twenty years ago, when I was working at PayPal, 200 million people on the planet had access to the Internet. The vast majority of them are dial-up Internet access. But you look at the capabilities we have today. Technology touches everyone and every industry. If you create an effective company, it can attract a global audience and quickly gain attention, which makes your business grow faster than ever. . High growth will naturally attract more funds.
The choice faced by entrepreneurs is when do they need help, when do they need business partners, and when do they need transaction capital? Who will join the board and who will help build the business? Are they suitable?
We recently met Jack Dorsey at a founder event. He talked about how to return 1% of the equity to Square’s company twice. Not his own 1% equity, but 1% of the company, because he wants to supplement the talent pool so that he can hire more outstanding talents to help the company succeed. His insight is: “I want a small part of things that are truly successful and have a significant impact, rather than hoarding as much equity as possible for myself.” I think his approach is very successful.
Patrick: How do you think today’s landscape is different from the past? Or what is the wind of change today?
Roelof: In the past 15 years, one of the biggest changes I have noticed is that the founder is sufficiently ambitious. When you see him accomplish something, it is a bit like a scientific proof of existence. He can provide reference templates. Just like PayPal, he was once acquired by 1.5 billion U.S. dollars, and today it is a company worth more than 300 billion U.S. dollars. The founders are more patient than ever, with more global ambitions and sense of mission. Not only in the United States, but also in Europe.
Patrick: What will happen to this change?
Roelof: Do not take shortcuts, do not use tape, and try to build things correctly. I have seen the founders consider the composition of the management team more carefully.
Take Square as an example. Square Cash did not exist in the first four to five years of the company’s establishment. Today, this is a huge business with 10 million users. Jack once said: The company has multiple nodes of secondary innovation. How do you encourage the team so that creativity can flourish in the organization and produce more results.
Roelof’s investment framework
Patrick: When you first met with the founder or founding team, what was your goal? For example, what do you want to figure out?
Roelof: A difficult and interesting question. Every meeting is a business, just like a good interview. How to find good problems and ask them in a fascinating way, and how to build trust in communication, is a delicate balance.
Frankly speaking, finding the problem is very valuable in itself. We hope that the founder will come back and say to us: “You asked the toughest question. This is why I want to work with you, because you make my mind sharper. You help me think about mine in a different way. Business. This is the kind of thinking I want for the future.”
I like to understand their Eureka moments. It is said that Archimedes was blessed to his soul when he took a bath, and he figured out how to measure the volume of the crown, so he cried out in surprise: “Eureka!”
Every time I want to figure out, how did the founder’s inspiration and sense of mission happen? For example, Natera, a listed company specializing in bioinformatics, has the world’s leading non-invasive prenatal testing technology. The founder and I met in high school. He has a PhD in electrical engineering from Stanford University. Now he is doing his best to study biology and genetics because he believes that people need better care.
Because he discovered that in the 21st century, people do not have better technology to help families have healthy children. This is motivation, it is driven by mission, and they may spend the rest of their lives to solve this problem.
Patrick: To what extent do you want to understand the potential business model or revenue model of the company in the early stages?
Roelof: There is almost no such thing. Before I get value, I always think about value creation first. It is very rare for a company to create or provide great value but fail to build a good business. Now to build a great company instead of a good one, you need to have some originality in your business model.
Patrick: What circumstances would make you lose interest in the company in the early stages?
Roelof: You can say no to every company, this is part of the challenge. Don Valentine once told us that our business is investment, not non-investment.
Personally, there is a situation that may make me lose interest: the founder is a mercenary rather than a missionary. Because mercenaries will languish in adversity.
Square, YouTube, Unity and MongoDB
Patrick: As a major investor and board member of Square, YouTube, Unity and MongoDB. What experience can you share?
Roelof: I know the payment track very well, and this is part of the reason for my enthusiasm for related investments. What is really surprising is that Square is able to build a large consumer business, because the company’s original DNA is to serve small businesses.
This proves that this company has an extraordinary ability to create a second time. The essence of this ability is the ability to bring new ideas to life. Because most organizations are their own worst enemies, many good ideas are often stifled in the organization.
Patrick: Thinking back to the early days of PayPal, what is the most exciting thing about future payments? What is interesting about today’s payment pattern?
Roelof: The beauty of payment is that it helps lubricate the wheels of business. Although it is an overused term. But things of real value do make business easier.
This is what we concluded after eBay acquired PayPal. The close integration between PayPal and eBay’s payment products has accelerated business activities on eBay. This is the benefit that general payments can bring to the economy and GDP growth-making business easier.
I like the promise of smart contracts, where you can embed cryptocurrencies with payment activities to make transactions more seamless. The promise of certain DeFi technologies in enabling smart contracts and reducing transaction costs is absolutely fascinating.
Patrick: This week’s business and market theme-Metaverse, I feel that Unity is a good opportunity. How do you see its role in the overall trend?
Roelof: Unity is definitely part of the meta-universe communication, because it does real-time 3D interaction technology. 70% of the top 1,000 games currently on the App Store are built on Unity. Unity is the engine that powers the development of Metaverse. In addition, they have use cases in the manufacturing and automotive fields.
The difference between Unity and other products is that it fundamentally believes in an open ecosystem. Because in my opinion, the real risk of Metaverse is being controlled by big companies.
Patrick: Why can open decentralization have a good impact?
Roelof: The disadvantage of openness is interoperability. If things are very open, then the pipeline between technologies may be fragile and things will not work seamlessly. But this is a technical challenge that can be solved.
Unity can help solve this challenge. Therefore, when developers work on Unity, the games or applications they develop can run on all hardware devices. If you build an application in Unity, it will run on iOS, Android, macOS, Windows, PlayStation, and even Xbox, and it can be used on all different platforms.
As long as a company like Unity becomes possible, you can use everyone’s creativity. If it is a closed ecosystem, it will become a monopoly, and the monopolist does not need to innovate. Of course the trade-off is whether technology brings a good experience? Otherwise, consumers will choose a closed system.
Patrick: What is the biggest feeling of investing in YouTube?
Roelof: It’s great to participate early! Three of the founders were my friends and colleagues from the PayPal era. They were in the Chad garage in Menlo Park and they entered Sequoia’s office from the beginning. Sequoia was their first office address, and in the first few months, I worked with them every day. It was an incredible experience. Together, we made the company’s development reach a critical state.
In the early days, Chad, Steve and Jawed and I discussed how YouTube became a platform for creators. We also consider how we can connect creators with brands to support their business activities and finally make a living on YouTube. Now it’s true! So many people are speaking on it, it is totally unimaginable 25 years ago, how amazing it is.
Patrick: Regarding MongoDB, it is mainly for developers. I am more interested in your views on the world of developers.
Roelof: More than ten years ago, we had a theme of strategic insight, internally called the rise of developers. This provides information for our investment in Unity, and Unity also has developers, GitHub, MongoDB, Confluent, and many other businesses.
At present, about 25 million people on the planet make a living writing software, but the excellent products we use today depend on a very small number of people, so we need to provide help to these developers and make those technologies or products that can increase productivity benefit the world. The influence that produces a multiplier effect.
Board members, legendary investors and melting pot moments
Patrick: How do you ensure that you can help the founder complete the transition at key points?
Roelof: Sometimes a company may have one or several founders with product technical experience, but they have never built a sales team before but need to go to the market. You can ask a board member who is good at this area to help the company. He may not focus on key points like I did, but they are very good at building a sales force and understanding the actions to enter the market, which is more functionally targeted.
I read a book many years ago called “The Hinge Factor”. The subtitle of this book is How opportunity and stupidity changed the course of history. So I have been looking for a critical moment when the company may turn left or right on the road. It has a huge impact on the results.
Patrick: Tell me more about how you improved your ability to capture key points? (Maintain accuracy)
Roelof: To be honest, one is experience, and the other is that after entering Sequoia, we have received relevant training. The third is regular in-depth thinking. I will think about the three most important things that will happen to each company I work with in the next six months. This will free you from the troubles caused by the little things in front of you.
Patrick: You just mentioned that board members represent different skills on the board and have different effects on the company. I believe the same answer applies to how to be a great investor. You have worked with Mike Moritz, Doug Leon, Don Valentine, Jim Gates, and many legendary investors. What do they have in common? What is the DNA of such a great investor?
Roelof: It’s curiosity, it’s the most important.
Of course, he may need analytical skills, human judgment, intuition about market trends, etc. You go to the YouTube memo, which is now public. It takes imagination to support three people with a product registered with 9,000 people. So you still need imagination. But the most important thing is curiosity. Are you interested in learning new things? Are you interested in meeting new people? Are you interested in hearing what they think of a company and how they will change the world? If you lose this curiosity, you will become bored. Then, you should probably stop working as an investor.
Patrick: What makes an excellent investment memorandum?
Roelof: Clarity and conviction.
The ability to explain things clearly. I work with a man named Shankar Balasubramanian, who is a professor of chemistry at Cambridge University. He invented the chemistry behind next-generation sequencing, and he founded a company called Solexa, which was acquired by Illumina and formed the backbone of next-generation sequencing products. He is definitely a genius and talented person. He has the ability to explain extremely complex topics in a way that I can understand. This is a gift to me, when you can clearly summarize the complex business and technology, anyone can read and understand it. For me, it means you have mastered it.
Many people have good analytical skills and they can tell you. On the other hand, our business is to make decisions, and there is always uncertainty, so you have to call when you are not sure, so you need that kind of belief, the kind of willingness to stretch your neck and make suggestions.
Patrick: Around 2017, you took over additional responsibilities to oversee Sequoia’s franchise in the United States. I know you have been the driving force behind major changes in the way they do business in the United States. What do you think of the skills required to complete this job, which is different from traditional general partner and pure investor work?
Roelof: I started to think more about team assembly. Do we have the right genes? Do we have the right people? Is their work harmonious? How are we working together? We have an early team and a growth team. How to ensure that there is a wonderful chemical reaction between them? As a company, we have decided to add important operational capabilities to our organization.
Venture capital business was a bit of a family business 25 years ago, basically a small number of people made investment decisions, nothing more. Today, our organization is much more complicated. We have a marketing team, a community team, and a talent organization that can help founders recruit. We also have a technical team inside Sequoia that can help us build technologies that we can use.
The business is becoming more and more complex. Therefore, the job of the leader is to ensure the collaboration between the teams, which is similar to the job of the leaders of other organizations, that is, it takes more time to consider human issues rather than product issues.
Patrick: I like the point you made earlier that the main change is that the founders have changed the scope of their ambitions. I am curious whether this applies to you and the company as well. Sequoia has a legendary history, how do you see the meaning of this brand?
Roelof: First, let me talk about branding. In the 1970s, when almost all other professional service companies, law firms, accounting firms, etc. put the founder’s name on the door, Tang made a very careful decision. He chose the redwood tree with thousands of years of life. Make the name of the brand because he wants to build a partnership that lasts longer than him. When you do this, the recruited person does not work for you, but works with you and inherits the business.
When I was recruited to Sequoia Capital, I had a feeling that if I succeed, I will be able to play an important role in the future partnership. I don’t just join in working for others, become their servant or lackey. We build Sequoia as a permanent partnership within the scope permitted by law. We regard Sequoia as a platform that provides us with the ability to serve the founders and LPs. Our job is to keep the partnership in a better state.
And my job is to help Sequoia recruit the next generation of teams, they will take over the partnership of existing leaders. In turn, their responsibility will be to allow the Sequoia platform to continue to grow and develop.
This is our mission. Everything we do is for this. This defines our ambition, and this is our North Star.
How to think about the world
Patrick: Back to the point of curiosity. What is your most curious set of trends in the world today?
Roelof: Genetic engineering. I am very fascinated by this. With the emergence of all the genetic engineering capabilities we are inventing, the development of precision genetic engineering is critical to the future of the world.
Patrick: What do you think is most needed in today’s world technology?
Roelof: Sustainability. But depending on how you express the problem, I think technology wants to show that it can improve the lives of most people, not some. And it can indeed make our planet a better place.
Patrick: What is the biggest obstacle?
Roelof: Accurate measurement may be one of them. On the one hand, it is because people do not have correct information for reference. On the other hand, we have no internalized externalities. For example, ESG (Environmental, Social and Governance), if we do not consider these externalities and simply pursue profit, we will sacrifice our livelihood as a species.
Although I am a capitalist and economist, the market system is not perfect in many ways. We need a sound system to improve it and make it flourish.
Patrick: At the beginning of your career, you were an actuary. How does this career affect your investment experience in the future?
Roelof: Professors during my undergraduate years often joked that accountants are trained to think about what they owe for a year, while actuaries try to think about the next 20 years. I didn’t fully realize the value of this sentence until I joined Sequoia. Because when making bad decisions, it is mostly because of the short vision, ignoring the importance of compound interest, although in prehistoric mankind, compound interest did not really help mankind. But when you think about how the company develops, it is very valuable. Back to the founding of Sequoia Fund, people actually underestimated the sustainable compounding ability of truly successful companies.
Patrick: What is the difference between talent and genius?
Roelof: For me, genius is more about inspiration, and talent is more about sweat. You can have a talented supervisor in a particular category that can help you get from N to N+1. But you need genius to go from 0 to 1.
Patrick: I think you need both. This is probably the finishing touch.
Roelof: I don’t like to emphasize too much on the specific attributes of either party. Like playing rugby, part of the charm of rugby is that it is a complete team sport. And there is no measurement of a single indicator. No one walked out of the rugby field and said, “Oh, I gave five passes, or I ran for a hundred yards.” It’s just, did we win as a team? You don’t even count whether you passed the ball to the scoring teammate. The important thing is that we tried and we won as a team.
When I think about building a business, this kind of complementarity is also needed . You need to respect and appreciate the different talents people bring, not just praise the quarterback.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/the-melting-pot-of-sequoia-capital/
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