Sequoia Capital: A Lesson In Excellence

sequoiaThe term unicorn has been re-entering our lexicon recently. In the NBA, people are using the term ‘unicorn’ to talk about players who are 7’ tall like a center, can dribble like a point guard, and can shoot like a shooting guard. Basically, a unicorn in the NBA is a player that defies conventional expectations for a basketball player.

In venture capital, a unicorn is no different in terms of what it means. Unicorn companies are private companies that have a $1B plus valuation; the elite startups that defied the odds, survived the trials and tribulations of early growth, and have become global players. The names of unicorns are well known companies, including Uber, Didi Chuxing, AirBNB, Lyft, WeWork among others. These types of companies are the gold standard for venture capitalists.

Venture Capital Explained

The way venture works is that every so often, a group (think KPCB, Sequoia Capital, or even our own Professor Doyle’s Sigma Prime Ventures among many others) raises what’s called “a funding round.” It consists of investments by pension funds, high net worth individuals, insurance companies, and the ilk, which collectively are called Limited Partners (LP’s), often spearheaded by a single lead investor who can contribute between 30-60% of the total amount. That fund is distributed to members of that group, called ‘General Partners.’ The General Partners are tasked with finding, vetting, and investing in startups in expectation that those companies will exit (whether that’s IPO or acquisition) and earn the firm a good return on that money. As Prof. Doyle talked about last week, venture aims to return 3x the amount of money invested in it at the end of the funding round. Most rounds last 10 years, in order to give time to companies to properly grow and reach valuation targets, so LP’s can only sit and wait as they wait for their return.

This sitting and waiting is what is so hard for LP’s to do. Investments in the stock market can be pulled within a day, bad investments mitigated and damage controlled. VC funds are nothing like that. Once an investment is made in a company, that money is gone. It’s what puts the onus on the GP’s to not only be good investors, future thinking and able to predict market changes or evolutions, but also good board members and advocates for their investments. Their investments must work out, it’s other people’s money after all and it’s other people that can choose to take their money elsewhere for the next fundraising round.

What Does It Mean to Be a Good VC?

So this brings us back to unicorns. The best of the best startups. One unicorn can single handedly change a funding round. For instance, Uber’s valuation today is around $69B, in just June 2014 it was $18.2B, growing by more than 300% in the last 3 years. 10 years ago the company didn’t even exist. That’s the kind of monetary growth achievable by VCs who can spot unicorns and conversely why unicorns are so important to VC firms.

Evaluating Sequoia Capital

So it stands to reason then that measuring VC firms on their unicorn spot and hit rate, while not fully indicative of the quality of the investment firm, is a reasonable place to start evaluations. And no VC firm has done a better job of finding unicorns than Sequoia Capital, who has invested in more unicorns than any other VC firm on earth. Those names are a who’s who in tech: Oracle, Google, and Apple among others. And not only do they get in on the party, they’re often the ones starting it. No one’s invested in more unicorns at Seed/Series A (the first rounds that companies raise) than Sequoia has. Those early investments Sequoia makes at around $1M for a substantial piece of the company can balloon as companies soar past that $1B mark. Those early investment companies are monsters now in their own right: AirBNB, Instacart, and Stripe to name a few.

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Who Is Sequoia and How Do They Work?

Sequoia bases their investment strategy on two core pillars: authentic founders and big markets. These pillars are founded on founder Don Valentine’s investment strategy. Boston College’s own Pat Grady gets into these a little more in depth in an awesome podcast I highly recommend here. He explains how teams led by founders who have found authentic problems, problems they themselves have encountered or been stuck at and founded their company to solve, that serve large markets, meaning opportunities that tackled well are worth a lot of money either in terms of number of users in that market or value of services provided in that market, are the teams that Sequoia has seen excel.

Sequoia is structured into two main groups, although there’s overlap between each group by seasoned professionals like Jim Goetz and Michael Moritz, who have experience as VCs taking companies through their full life cycle. One group is called ‘Early’ and, as you might guess, they focus on Seed and Series A companies. The other group is called ‘Growth’ and their focus is on companies that have a substantial number of employees, Pat Grady in the podcast put that number around 150, and experience in a marketplace. Sequoia has both their early stage and growth investing teams tightly integrated in the sense that they have an emphasis on certain types of companies, teams that can define a market for a long period of time, because to Sequoia it doesn’t matter if they interject at the beginning of the company or 12 months away from an IPO because they’re always investing in the same type of company. However, because business decisions are different at seed than at IPO, the teams are split in order to maintain their own investing criteria/due diligence.

Sequoia Culture

One really interesting part of Sequoia is who their LP’s are. They raise their money from nonprofits, universities, and foundations. When they strike out on their funding rounds, it’s kids not getting scholarships and cancer research that misses out. I can’t even number the amount of Sequoia General Partners who listed that on their website profile on why they do what they do.

Not only do they raise money that way, but their company culture treats their teams like partners rather than investments. From their website: “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.” That’s a VC firm that puts companies first, pushing them to succeed where possible, and setting those companies up for the most success. Not only is the firm stocked with high quality GP’s and filled with an ethos of putting others first, but Sequoia continues to excel in putting their companies first and being a partner on the way to success.

Questions/Things to Think About

  1. How does a VC know he/she is asking the right questions of a company?
  2. What market miss, a company that you thought would create a new market that didn’t for some reason, have you made and how do you make sure you learn from that, when every market miss is going to be unique in its own right?
  3. What is the key to making sure that the Growth and Early teams are on the same page in terms of company/Sequoia fit?

12 thoughts on “Sequoia Capital: A Lesson In Excellence

  1. Great post, JB!
    It is crazy to think that Sequoia has discovered more unicorns than any other VC firm on earth! I know that I learned a lot during Prof. Doyle’s class on venture capital and from what I know now, it seems like Sequoia does have the magic touch. But besides being able to just identify great potential, it seems like they do a great job at nurturing startups as well. Being invested in by Sequoia is a stamp of approval in Silicon Valley and it comes with a lot of connections and resources at your disposal.
    I’ve spoken to some TechTrek alumni and they’ve said that Sequoia was one of their favorite visits of the whole trip. I am looking forward to it and to learning more during your presentation!

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  2. Hey JB, I really enjoyed this post! We have learned about 3 VC’s so far in a lot of depth- Sequoia, True Ventures, and Kleiner Perkins- and I have found it very interesting to compare each company’s investment strategy. Sequoia’s two core pillars, authentic founders and big markets, are very aligned with Kleiner’s mission to create new markets that have billion dollar potentials. I liked how you stressed the general partner’s websites in this post because they are what defines the VC. In your research were you able to look at any of their general partners, and if so, which one/ones were the standout(s)?

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    • Hey Lizzie! I mentioned Michael Moritz and Jim Goetz in the post as specific VCs who transcend the two groups in Sequoia. Typically I’ve seen those two as the face of the GP’s in Sequoia in terms of speaking engagements and thought leader articles. I also saw Jim Goetz and Managing Partner Doug Leone ranked in the Midas list of top 20 VCs. I’m hesitant to use lists like that to describe standouts because of the subjective nature of picking those lists but, same as using unicorns to evaluate VCs, it’s a good place to start. Jim was #1 on the list for leading the $22B acquisition of WhatsApp, where he turned an investment of $60M into over $3B in just 3 years, as well as leading a string of IPOs by HubSpot, Barracuda Networks, Nimble Storage, and Palo Alto Networks all within the last 5 years. Doug had his spot on the list as a leader in Sequoia, taking the firm to India and China.

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  3. Awesome post! The big wins that Sequoia has had reminded me of something that Bill Gurley said about why venture is so difficult, “If you invest in something that doesn’t work, you lose one times your money. If you miss Google, you lose 10,000 times your money.” I think it would be interesting to hear about the successful companies that they’ve passed from funding and why they decided to not invest.

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    • Nice point Erik. I recently had the fortune for a partner at a VC firm to get a talk in one of my classes, and he said something similar to that. He actually said that he keeps a portfolio of “what ifs” of great companies that exploded that he had the opportunity to invest in, but did not. He said that he did so in order to keep himself humble and motivated. Can you imagine the sleepless nights, or coming into work, after not invest in Uber? Lol

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  4. I loved how comprehensive this post is! It’s funny, whenever I look into a new VC firm, I always compare it to Sequoia. They have a proven investment strategy with impressive leadership that sets the bar incredibly high. I’d love to know what kind of questions they need answered when looking at companies to invest in. Obviously, there are so many things to consider, so what does Sequoia specifically look for?

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    • Great point about how we compare other VCs to Sequoia- I wonder if that helps them success or just adds unnecessary pressure for them to succeed. Also, to reply to your question about what they specifically look for- worry no more. Don Valentine, founder of Sequoia, does many interviews and a lot of them are on Youtube. This one is a bit long, but he talks in detail about what he looks for in companies when he invests: https://www.youtube.com/watch?v=Nz9GOmMtpFY.

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  5. Nice post, JB! I love how you went into detail about the Sequoia company culture. After seeing how Salesforce tries so hard to maintain their company culture, I wonder if it is worth it for Sequoia to implement something similar once it strikes gold, or unicorns in this case.

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  6. Nice job, JB! I agree with Lizzy that it’s interesting to see the similarities and differences in different VCs investment strategy. I also remember that when I went to High Land Capital with TechTrek Boston, it’s GP emphasized: “future is here, but not evenly distributed”. In the video of Doug Leone at Stanford, he said it would be impossible to say what’s the next hot industry. A VC’s mind is very fascinating!

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  7. Great post, JB! I really appreciated this overview of Sequoia. I thought your point of who they choose to raise money from (nonprofits, universities, etc.) really hit home. By strategically choosing these investments, I think it makes Sequoia overall more successful; Sequoia investors know in the back of their mind who will experience the burden of the loss – students, those with cancer, the poor and marginalized, etc. Whether consciously or subconsciously, I think this notion of who will hurt if they do not invest properly is in the back of the mind and therefore, fuels their work in a positive way.

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