20VC Sequoia Partner, Pat Grady on Why Data Is The New Oil, Why We Will See The Return of The Apprenticeship Model in VC & The Defining Characteristics of The Next Generation of Great Software

In this episode of "20 minutes vc," host Harry Stebbings interviews Pat Grady, partner at Sequoia Capital, discussing the venture capital landscape and the future of software. Pat shares his journey from a math enthusiast at Boston College to venture capital, initially at Summit Partners and then drawn to Sequoia for its focus on scaling impactful companies. He reflects on the importance of foundational skills in VC, such as financial modeling, and the value of Sequoia's "tribal knowledge" and diverse partnership in supporting founders. Pat predicts a shift back to an apprenticeship model in VC, emphasizing the increasing rate of change in the world and the need for fresh perspectives. He also explores the role of data as the new oil, fueling digital experiences and creating competitive moats for companies, and stresses the significance of connecting data to real-world problems. Finally, Pat discusses the democratization of innovation beyond Silicon Valley and Sequoia's global presence, while acknowledging the cultural nuances essential for success in international markets.

• Harry Stebbings is the host of the 20 minutes vc podcast.
• Sequoia Capital, a highly renowned venture capital firm, is featured in this episode.
• Pat Grady, a partner at Sequoia Capital, is the guest.
• Pat's investments include companies like Zoom and Qualtrics.
• Pat previously worked at Summit Partners.
• Sarah Guo from Greylock facilitated the introduction to Pat Grady.

"Now, this week is a week I've wanted to do since starting the podcast over two years ago. This week we're featuring undoubtedly one of the world's greatest funds. They've made investments in the likes of Google, Apple, WhatsApp, Stripe, PayPal." "Now, Pat is a partner at Sequoia where he's made investments in many past guests of this show and the Sasta podcast, including the likes of Zoom, namely, and Qualtrics, just to name a few."

These quotes establish the significance of Sequoia Capital in the venture capital industry and introduce Pat Grady as a prominent partner at the firm.

• Pat Grady attended Boston College and had a strong affinity for math.
• He was drawn to physics and business, particularly the positive-sum aspect of entrepreneurship.
• Venture capital resonated with Pat due to its potential for tangible contributions.
• Pat began his career at Summit Partners in Boston, focusing on private equity and venture capital.
• He joined Sequoia to concentrate on scaling impactful companies.

"And through the course of school, I was looking for places to apply math, and I was kind of drawn towards physics on one side and business on the other." "I went to a place in Boston called Summit Partners, which does a little bit of private equity and a little bit of venture capital."

Pat describes his academic interests and his initial professional steps into venture capital, highlighting his motivation to make a meaningful contribution through business.

• Pat learned essential skills like building financial models at Summit Partners.
• These skills helped understand business unit economics and drivers.
• However, understanding the product, team, and market is more complex and requires years of experience.
• Accumulated knowledge is crucial for venture capital success.

"But it turns out that those unit economics and drivers are a function of the product, the team, and the market." "It really just takes many, many years of trying to break down businesses, talk with customers, talk with founders, talk with your partners."

Pat emphasizes the importance of experience and deep understanding of the product, team, and market over technical skills like financial modeling.

• The apprenticeship model in venture capital is debated, with some favoring operators and founders as VCs.
• Sequoia values tribal knowledge and wisdom from decades of experience with successful founders.
• Sequoia hires both seasoned operators and individuals early in their careers for fresh perspectives and to instill Sequoia's values.
• Pat believes Doug Leone exemplifies the success of the apprenticeship model.

"We place a tremendous amount of value on tribal knowledge and the accumulated wisdom of 40 plus years of experience." "We also hire people who are much, much earlier in their career who are essentially just raw dna."

Pat discusses the balance Sequoia maintains between hiring experienced operators and nurturing new talent through an apprenticeship model, valuing the long-standing knowledge within the firm.

• There has been a recent trend towards hiring founders and operators as VCs.
• Pat predicts a shift back towards hiring younger individuals with fresh perspectives.
• The apprenticeship model may regain popularity due to the accelerating pace of change in the world.
• Data points like the turnover rate of companies in the S&P 500 support this notion of accelerating change.

"I think in the next five or ten years, it's going to swing back the other way towards hiring younger people with fresh perspective and more of an apprenticeship model." "The world around us is moving faster than it ever has before."

Pat shares his personal view on the evolving hiring trends in venture capital, suggesting that the industry will value fresh perspectives and the ability to adapt quickly to change.

• The value of operational experience is diminishing due to accelerating change.
• A fresh perspective is increasingly beneficial in a rapidly changing world.
• Emotional attachment to personal experience is common, but may not be as valuable as it once was.

"The length of that stay has been shortening monotonically over the last 40 or 50 years. And so if you believe in accelerating change, which we very much do, what that implies is the rate of decay on the value of your experience as an operator has never been higher."

This quote explains that the relevance of operational experience is declining more quickly than before because of the fast pace of change in the modern world.

• VC empathy towards founders can be limited without operational experience.
• Founders may initially respect VCs with operational backgrounds more.
• Sequoia's diverse team allows for matching founders with partners who have relevant experience.

"The wonderful thing about being part of sequoia is we truly and deeply believe that this is a team sport."

Pat Grady explains that at Sequoia, the collective expertise of the team compensates for individual gaps in experience, ensuring founders get the support they need.

• The last major software shift was from on-premise to SaaS/cloud, changing the business model but not the user experience.
• The next generation will focus on improving user experience through a virtuous cycle of design and data.
• Successful companies will create products that are more intuitive and data-informed, resembling consumer applications.

"Now, I think the next generation of grid software will actually embrace what the cloud enables you to do. And it won't be a business model transition. It'll be a user experience transition."

Pat Grady highlights the shift in focus for future software development, prioritizing enhancements in user experience rather than just business model changes.

• There's criticism that recent innovations are incremental rather than groundbreaking.
• Fundamental innovation is still occurring, especially where technology intersects with traditional sectors.

"But I do think that we're seeing more and more fundamental innovation over time."

Despite the perception that innovation has been minor, Pat Grady believes that significant, foundational changes are happening, particularly at the intersection of technology with other industries.

• Sequoia has a significant presence in emerging markets like India and China.
• Investments in these regions often focus on technology as an agent of change in fundamental industries.
• There is also a substantial amount of core technology development in these markets.

"Our partners in India and China... They tend to do a lot of what we do, meaning invest in companies where technology is the weapon and technology is the agent of change."

Pat Grady discusses Sequoia's approach to investing in emerging economies, emphasizing technology's role in driving change across various industries.

• Data's role in powering digital experiences is analogous to oil's role in physical commerce.
• The analogy isn't perfect, as data is not fungible and requires processing to be valuable.
• Large companies with abundant data and resources are well-positioned to create great digital experiences.
• Startups need to be strategic in accumulating and leveraging data to compete.

"Data at rest is no better than oil in the ground. It has to be refined into actionable intelligence."

Pat Grady compares raw data to unrefined oil, stressing the need for processing data into something useful, which is a challenge that both startups and large companies face.

• Data is seen as a primary source for creating moats in digital experiences.
• Founders in software businesses should keep data top of mind.
• There are strategies to gain an edge with data, such as narrowing product scope to become an expert, breaking new ground, or prioritizing data collection before monetization.

"In general, data will fuel great digital experiences. It is likely to be the primary source of moats, and it should be absolutely top of mind for every founder going into a software business of any kind."

This quote emphasizes the importance of data in creating a competitive advantage and sustainable business moats. It suggests that founders should prioritize understanding and leveraging data in their business strategies.

• The last platform shift (mobile and cloud) benefited existing large companies, like Apple, more than startups.
• In future platform shifts, large companies may again reap the most value, but there will still be opportunities for startups akin to Uber.
• Identifying the "Ubers" of the next platform shift is a key investment focus.

"The biggest beneficiary is likely to be Google or Facebook or Apple or Amazon. However, the question for us is, what's the Uber meaning? Yes, Apple reaped the most value out of the transition to mobile, but Uber was also created as a result of that transition."

Pat Grady notes that while large companies are likely to benefit significantly from platform shifts, there is also potential for startups to emerge and thrive, using Uber as an example from the mobile and cloud shift.

• The rise of AI has given data a more defined utility value in mass consumer worlds.
• The challenge with data is not its analysis but the "last mile problem" of connecting it to real-world human problems.
• Examples like "Moneyball" and the company Medallia illustrate the importance of applying data insights to practical decisions and customer experiences.

"I think the challenge with data has been the last mile problem. And what I mean by that is basically just connecting it to human beings who have actual problems at the time and in the context of those problems that they're trying to solve."

Pat Grady discusses the difficulty of translating data into actionable insights that address human problems in a timely and contextually relevant manner, which he refers to as the "last mile problem."

• The Turing test and the concept of AGI have been around since the 1950s.
• As we learn more about AI, the predicted date of AGI dominance has been pushed further away.
• There is a belief in the inherent "magic" of being human that may never be replicated by AI.

"And my personal view is it's one of these things that the more we know, the more we realize we don't know, and that there is some magic in being human that we will never be able to replicate."

Pat Grady expresses skepticism about fears of AI taking over humanity, suggesting that the uniqueness of the human experience may not be fully replicable by artificial intelligence.

• Silicon Valley has seen consistent growth in innovation, but its share of global innovation is decreasing.
• The democratization of the means of production allows for global company creation.
• Scaling a company has become more difficult due to global competition, requiring more resources and knowledge.

"Silicon Valley's slice of that pie has been decreasing monotonically for the last 40 or 50 years."

Pat Grady acknowledges that while Silicon Valley continues to innovate, its proportional contribution to global innovation is declining due to the rise of innovation across the world.

• There is significant competition between startups in Asia and the West.
• Cultural differences can be a barrier, as seen in Uber's retreat from China.
• Understanding and navigating these cultural differences is crucial for success in global markets.

"I don't think people appreciate the cultural differences."

Pat Grady points out that cultural differences are often underestimated and can greatly impact a company's ability to succeed in international markets, as illustrated by Uber's challenges in China.

• Different cultures have unique aesthetic preferences; what may seem unappealing in one culture can be attractive in another.
• The concept of "runal" in Chinese culture appreciates crowded, noisy, and busy environments, which contrasts with Western design preferences.
• Local understanding and growth are crucial for businesses expanding into new countries, rather than imposing foreign methodologies.

"Messaging apps or the e-commerce apps that people use in China, to an American consumer, to a western consumer, more generally, they don't look good. They look crowded, they look messy. There's red and gold colors splashed all over the place. It's very, very noisy."

This quote highlights the stark difference in design preferences between Western and Chinese consumers, emphasizing the importance of cultural context in business and design.

"It's much, much better to start in those other countries and grow from the ground up, truly appreciating all the cultural nuances that might not be obvious from the surface."

Pat Grady underscores the value of building a business with a local team that understands cultural nuances, as opposed to transplanting foreign business models.

• Adopting local workforces is key for startups expanding into new regions.
• Local employees bring valuable insights and cultural understanding that can't be replicated by outsiders.

No direct quote provided.

• The "underdog mentality" is a driving force for success, as exemplified by the 1936 US Olympic rowing team.
• Maintaining humility and a sense of urgency is crucial, even for successful teams like Sequoia Capital.

"Every single one of them thought that he was the weak link in the boat and was just fighting desperately to not let down his teammates."

Pat Grady uses the example of the 1936 US Olympic rowing team to illustrate the power of an underdog mentality and the desire to support one's team.

"We can lose to anybody with any company on any day."

Despite Sequoia Capital's success, Pat Grady acknowledges the competitive nature of their business, which keeps the team grounded and focused on the present and future rather than past achievements.

• Mentors play a significant role in personal and professional development.
• Doug Leone and Jim Getz are highlighted as Pat Grady's mentors at Sequoia Capital.

"Doug Leone and Jim Getz both partners of mine here at Sequoia."

Pat Grady credits Doug Leone and Jim Getz as his mentors, indicating the importance of mentorship within Sequoia Capital.

• Immersing oneself rapidly and speaking to a wide range of stakeholders is key when entering new verticals.
• Developing a specific investment thesis and rigorously testing it is part of the learning process.

"Dive right in, talk to as many people as possible, customers, competitors, anybody who's a thought leader in the vertical and try to iterate like crazy and try to frame a very specific and deliberate investment thesis and then stress test it from a hundred different directions."

Pat Grady describes his approach to learning in new verticals, which involves deep engagement with the industry and constant iteration of investment strategies.

• Sequoia Capital's investment decisions are based on the founder's capabilities and the market potential.
• The company "namely" was chosen for investment due to its founder and its position in the human capital market.

"It's a function of the founder and the market."

This quote summarizes the two main reasons for Sequoia Capital's investments: the quality of the founder and the attractiveness of the market.

"Namely, is essentially for employees what HubSpot is for customers."

Pat Grady explains the rationale behind investing in "namely," comparing its comprehensive solution for employee management to HubSpot's customer acquisition platform.

• AI-powered personal assistants like X.AI are valuable for scheduling meetings efficiently.
• Workable is an all-in-one recruiting software that simplifies the hiring process for companies.

No direct quote provided.