20VC Sequoia's Mike Vernal on His Biggest Lessons From 8 Years of HyperGrowth at Facebook, Why The Strength of Data Moats Is OverRated Today and The Challenge of Overthinking Investments In Venture

In a revealing conversation on "20 Minutes VC," host Harry Stebings interviews Mike Vernal, a partner at Sequoia Capital, to discuss his transition from operations to venture capital and the insights gained from his tenure at Facebook. Vernal emphasizes the importance of execution, focus, and clarity in both startups and investment decisions. He also touches on the evolving SaaS landscape, the skepticism around data moats, and the challenges of time management in venture capital. Additionally, Vernal shares his thoughts on the future consolidation of SaaS applications and the potential fading of SaaS as a distinct category, predicting a rebundling of services. The discussion also covers the significance of conviction in investment decisions and the balance between gut instinct and rigorous analysis.

• Harry Stebings hosts the 20 minutes VC podcast.
• Harry invites feedback on Instagram at hstebings1996 with two b's.
• Expresses enthusiasm for the guest, Mike Vernal.

"Hello and welcome to the 20 minutes vc with me, Harry Stebings."

This quote is Harry Stebings introducing the podcast and himself as the host.

• Mike Vernal is a partner at Sequoia Capital.
• Sequoia Capital's portfolio includes WhatsApp, Zoom, Stripe, Airbnb, GitHub, and more.
• Mike Vernal has led and currently sits on the board of Citizen, Rideos, Rockset, Threads, and Houseparty.
• Houseparty was recently acquired by Epic.
• Mike Vernal's previous roles include VP of Product and Engineering at Facebook and PM Lead at Microsoft's developer division.
• Pat Grady was thanked for introducing Mike to the show.

"And so with that, I'm delighted to welcome Mike Vernal, partner at Sequoia Capital."

This quote serves as Harry Stebings' introduction of Mike Vernal, highlighting his current position and career background.

• Airbase is a cloud-based spend management platform for startups.
• Offers virtual and physical cards, checks, and ACH transfers.
• Features a pre-approval system for expense requests.
• Automates accounting work like coding expenses and collecting invoices.
• Used by companies like Gusto, Front, and Segment.

"Airbase, the ideal cloud based spend management platform for growing startups."

This quote describes Airbase as a financial management tool tailored for startups, emphasizing its key features and benefits.

• Culture Amp focuses on turning company culture into a competitive advantage.
• The platform is designed for companies at any funding stage.
• It emphasizes the importance of performance reviews for high-performance cultures.
• Culture Amp offers a guide to revamp traditional performance reviews.

"Culture Amp's new guide to performance reviews shows you how to create a process that actually makes an impact."

This quote highlights Culture Amp's approach to improving performance reviews to foster employee development and company success.

• Terminal helps in building skilled remote engineering teams.
• Manages all aspects of remote teams, including office logistics, benefits, and legal.
• Terminal's clients include Eventbrite, Hims, and Dialpad.

"Terminal is your dedicated partner in quickly building skilled remote engineering teams."

This quote explains Terminal's role in facilitating the creation of remote engineering teams for companies, emphasizing their comprehensive service.

• Mike Vernal did not initially aspire to a career in venture capital.
• His connections to Sequoia began with college friends who started companies funded by Sequoia.
• Mike joined Sequoia's scouts program through these connections.
• Reflection during paternity leave led him to consider a career switch.
• Mike enjoyed the early days at Facebook and wanted to work with early-stage founders.
• He has been with Sequoia for over three years.

"I never expected to be in venture. It was not a career goal. It was never a thing that I aspired to."

This quote reflects Mike Vernal's unexpected path to a career in venture capital, emphasizing that it was not his original plan.

• Execution, tempo, and focus are critical for success.
• Many companies lack a clear understanding of goals and measurement of progress.
• Mike Vernal applies these principles in his investing mindset.

"Execution matters. Execution matters. Tempo matters. Focus matters."

This quote from Mike Vernal encapsulates the key lessons he learned from Facebook's hypergrowth, which influence his approach to investing.

• Facebook's growth team emphasized focus and extreme clarity in objectives.
• Successful companies excel in focus, clarity of thought, and execution.
• The importance of prioritizing tasks that are critical and important.
• Relentless execution is key to achieving goals.

"But I think the growth team really sort of helped to define this notion of focus and extreme clarity around what are you actually trying to accomplish?"

This quote highlights the value the growth team at Facebook placed on having a clear and focused approach to achieving objectives, which is seen as a significant factor in successful execution.

• Effective founders can articulate their domain and strategy concisely.
• The ability to explain a business within a short time frame indicates a deep understanding.
• A succinct pitch is often a sign of an exceptional entrepreneur.

"They can come in and explain the entirety of their business in three to five minutes."

Mike Vernal points out that entrepreneurs who can clearly and quickly explain their business demonstrate a profound understanding of it, which is a positive indicator in the assessment process.

• Overthinking investments can be a challenge in venture capital.
• Long feedback cycles in venture capital make it difficult to quickly determine successful investments.
• Reflecting on investment decisions through documentation helps in understanding one's thought process.
• Balancing instinct with rational analysis is necessary in investment decisions.

"For the handful of companies where I think I probably made a mistake, I thought it was pretty interesting."

Mike Vernal acknowledges that sometimes overthinking can lead to dismissing potentially successful companies, suggesting that initial instincts should not be completely overlooked in the investment process.

• The conviction of the investment sponsor is crucial.
• Personal excitement about a company and its founding team is a strong signal.
• The willingness to join the company being invested in can be a litmus test for conviction.

"But I think the thing that I am discovering is even more important is really your internal conviction about an opportunity."

Mike Vernal emphasizes the importance of personal conviction in investment decisions, suggesting that it can be a more reliable guide than external feedback alone.

• Terminal decisions are irreversible, whereas non-terminal decisions can be modified.
• Few operational decisions are terminal; most can be changed if proven wrong.
• In operations, tempo and feedback loops are more critical than the permanence of decisions.

"And in my experience, there are incredibly few decisions in an operational role that are terminal decisions."

Mike Vernal contrasts terminal and non-terminal decisions, indicating that in operations, the ability to adapt and learn from feedback is more vital than worrying about irreversible decisions.

• Product development prioritizes speed, learning, and iteration.
• Venture capital focuses on decision-making due to the terminal nature of investment decisions.
• Venture firms typically have a structured process for decision-making, including writing memos and voting.

"Just optimize for doing things somewhat quickly, learning and then sort of iterating based off of that in venture on the other side, the most important thing that we do is make decisions."

This quote emphasizes the contrast between the fast-paced, iterative approach of product development and the careful, structured decision-making process in venture capital, highlighting the finality of investment decisions.

• There has been a shift from on-premise software to SaaS, leading to a proliferation of niche SaaS apps.
• A market correction is expected, leading to consolidation of SaaS apps and emergence of all-in-one solutions.
• Notion is cited as an example of an all-in-one workplace solution.
• There may be a future for a SaaS App Store or meta SaaS apps to manage the plethora of tools.

"I think there will be a consolidation of many of these different SaaS apps."

This quote predicts a market evolution where the current abundance of niche SaaS apps will consolidate, leading to fewer, more integrated solutions.

• Incumbents may consolidate the market by integrating SaaS features or acquiring other apps.
• Market consolidation will likely occur within functional verticals, with examples like Adobe and Salesforce.
• This process is gradual, with Salesforce only recently expanding its portfolio significantly.

"I think Salesforce is probably 15 to 20 years old at this point, and maybe only in the past five to eight years, I think has been really adding more and more things to its portfolio."

This quote exemplifies how established companies like Salesforce evolve over time to consolidate their market position by adding new features and services.

• The term SaaS initially distinguished cloud-hosted software from on-premise solutions.
• SaaS has become so commonplace that it is now synonymous with software.
• The distinction between SaaS and traditional software is fading as cloud-based solutions become the norm.

"SaaS at this point is just business software."

This quote signifies the evolution of the software industry, where SaaS has become the standard model for delivering business software, making the term itself less distinctive.

• Data moats are often cited as a competitive advantage in AI and machine learning.
• Skepticism exists regarding the durability of data moats due to rapid technological advancements.
• The efficiency of training models is improving, reducing the need for large data sets.
• Companies should critically assess the reality of their data moats.

"I personally am pretty skeptical."

This quote expresses doubt about the long-term viability of data moats as a competitive advantage, suggesting that technological progress may undermine the exclusivity of large data sets.

• Workflow integration can create a strong mode of operation within specialized functions like radiology or dermatology.
• Training a generation on specific software can make it difficult to replace that software.
• The stickiness of workflow integration may be more durable than having a large amount of labeled data.

"And so there might be a mode, but the mode to me is not really based on the data and the labels. It's more based on...now they have been trained to use our software for this thing, and it will be hard to rip out our software because you'll have a generation of people that are just trained to use this piece of software."

The quote emphasizes that the strength of a software's mode is not merely in its data, but in how deeply it is ingrained into the user's workflow and training, making it challenging to replace.

• The rise of synthetic data creation may mitigate the benefits of data moats.
• The effectiveness of synthetic data depends on the context and the accuracy required by the model.
• In autonomous vehicles, simulations help with common cases but may not capture the complexity of edge cases.

"Can I ask, is the kind of benefits of data mode, so to speak, not actually largely mitigated when one looks at the rise of kind of synthetic data creation?"

The question raises the issue of whether synthetic data creation could lessen the competitive advantage provided by data moats.

"I think if you talk to people that are doing autonomous vehicles, for instance, I think they feel that simulation might make some common cases more efficient. But the hard part of driving a car autonomously is the edge cases that live beyond 99.99. And I think those ones are just hard to imagine, let alone generate synthetically."

This quote highlights the limitations of synthetic data, particularly in handling edge cases in complex systems like autonomous vehicles.

• Mike Vernal recommends "100 Years of Solitude" as a must-read book.
• Colin Greenwood, Radiohead's bassist, is considered an underrated talent by Mike.
• Startups often underprice their products, according to Mike.
• Exceptional companies justify exceptional investment prices, but this should not become the norm.
• Time management is the biggest challenge in Mike's role at Sequoia.
• Prioritization in venture investing involves quickly evaluating a wide range of companies and meeting the ones that seem interesting.
• Vercata, a security camera company, is a recent investment by Sequoia that excites Mike due to its combination of hardware, software, and cloud services.

"100 years of solitude? I think the most magically written book of all time, or at least that I have ever read."

Mike Vernal regards "100 Years of Solitude" as an exceptionally well-written book and recommends it for reading.

"I'm on a bit of a Colin Greenwood kick at the moment. Who's the bassist for Radiohead? I think he's just a very talented and melodic bassist."

Mike Vernal appreciates Colin Greenwood's talent as a bassist and believes he deserves more recognition.

"I think almost every startup underprices its product."

Mike Vernal observes that startups tend to underprice their products, which could imply a common issue in startup pricing strategies.

"I think for a truly exceptional company, you should always make an exception. But if you make the exception the norm, it is the new norm."

This quote suggests that while investors might pay a premium for exceptional companies, doing so regularly can lead to inflated norms.

"Time management. There are far more interesting companies created each year than I have time to meet."

Mike Vernal identifies time management as a significant challenge due to the high volume of interesting companies to evaluate.

"It is a constant battle, but I think it is a blend of trying to read everything that I get and look at everything quickly and then just try to meet everything that I think might be interesting."

Mike Vernal describes his approach to prioritization, which involves a quick assessment of many opportunities to identify the most interesting ones.

"So we just partnered with a company called Vercata, which is a security camera company."

This quote introduces Vercata as a recent investment, highlighting Mike Vernal's excitement about the company's integration of hardware, software, and cloud services.

• Mike Vernal can be found on Twitter.
• Pat Grady at Sequoia is thanked for his introduction.
• Harry Stebings invites listeners to follow him on Instagram.
• Airbase is promoted as a spend management platform for startups.
• Culture Amp is presented as a tool for turning company culture into a competitive advantage.
• Terminal is endorsed for building skilled remote engineering teams.

"I absolutely loved having Mike on the show there. And if you'd like to see more from Mike, you can find him on Twitter at mvernal."

Harry Stebings expresses appreciation for having Mike Vernal on the show and directs listeners to Mike's Twitter for more insights.

"I want to say huge thank you again to Pat Grady at Sequoia for the intro today."

Harry Stebings thanks Pat Grady for introducing Mike Vernal, indicating the importance of networking in the venture industry.

"It'd also be fantastic to welcome you behind the scenes here. You can do so on Instagram at hdbbings 1996 with two B's."

Harry Stebings invites listeners to engage with him on Instagram, providing a personal touch and promoting his social media presence.

"The ideal cloud based spend management platform for growing startups."

Airbase is promoted as an essential tool for startups to manage their spending effectively.

"The platform that turns your company culture into your competitive advantage."

Culture Amp is touted as a solution for enhancing company culture, which can be a strategic advantage for businesses.

"Terminal is your dedicated partner in quickly building skilled remote engineering teams."

Terminal is recommended for its expertise in assembling remote engineering teams, highlighting the demand for such services in the tech industry.