20VC Sequoia's Pat Grady on What Sequoia Is Focused On Today, How Sequoia Think About Investment DecisionMaking Processes & Why It Is Important To Trade A Few Points of Efficiency for Culture When It Comes To Attribution



Harry Stebbings welcomes Pat Grady, partner at Sequoia, back to "The 20 Minute VC" podcast to discuss his journey in venture capital and the core principles guiding Sequoia's renowned investment strategy. Grady, having previously worked at Summit Partners, now co-leads Sequoia's growth investment team, contributing to the success of companies like HubSpot, Zoom, and Okta. Sequoia, with its mission to help daring founders build legendary companies from idea to IPO and beyond, focuses on early-stage investments despite the allure of larger funds, aiming to support founders at any stage and location. Grady emphasizes the importance of team collaboration over individual achievements, the value of trust and listening on boards, and the necessity of aligning with founders' visions. He also shares insights on the delicate balance between consensus and conviction in decision-making, and the role of venture capital in both driving innovation and addressing its unequal impact on society.

Summary Notes

Introduction to 20 Minutes VC Podcast

  • Harry Stebbings hosts the 20 Minutes VC podcast, which focuses on building relationships and friendships with inspiring individuals.
  • Pat Grady, a partner at Sequoia, is the guest on the podcast, known for his work with companies like WhatsApp, Zoom, Stripe, Airbnb, GitHub, HubSpot, Okta, and Qualtrics.
  • Harry expresses gratitude for the question suggestions from Frederick at Octa and Dan Scheinerman.

"Today's guest I had on the show over two and a half years ago since he's been hugely supportive and kind to me, and I'm forever grateful for that."

This quote highlights the value Harry places on the relationships he's built through his podcast, particularly with the returning guest Pat Grady.

Pat Grady's Background

  • Pat Grady shares his journey from a Wyoming coal mining town to becoming a partner at Sequoia.
  • He began his career at Summit Partners in Boston, gaining basic investing tools, and later moved to Sequoia to work more closely with founders.
  • Pat's initial years at Sequoia involved working as an apprentice with industry veterans like Doug Leone and Jim Getz.

"I got to work with everybody else at Sequoia, mostly Doug Leone and Jim gets were kind of the two folks that I was lucky enough to work the most with, and four or five years as an apprentice and then started leading some investments..."

This quote explains Pat's early professional development at Sequoia, where he learned from established figures in the venture capital industry.

Overcoming Intimidation at Sequoia

  • Pat Grady discusses the intimidation of working with venture capital legends at Sequoia.
  • He was advised to get a voice coach due to nervousness impacting his ability to speak during partner meetings.
  • The intimidation was self-imposed due to the high expectations of the environment.

"I was so nervous, I literally couldn't speak. And Ruloff thought that I might have a speech impediment. Wasn't a speech impediment. It's just that I was so nervous..."

This quote conveys the immense pressure Pat felt when presenting in front of the accomplished partners at Sequoia, to the point where it affected his speech.

Sequoia's Focus and Mission

  • Sequoia's mission since 1972 is to help daring individuals build legendary companies from idea to IPO and beyond.
  • The firm has expanded geographically to support founders across the Americas, China, India, and Southeast Asia.
  • Despite access to large funds, Sequoia focuses on early-stage investments, with three-quarters of their investments in the past year being seeds or series A's.

"That unifying theme is our mission, which has been approximately the same since 1972. And we articulate that mission as we help the daring build legendary companies from idea to IPO and beyond."

This quote encapsulates Sequoia's enduring mission to support founders throughout their entire journey, emphasizing the firm's long-term commitment to entrepreneurship.

Signaling Risk in Venture Capital

  • Signaling risk is a concern for founders when accepting investment from large funds, fearing negative signals if the fund does not lead subsequent rounds.
  • Pat argues that signaling risk is overblown and has not seen it materially harm a company.

"Signaling risk is this funny thing, because most founders are worried about it, but we have never actually seen a situation in which it hurt."

The quote addresses the common concern of signaling risk in venture capital and suggests that the impact may be less significant than perceived by founders.

Ownership in Venture Investments

  • Building ownership is key in venture returns, with a trend towards more founder-driven decisions regarding ownership.
  • Sequoia has shifted from a focus on aggressive ownership to being more founder-focused, recognizing a trend of founders wishing to consume capital efficiently.

"It's all pretty founder driven. I think one of the mistakes we made historically was to be a little bit too greedy, quite frankly, on ownership."

This quote reflects Sequoia's evolving philosophy on ownership stakes in investments, highlighting a move towards prioritizing founders' preferences and interests.

Investment Strategies and Founder Preferences

  • Sequoia Capital focuses on aligning their investment strategies with the preferences of founders.
  • They adapt their approach to either acquire a significant ownership stake in a single investment or build ownership over multiple funding rounds.
  • The flexibility in their investment approach allows them to support companies in various stages, from early to late rounds.

And so there are situations like Zoom, as I guess, a recent example, where we got a nice chunk of ownership in one initial investment, where we and the founder both felt great about how that went. And then there are situations like Okta, where we never bought a large chunk of ownership, but we had a chance to lead the Series D, the Series D, the Series E, the series F, and after leading four rounds in a row, we ended up being the largest outside shareholder.

These quotes illustrate Sequoia's strategy of either taking a large initial stake in a company, as they did with Zoom, or progressively building ownership across multiple funding rounds, as with Okta. The strategy is tailored to what founders are looking for.

Impact of Extended Privatization on Sequoia's Strategy

  • Sequoia Capital adjusts its fund structures to support founders who prefer to keep their companies private for longer periods.
  • The firm's mission is to assist founders from the inception of their idea through to IPO and beyond, adapting to the founder's timeline and goals.

If founders want to stay private longer, then we'll end up raising vehicles that can support them when they're at pretty decent scale.

This quote highlights Sequoia's commitment to supporting founders' desires to remain private for extended periods by raising appropriate investment vehicles.

The Role of Public Accountability

  • Pat Grady believes that public accountability and transparency can bring out the best in companies and their teams.
  • The decision for a company to go public is influenced by the founder's objectives and the benefits of increased accountability.

Accountability brings out the best in people. And I think that at some point it's good for most companies to be public companies, because that does have a higher level of accountability and transparency, and I do think that helps to bring out the best in people.

Pat Grady cites Frank Slutman's view on accountability, indicating the positive impact of going public on a company's performance due to the higher standards of accountability and transparency.

Venture Capital as a Team Sport

  • Sequoia Capital views venture capital as a team sport, which contributes to their long-term success and ability to navigate various economic and technological changes.
  • They believe that collective expertise leads to better investment decisions and stronger support for portfolio companies.

It is appealing to think that VC is an individual sport because individuals build such deep relationships with the founders... We have found it to absolutely be a team sport... Over time, the near term benefit of being a team sport shows up in investment decisions and shows up in company building with the decisions.

Pat Grady explains that while individual relationships are important, the team approach has proven more beneficial for Sequoia in terms of investment decisions and company building.

Attribution in Team-Based Approach

  • Sequoia Capital prioritizes culture over efficiency when it comes to attribution of success within the team.
  • They made a conscious decision to associate all prospects and companies with "Team Sequoia" rather than individual partners to foster a collaborative culture.

We have made a very deliberate decision to trade a few points of efficiency in exchange for our culture... every prospect we're talking with, every company with whom we're in business today, they don't belong to an individual. They are associated with Team sequoia, and it should always be a team effort in pursuing those things.

This quote reflects Sequoia's culture-focused approach, where they emphasize team effort over individual recognition, even if it means sacrificing some efficiency.

Selecting Partners at Sequoia

  • Sequoia Capital looks for partners with unique characteristics that are complementary to the existing team and who share the firm's values.
  • They prioritize alignment with their mission to serve founders and support great causes through their investments, which fund nonprofits, universities, and foundations.

When we look for new partners, there are three basic things that we look for one, some sort of outlier characteristic or something that makes that person special. Two, whatever it is that makes that person special should be additive to what we already have here at Sequoia. And then three, values.

Pat Grady outlines the three core criteria for selecting new partners at Sequoia: unique characteristics, additive skills, and shared values, particularly a commitment to entrepreneurship and supporting great causes.

Decision-Making Processes

  • Sequoia Capital balances the benefits of consensus and conviction in their decision-making process.
  • They recognize the advantages of team support and the drawbacks of potential bias in consensus-driven decisions.

So, consensus and conviction are two things that have pros and cons associated with them. So the positive of consensus is once you're in business with a founder, it's all hands on deck, and the whole team is supportive, and nobody who was negative at the time of the decision is secretly rooting for failure.

Pat Grady discusses the trade-offs between consensus and conviction in decision-making, highlighting that consensus ensures team support for the founder post-investment, while conviction-driven decisions can be more polarizing.

Conviction in Investment

  • Conviction is crucial for making investments, especially when the potential is not immediately obvious.
  • Too much emphasis on conviction, however, can lead to false bravado and inadequate due diligence.
  • True conviction should be accompanied by the ability to explain the investment simply, allowing others to understand the vision.
  • At Sequoia, consensus is reached when the team understands and trusts the judgment of the individual with conviction.

"The positive of conviction is that investments are never obvious, and you really need somebody who sees something special to step up and have conviction and make an investment."

This quote highlights the importance of having strong belief in an investment's potential, particularly when it's not apparent to others.

"The downside of conviction is that if you put it on a pedestal and make it a requirement for making a new investment, then you can unintentionally end up with a lot of false bravado where people are acting as if they have conviction, even though they haven't necessarily done their homework."

This quote warns against the dangers of overvaluing conviction without thorough analysis, which can lead to misguided investments.

"And so, at Sequoia, rarely do investment decisions begin with consensus. It's usually a couple of people who see something special, but they always end with consensus, because by the time we invest, we want it to be a team Sequoia investment, not an individual's investment."

The quote explains Sequoia's investment process, which starts with individual conviction but ultimately requires team consensus.

Rigorous Investment Process

  • Sequoia's investment process involves crystallizing an investment thesis and then rigorously stress-testing it.
  • The process has three components: inside the building (team dynamics and decision-making), outside the building (market dynamics), and the evidence (supporting data).
  • The process ensures a deep understanding of the investment from multiple angles before proceeding.

"The theory of our process is as simple as crystallize an investment thesis and then stress test it."

This quote summarizes the fundamental approach to Sequoia's investment evaluation process.

"One is what we call inside the building, two is what we call outside the building, and three is what we call the evidence."

The quote breaks down the three critical aspects of Sequoia's investment analysis process.

Acceptable vs. Unacceptable Risk

  • Sequoia's investment decisions often hinge on the founders, with the belief that great founders can navigate through various challenges.
  • Even when other investment factors are not aligned, strong conviction in the founders can justify taking the risk.
  • Sequoia's approach emphasizes investing in great founders and supporting them to success.

"Almost every risk is an acceptable risk. Founder Risk is not great. Founders will figure it out."

This quote conveys Sequoia's philosophy that the right founders are capable of overcoming most risks associated with their ventures.

Compressed Fundraising Timelines

  • Compressed timelines in fundraising can be challenging for both founders and investors to establish trust and understanding.
  • Sequoia prefers a proactive approach, building relationships over time to make informed decisions when investment opportunities arise.
  • The partnership between founders and investors is more critical and long-lasting than the terms of the deal itself.

"It's quite easy to compare one term sheet to the next. It's quite hard to compare one person or one partnership to the next."

This quote reflects on the difficulty of assessing the quality of potential partners in a compressed timeframe, as opposed to the more straightforward comparison of financial terms.

Board Membership Advice

  • The primary role of a board member is to build trust with the team and other board members and to listen to the company's internal dynamics.
  • Trust and listening provide the foundation for a productive relationship and the ability to support the company effectively.

"Your job as a board member, first and foremost, is to build trust and to listen."

The quote emphasizes the fundamental responsibilities of a board member, which are to establish trust and understand the company's situation through active listening.

Work-Life Balance

  • Doing the right thing and being surrounded by wonderful people simplifies life and nudges one in positive directions.
  • Having a supportive partner and nurturing strong personal relationships contribute to a successful blend of work and life.

"It turns out that if that's the thing you care about most, life ends up being relatively simple and you end up being surrounded by wonderful people, and you kind of end up getting nudged in good directions."

This quote reflects on the speaker's personal philosophy that prioritizing ethical behavior and good relationships leads to a fulfilling life.

Importance of Professional Networks

  • Having influential and supportive friends and colleagues can significantly enhance one's professional image and opportunities.
  • Partnerships that leverage complementary skills can lead to successful outcomes in business environments.
  • The dynamic between Pat Grady and his partner Michael Abramson at Sequoia is an example of a powerful complementary relationship.

And so when you have friends like that, you end up looking pretty good just because you have these amazing friends.

This quote underscores the value of having a strong network of friends and colleagues, which can reflect positively on an individual's professional reputation.

And Michael and I are very different people. But he's great at all the things that I'm not. Hopefully, the things that I'm reasonably decent at are blind spots of his.

The quote illustrates the benefit of working with someone whose skills complement one's own, creating a well-rounded team.

Personal Growth and Reading Preferences

  • Reading preferences can evolve over time, reflecting personal growth and changing interests.
  • Pat Grady's reading recommendations have shifted from Anne Rand in high school to Dostoyevsky and Kurt Vonnegut in college, and more recently to "Boys in the Boat."
  • "God Friended Me" is recommended for its uplifting message about helping others, contrasting with the cynicism often found in media.

In high school, I would have said something by Anne Rand. In college, I would have said something by Dostoyevsky or Kurt Vonnegut.

This quote shows how Pat's reading choices have changed over time, suggesting a journey of personal and intellectual development.

It's called godfriended me, and it is basically about a couple of people who go out of their way to help others.

Pat recommends "God Friended Me" for its positive message, which he finds refreshing in the current media landscape.

Silicon Valley's Tech Ecosystem

  • The narrative around technology's positive impact on the world is prevalent, but the industry often overlooks the uneven distribution of benefits.
  • The cultural atmosphere of Silicon Valley has become overwhelming, with a need for a more balanced perspective on life beyond startups.

I think the ecosystem has kind of neglected the flip side of that narrative, which is that tech does not bring everybody along equally.

Pat points out that the tech narrative often fails to address the unequal opportunities and benefits that technology provides.

Silicon Valley almost needs a chill pill, and it needs to kind of relax and appreciate that there's more to life than what we all do every day.

The quote expresses concern that Silicon Valley's intense focus on startups may overshadow other important aspects of life.

Sequoia's Misses and Opportunities

  • Sequoia Capital, despite its success, acknowledges missing out on investing in several successful companies.
  • The firm strives to partner with the best founders, recognizing that perfection is unattainable and mistakes are part of the process.

If you don't see sequoia as a major shareholder, it means that we screwed up.

The quote candidly admits that Sequoia has missed investment opportunities, indicating a transparent approach to their track record.

Being able to participate at every point along the founder's journey actually helps us fix our own mistakes over time.

Pat explains that Sequoia's strategy of engaging with founders at various stages helps the firm learn from and rectify past investment oversights.

Pat Grady's Personal Strengths and Weaknesses

  • Networking in social settings is identified as a personal weakness.
  • A strength lies in a team-oriented approach, valuing collective success over individual recognition.

The people who can work the room know, seem to be friends with everybody and just have a magical touch with other people. That's never been my forte.

Pat acknowledges his discomfort with networking, expressing admiration for those who excel in social environments.

It's amazing what you can accomplish when you don't care who gets the credit.

The quote reflects Pat's belief in the importance of prioritizing the team's success over personal accolades.

Sequoia's Investment in Embark Trucks

  • Embark Trucks, a self-driving truck company, represents Sequoia's interest in solving supply and demand imbalances in the trucking industry.
  • The decision to invest was driven by the market opportunity and the impressive background of the company's founder, Alex Rodriguez.

Self driving trucks or trucking in the US is a massive market... And embark is filling that gap between the excess demand and shortage of supply with self driving trucks.

This quote explains the rationale behind Sequoia's investment in Embark Trucks, highlighting the significant market potential and the company's solution to industry challenges.

He's just a super, super special person... He's today, at the ripe old age of 23, the CEO of the leading autonomous truck company.

The admiration for Alex Rodriguez's achievements and potential is cited as a key reason for Sequoia's investment in his company.

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