20VC The Memo Sequoia's Alfred Lin on Why Chasing GMV Leads To Bad Behaviours, How To Approach Competition and Capital Efficiency & The Core Importance of Understanding the Difference Between Input and Output Metrics

In the inaugural episode of "The Memo" on the 20 minutes VC podcast, host Harry Stebbings introduces Alfred Lin, a partner at Sequoia Capital, to discuss his investment in DoorDash's Series A round. Lin shares insights into his investment thesis, including the importance of founder-market fit, operational excellence, and the significance of suburban markets for delivery services. Lin's background as COO at Zappos and his early interest in food delivery shaped his perspective on the potential of DoorDash. The conversation delves into the challenges and strategies around market sizing, merchant and driver acquisition, and the evolution of unit economics. Lin also highlights Tony Xu's leadership growth, DoorDash's resilience during funding difficulties, and their strategic response to the COVID-19 pandemic. The episode is interspersed with sponsorship messages for Ripling, Exodus, and OurCrowd.

• "The Memo" is a monthly show on the 20 minutes VC podcast.
• The show invites venture capitalists who have led funding rounds for prominent companies.
• The discussion revolves around the investment memo written at the time of investment.
• The show explores changes and outcomes post-investment.
• Alfred Lin is the first guest, known for leading Series A for DoorDash and working with other notable companies.

"On the 20 minutes VC. So starting from today, we're launching the memo, a monthly show where we invite VCs who've led rounds for some of the best and biggest companies in the world."

This quote introduces the concept of "The Memo" and its focus on venture capital insights.

• Alfred Lin is a partner at Sequoia Capital.
• He has led investments in Airbnb, DoorDash, Instacart, Reddit, and Houzz.
• Alfred previously served as chairman and COO at Zappos, leading to its acquisition by Amazon.

"Alfred is a partner at Sequoia and has led deals in the likes of Airbnb, DoorDash, Instacart, Reddit and Houzz, to name a few."

The quote summarizes Alfred Lin's professional background and his role at Sequoia Capital.

• Ripling PEO helps startups automate HR and IT, including payroll and benefits.
• It assists with state-by-state compliance for startups with remote or relocated employees.
• It simplifies complex HR and benefits processes for startup founders.

"Ripling automatically registers your startup with the appropriate unemployment agencies and keeps you compliant with all local regulations, from minimum wage to sick leave."

This quote explains how Ripling PEO helps startups maintain compliance with state regulations.

• Exodus is known for its user-friendly blockchain products.
• It supports desktop and mobile, syncing wallets across devices.
• The app allows for the exchange of around 100 different cryptocurrencies.
• Exodus integrates with the Trezor hardware wallet for enhanced security.

"Exodus has become one of the most popular cryptocurrency apps."

The quote highlights Exodus's popularity and user-friendly design in the blockchain product space.

• Our Crowd allows accredited investors to invest early in various companies.
• Investors have access to IPOs and acquisitions.
• Our Crowd offers investment opportunities in companies like Nanolock Security.

"With Our Crowd, accredited investors have access to invest directly, easily, and most importantly, early."

This quote describes the Our Crowd platform's value proposition for investors seeking early investment opportunities.

• Alfred Lin's interest in food delivery started before joining Sequoia.
• He attended the TED Global conference in 2011 and was influenced by Jeffrey West's talk on urban efficiency.
• Lin saw a lack of services in the Bay Area that were common in New York City, such as reliable food delivery.

"And I love food, and I've always been annoyed that food delivery wasn't more available."

Alfred Lin expresses his personal interest in food delivery services, setting the stage for his investment in DoorDash.

• Between 2011 and 2013, Sequoia evaluated Grubhub, Caviar, Postmates, and TaskRabbit.
• The firm passed on these opportunities, concerned about market size and founder-market fit.
• Sequoia sought founders who were operationally detailed and pursued excellence.

"We passed on each of those opportunities, not partly because we're somewhat concerned about market size, but more importantly, we felt like we didn't find the right founder market fit for this opportunity."

The quote reveals Sequoia's decision-making process and the importance of founder-market fit in their evaluation.

• Alfred Lin met the DoorDash team after ordering from them during YC office hours.
• The team's pitch was to become the "FedEx of local."
• Sequoia passed on DoorDash's seed round but stayed in touch with the founders.

"We met Tony and Andy and Stanley and Evan later that afternoon to listen to their pitch."

This quote describes the initial meeting with the DoorDash team and their vision for the company.

• Alfred Lin kept in touch with DoorDash's CEO, Tony Xu, after passing on the seed round.
• Lin was impressed by Xu's attention to detail and operational insights at a networking dinner.
• Sequoia led DoorDash's Series A round one week after this dinner and invested in subsequent rounds.

"And a week later, we led the Series A."

The quote marks the pivotal moment when Sequoia decided to lead DoorDash's Series A funding round.

• Alfred Lin reflects on the importance of finding great founders attacking a large market at the seed level.
• Sequoia's initial pass on DoorDash's seed round was a learning experience.
• Lin emphasizes the need to focus on founder-market fit rather than getting bogged down by details that are proven in later funding stages.

"The most important thing at the seed level is to find great founders attacking a large market."

This quote captures the essence of Sequoia's investment philosophy at the seed stage.

• The investment memo for DoorDash discussed the takeout volume and the small percentage that was delivery.
• Sequoia considered both the initial addressable market and the larger restaurant market.
• The belief was that the delivery market could grow to match or exceed the takeout market.

"But the notion was that if delivery was more efficient, then the delivery market would be as big, if not bigger than the takeout market."

The quote provides insight into Sequoia's market evaluation process and growth expectations for DoorDash.## Market Entry Strategy

• DoorDash initially focused on food delivery as a starting point to eventually deliver almost anything.
• Tony Xu, the founder of DoorDash, had a vision to be the "FedEx of local" delivery.
• The choice to start with food delivery was strategic because it presented a significant logistical challenge.
• Success in food delivery would demonstrate the company's capability to handle a wide range of delivery services.

"Tony's whole notion was not just food delivery, but he wanted to build the FedEx of local and he wanted to deliver almost everything."

The quote outlines Tony Xu's broader vision for DoorDash beyond just food delivery, aiming to establish a local delivery service akin to FedEx.

• DoorDash began its operations in Palo Alto before expanding to the entire Bay Area and then to San Jose.
• Geographic expansion is a critical step in the growth of a delivery service.
• The majority of DoorDash's business remains in food delivery despite its expansion.

"We started in Palo Alto, we then expanded sort of almost all of the Bay Area. We then go into San Jose and today we are in more than food, but the majority of the business is still in food."

This quote describes the step-by-step geographic expansion of DoorDash, starting locally and gradually covering more areas.

• Desire to expand into new categories may indicate dissatisfaction with the core business.
• Successful companies often scale significantly within their core business before diversifying.
• Customer demand should drive expansion into new areas rather than the pursuit of building an empire.
• Management teams are cautioned against the undisciplined pursuit of more, as described by Jim Collins.

"It's always much better that your customers pull you into a different area than if you just want to go into a different area."

The quote emphasizes that expansion should be customer-driven rather than based on the company's aspirations for growth.

• Advising founders involves assessing their ambition and understanding why they want to expand beyond their core business.
• Founders are encouraged to consider the increasing advantage they gain by entering adjacent markets.
• Expansion should leverage the company's strengths and improve the customer experience.

"Are you leaving your core business because it's not that interesting to you, or is the business not as big as you thought? Why do we need to expand if you can just do this?"

The quote reflects the critical questions posed to founders to understand their motivations for expanding beyond their core business and whether it's strategically sound.

• The evolution of the delivery market was more competitive than initially expected.
• Companies should be competitor aware but customer obsessed.
• Competition in the market was a sign of too much money in the system.
• Capital is necessary but secondary to having a differentiated business model, superior unit economics, and a strategy to win.

"We tell our companies to be competitor aware, but customer obsessed. So if you just focus on the customer, what do you do to sort of improve the customer experience and continue to sort of retain your customers in an increasing advantage?"

The quote advises companies to prioritize customer experience over competition as a means to retain and grow their customer base.

• DoorDash's strategy focused on the suburbs and merchant selection.
• The company aimed to provide the largest selection of merchants to win the market.
• The paradox of choice is an individual issue, not a population issue.
• DoorDash was efficient in routing orders and estimating delivery times, which allowed them to batch orders effectively.

"They had a differentiated strategy on focusing on the merchants as well, and on selection. So those were two pronged on the strategy that were quite different, and then they just had better retention and better unit economics."

The quote explains how DoorDash's focus on merchant selection and operational efficiency contributed to its success.

• Unit economics at the seed or series A stage reflect the founders' understanding of their business.
• Early adopters may skew unit economics positively.
• Founders must be prepared for the potential worsening of unit economics as they scale.
• DoorDash leveraged the excess capacity in restaurant kitchens to improve their delivery model.

"The unit economics, not of his business but also of a restaurant, and the issues at a restaurant where they have more capacity in the kitchen than they have capacity in the front of the house to seat people."

The quote highlights the consideration of unit economics both for DoorDash and the restaurants they partner with, focusing on the capacity mismatch between kitchen production and dining space.

• The journey to improve unit economics is ongoing and involves constant experimentation and adaptation.
• Early customer acquisition strategies at DoorDash were cost-effective but not scalable in the long term.
• Finding new marketing channels and revisiting old ones is part of the cycle to maintain efficient customer acquisition costs (CAC).

"You're always looking for new ways of finding a channel that allows you to scale and scale efficiently, and then that channel gets used up by either you or your competitors, and then you have to move on to the next channel."

This quote describes the dynamic and iterative process of finding and optimizing marketing channels to achieve sustainable customer acquisition.## Efficiency and Competitive Advantage

• Efficient operations allow companies to outspend competitors.
• Companies with better unit economics can rationally spend more to grow.
• Efficiency leads to profitability, which is crucial in a competitive market.

"The other thing that is quite interesting to me is that the best companies also know that if they run the business more efficiently, they can actually outspend their competitors."

This quote emphasizes the strategic advantage of efficiency in allowing companies to allocate more resources to growth than their less efficient competitors.

"So if you are more efficient, then I can outspend my competitors because my competitors at some point will not be profitable."

The quote underlines the direct link between efficiency and the ability to outspend competitors while maintaining profitability.

• Business decisions should be based on rationality, especially in capital allocation.
• Irrationality in spending can lead to unsustainable growth.
• Payback periods for marketing investments need to be rational and sustainable.

"It's true if people are rational. And so I say that as the statement of if people are irrational, then that's not going to be the case."

This quote points out that the advantage of efficiency only holds if businesses act rationally in their spending and investment decisions.

"When I worked at Zappos, every single marketing dollar had to pay back on the first order because we didn't have a lot of access to capital."

The speaker reflects on their experience at Zappos, where capital constraints necessitated a very rational and immediate return on marketing investments.

• Chasing Gross Merchandise Value (GMV) can lead to wrong business decisions and behaviors.
• Companies should focus on customer pull rather than pushing their products.
• GMV is an important but insufficient metric for understanding business health.

"Chasing GMV and top line will lead you in the wrong direction. It'll lead you to the wrong behaviors."

Chasing GMV blindly can lead companies to prioritize top-line growth over sustainable business practices and customer satisfaction.

"You should figure out ways where the customer pulls you as opposed to chasing the customer down to force them to use your product."

The quote suggests that sustainable growth is achieved when customers naturally demand the product, rather than the company aggressively pushing it onto them.

• Businesses should distinguish between input and output metrics.
• Focusing on input metrics allows businesses to control and improve fundamental aspects of their operations.
• Healthy input metrics lead to sustainable GMV growth.

"As an operator, you want to focus on the input metrics, things that you can control."

This quote highlights the importance of focusing on controllable factors (input metrics) in business operations to drive success.

"You break this down into smaller and smaller metrics that sort of multiply up into what GMV is."

The speaker describes the process of breaking down GMV into smaller, actionable input metrics that collectively contribute to overall business performance.

• DoorDash's early growth was characterized by strong customer retention and sticky cohorts.
• The company aimed for frequent, small Average Order Value (AOV) transactions with high usage.
• DoorDash's input metrics provided a clear picture of the business's health and areas for improvement.

"Memo we broke it down into, from GMV to retention to the cohorts. And the cohorts were just really sticky."

The quote reflects on how DoorDash analyzed their business metrics, finding that early customer cohorts showed high retention, indicating a promising growth trajectory.

"You either want large AOVs that happen infrequently, or you want the opposite where it's like, okay, the orders are small, but you want a lot of frequency and a lot of use."

The speaker explains the strategic choice DoorDash made in favoring frequent, smaller transactions to build a high-usage customer base.

• DoorDash initially targeted drivers who couldn't work for other services due to vehicle requirements.
• The company's strategy involved understanding restaurant dynamics and leveraging influencers.
• Partnering with restaurants was a way to demonstrate the volume of orders DoorDash could deliver.

"Well, at the beginning, they had a differentiated strategy with driver acquisition. It was people who wanted to be a driver for a service, but they couldn't drive for that service because they didn't have the right car."

DoorDash's early driver acquisition strategy involved targeting a specific segment of drivers overlooked by competitors.

"On merchant acquisition, there was a lot of talk about how they would go down to the strip in these suburbs and try to understand the dynamics and the market power of each restaurant and who are the influencers and try to get the influencers on board."

The speaker outlines DoorDash's hands-on approach to understanding the restaurant industry and leveraging influencers to onboard merchants.

• DoorDash used creative strategies for customer acquisition, including partnerships with top national merchants.
• Expansion into new geographies was driven by replicable models of customer acquisition and profitability.
• Partnerships with national brands helped seed new markets and drive expansion.

"That actually was the market pull, expanding to get these. Originally, all their merchant acquisition were local restaurants. The reason they expanded into national selection was because the customer asked them to."

The quote explains how customer demand for national brands influenced DoorDash's strategy to expand beyond local restaurants and drive national growth.

"And it was quite an interesting way to acquire customers because you could acquire customers through a partnership with the top 100 merchants."

The speaker discusses how partnerships with top merchants facilitated customer acquisition and contributed to DoorDash's nationwide expansion.

• Leaders, especially founders, need to adapt and grow into their roles over time.
• Tony Xu, CEO of DoorDash, demonstrated significant growth as a leader.
• Leadership involves collaboration and taking on the mantle of CEO beyond being a founder.

"And I saw that change happen relatively quickly. Somewhere between the c to the a and somewhere past the a. He sort of just kept stepping up."

The quote reflects on Tony Xu's evolution as a leader, noting his rapid development and increased responsibility as DoorDash grew.## Division of Labor in Leadership

• Leadership involves setting strategy, culture, and the operational tone.
• Founders initially may not listen to reasons why their business might fail.
• CEOs evolve to listen actively and make decisions based on a variety of opinions.

Hey, I do this, you guys do that. It was leading by sort of setting strategy, setting the tone, setting the culture.

This quote highlights the division of labor in leadership roles, where the speaker emphasizes the importance of strategy, culture, and operational tone in guiding a team.

And a CEO learns to listen and...To listen very intensely and carefully and actively to everybody. But then they take all that information and weigh the different opinions and make up their own mind.

The quote captures the evolution of a founder into a CEO, who must actively listen to various stakeholders before making informed decisions.

• Pre-parade is envisioning the best-case scenario for a company's future success.
• Memos are used to articulate why a company is important for the long term.
• Pre-mortem identifies potential risks and downsides that could lead to failure.
• It is important to consider economic profit and intense competition in investment decisions.

Pre parade is the dream case. So it's pre.

This quote introduces the concept of a pre-parade as a forward-looking vision of a company's success.

The pre mortem was pretty straightforward here. The downside is this is a company that is loved by their consumers because there is a consumer value proposition, but they're not willing to pay for it.

The pre-mortem quote acknowledges the potential risk where consumers love a service but may not be willing to pay, affecting the company's profitability.

• Fundraising can vary in difficulty, with early rounds being easier than later ones.
• Founders should focus on business growth and underlying metrics, not just valuation.
• Resilience is key when facing challenging fundraising rounds.

But I never saw Tony ever be dejected...He's like, my business is growing.

This quote demonstrates the founder's resilience and focus on business growth despite challenging fundraising experiences.

And he gained more conviction about the...Need to focus on inputs and rather than outputs.

Tony's conviction to focus on the inputs of the business rather than the outputs, like company valuation during fundraising, is emphasized here.

• Early operations teams are often unsung heroes in a company's success.
• These teams adapt to different market conditions and establish strong foundations.
• Resilience and adaptability are crucial in the face of adversity, such as a pandemic.

I think the unsung heroes, there are many. I think the early operations team were...A bunch of unsung heroes.

The quote acknowledges the significant contributions of the early operations team in launching and adapting to various markets.

And then took it up a whole nother level when the pandemic happened.

This quote illustrates the company's ability to elevate its performance during the pandemic, showcasing resilience and operational excellence.

• Doordash's response to the pandemic involved proactive measures to support restaurants and delivery personnel.
• The company focused on keeping restaurants open, reducing commissions, and ensuring safety with contactless deliveries.
• The pandemic tested the company's adaptability and commitment to its stakeholders.

He got the restaurants to stay open. He helped the restaurants get their menus on DoorDash.

The quote shows Doordash's proactive strategy to support restaurants during the pandemic by helping them to stay open and join the delivery platform.

He didn't care whether it was on Doordash or was on Uber Eats or...He wanted to keep the restaurants open.

This highlights the broader commitment to the restaurant industry's survival, beyond just the interests of Doordash.

• Ripling automates HR and IT for startups, simplifying compliance with state regulations.
• The Ripling PEO helps startups manage HR and benefits when hiring out of state or when employees relocate.

Employees paying too much for HR and benefits. The ripling peo can solve these challenges as soon as you hire someone out of state or an existing employee relocates.

The quote explains how Ripling's PEO service can alleviate HR and benefits challenges for startups when dealing with out-of-state employees.

• Exodus is a user-friendly cryptocurrency wallet that supports desktop and mobile use.
• It offers features like instant exchanges, price history charts, and portfolio performance tracking.
• Exodus integrates with Trezor for enhanced security.

Exodus has become one of the most popular cryptocurrency apps.

This quote highlights the popularity of Exodus among cryptocurrency users due to its focus on design and user experience.

• OurCrowd provides accredited investors with early investment opportunities in startups.
• Investors have benefited from IPOs and acquisitions of OurCrowd companies.

With our crowd, accredited investors have access to invest directly, easily, and most importantly, early.

The quote promotes the unique opportunity OurCrowd offers to investors to get in on early-stage investments.