Adapting Episode 2 Sequoia’s Black Swan Memo (with Roelof Botha)

Summary Notes


In episode two of "Adapting" by Acquired, hosts Ben and David, alongside guest Ruloff Botha from Sequoia Capital, delve into the implications of the firm's prescient "Black Swan" memo, which anticipated the dramatic shifts businesses would face due to the COVID-19 pandemic. Botha, a partner at Sequoia since 2003 and former CFO of PayPal, shares insights on how companies can navigate economic downturns by focusing on product development, community building, and maintaining cash reserves. The episode also touches on the potential for permanent changes in workplace dynamics, such as increased acceptance of remote work. Additionally, Botha discusses the importance of patience and long-term thinking, drawing on his experience with Square's IPO and Sequoia's approach to supporting portfolio companies during uncertain times.

Summary Notes

Initial Banter and Show Introduction

  • The hosts express a positive sentiment about the episode.
  • They discuss the nature of the podcast, focusing on companies and leaders adapting to change.
  • The current episode is the second in the series and part of the sixth season.

"It was pretty good." "Emoji Records welcome to episode two of adapting by acquired." "Well, I rehearsed or for those keeping track at home, season six, episode five. We are continuing our series to bring you the stories of great companies and."

These quotes establish the casual tone of the podcast and introduce the theme of the episode, which is about adaptation in business.

Sequoia Capital's Black Swan Memo

  • The memo was published 20 days prior to the recording of the podcast.
  • It is referred to as "the memo read around the world."
  • The memo is significant due to its timing and the advice it offers to businesses facing the changing world.

"The memo read around the world Sequoia Capital's Black Swan memo, amazingly published only 20 days ago." "As we record this man feels like 20 lifetimes ago."

These quotes highlight the rapid pace of change and the impact of the Black Swan memo on the business community.

Role of Sequoia and Ruloff Bota in the Episode

  • Ruloff Bota, a partner at Sequoia, is introduced as the guest.
  • The episode aims to delve into technology, venture capital, and Sequoia's adaptation strategies.
  • Sequoia's history of navigating business cycles is emphasized.

"We are joined by the best person in the world to tell us about it, longtime sequoia partner Ruloff Bota." "This conversation is particularly interesting not just to hear the story behind the Black Swan memo, but also to get a real-time look at how Sequoia themselves are thinking about adapting during this time, along with their portfolio companies."

These quotes set the stage for the deep dive into Sequoia's approach to business challenges and introduce Ruloff Bota as a key figure in this discussion.

Acquired Slack Community and Limited Partner Program

  • The hosts encourage listeners to join the Acquired Slack community.
  • They announce a new feature for the Limited Partner program: monthly Zoom calls named LP calls.

"Before we jump in, if you haven't already, we want to strongly encourage you to join the acquired Slack community." "We're going to be hosting monthly calls on Zoom for all lps, which we're calling, appropriately enough, lp calls."

These quotes are a call to action for listeners to engage with the podcast's community and benefit from additional content and networking opportunities.

Pilot's Partnership with Acquired

  • Pilot is presented as a partner of the podcast and a provider of accounting, tax, and bookkeeping services.
  • Pilot's growth and clientele are highlighted.
  • The importance of outsourcing non-core functions like accounting is discussed.

"For this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds." "Pilot is the one team for all of your company's accounting, tax and bookkeeping needs."

These quotes introduce Pilot as a solution for companies needing professional financial services and emphasize the value of focusing on core business activities.

Introduction of Ruloff Bota and His Background

  • Ruloff Bota is introduced with his background as a partner at Sequoia and former CFO of PayPal.
  • His experience with business downturns and his role in PayPal's success are noted.

"Ruloff has been a partner at Sequoia since 2003 and led early investments in some of the most important companies that we've covered on this show." "And prior to joining Sequoia, Ruloff was the CFO of PayPal, which is particularly relevant to our conversation today, having helped navigate them through crash, their subsequent IPO, and ultimately their sale to eBay for one and a half billion dollars."

These quotes establish Ruloff Bota's credentials and relevance to the episode's theme of adapting to change.

Discussion of the Black Swan Memo and Sequoia's Perspective

  • The Black Swan memo is discussed in detail, including its recommendations for swift and decisive action during downturns.
  • Sequoia's experience with business cycles and the importance of adaptability are emphasized.
  • The hosts and Ruloff Bota discuss the internal feelings and rationale behind publishing the memo.

"Nobody ever regrets making fast and decisive adjustments to changing circumstances. In downturns, revenue and cash levels always fall faster than expenses." "A sense of nervousness that the world wasn't really paying attention to the reality that we were facing."

These quotes from the Black Swan memo and Ruloff Bota's commentary provide insight into Sequoia's proactive approach to business challenges and the sense of urgency that prompted the publication of the memo.

Reflection on PayPal's Strategy During the Dotcom Crash

  • Ruloff Bota reflects on his time at PayPal during the dotcom crash.
  • The importance of focusing on runway and making necessary adjustments is discussed.
  • The role of Sequoia and its advice to PayPal during that time is highlighted.

"I remember being at a board meeting with Mike Maritz from Sequoia in June, and he told us, he warned us, focus on Runway, because the financing environment has changed forever." "We really started to sharpen our pencils to make sure that we had enough Runway to make it to the other side."

These quotes provide a historical example of how Sequoia and its partners have navigated past economic downturns by emphasizing financial prudence and strategic adjustments.

Financial Management During Crisis

  • Importance of identifying essential expenses and controlling costs.
  • Necessity of a viable business model for sustainability.
  • The impact of external environmental changes on business strategies.
  • Creative solutions arise from constraints imposed by crises.

"We tried feverishly to raise more money to extend our Runway, and we got religion about our business model."

The quote emphasizes the urgency with which the company sought additional funding to continue operations and the serious approach they took to refine their business model to ensure the business's longevity.

Observations from China's Response to the Crisis

  • Early signs of the severity of the crisis observed in China.
  • Recognition of the virus's rapid spread and higher mortality compared to seasonal flu.
  • Challenges in the U.S. due to porous travel restrictions and lack of testing infrastructure.
  • Exponential growth of cases leading to a significant underestimation of the crisis.

"So clearly, the people at the front lines had seen that this was a virus, unlike others, that was spreading a lot faster and had higher mortality rate than a typical seasonal flu."

This quote highlights the early recognition by those in China of the unique and serious nature of the virus, which was underestimated elsewhere.

The Role of Defense in Business Strategy

  • Importance of preparing for various scenarios due to uncertainty.
  • Cash preservation as a critical factor for company survival.
  • The decision matrix as a tool for scenario planning and strategic defense.

"Cash is the most important thing companies have to focus on right now, because if you don't survive, obviously there's no chance for you to build an enduring business."

The quote underlines the crucial importance of cash management for businesses to outlast the crisis and eventually thrive.

Leveraging Community and Product Development

  • The benefit for companies that adapt to remote work and essential services.
  • Emphasis on product development during times when marketing and sales are challenged.
  • Building a community among founders for support and sharing best practices.

"Hunker down and focus on product development. Build that truly differentiated product that, if you can survive, gives you a huge advantage when you come out the other side."

This quote advises companies to concentrate on enhancing their products to gain a competitive edge once the crisis subsides.

Support and Collaboration Among Portfolio Companies

  • Frequent contact and sharing of best practices between board members and companies.
  • Organizing Q&A sessions and founder-to-founder meetings for mutual support.
  • Development of digital products to foster community in the absence of physical events.

"We've created the Q and A with us as a group. So we get over 100 companies, get together with Sequoia partners, and we have a few prepared remarks, things that we're seeing, and we open it up for questions."

The quote describes the efforts to maintain a sense of community and shared learning among portfolio companies through digital means.

Revisiting Business Models in Response to Crisis

  • The necessity can drive the rapid development of new business models.
  • The example of PayPal developing its transaction-based revenue model out of necessity.
  • Crisis as an opportunity to reassess and innovate business models.

"Necessity is the mother of invention. I don't think it was that difficult to figure out that as a payments company, there were so many precedents of charging transaction based fees."

This quote reflects on how the urgent need for revenue led PayPal to adopt a transaction-based fee model, demonstrating how a crisis can catalyze fundamental changes in business operations.

Online Fraud and Value Delivery

  • Online fraud can be a significant financial burden for companies, resulting in millions of dollars in losses.
  • Companies must ensure they are providing sufficient value to justify their service fees and remain viable.
  • The upcoming six months may be critical for businesses to refine their models, especially those currently offering free services.

"We lost millions of dollars in 2000 to scalable online fraud."

This quote underscores the financial impact of online fraud and its potential to threaten the existence of a company if not managed effectively.

"We need to deliver enough value so that whatever we charge leaves enough of a gap of value capture to the customer where they're happy to pay for the service we have."

This quote highlights the importance of delivering value that exceeds the cost of the service to ensure customer satisfaction and business sustainability.

Adapting to Crisis and Leadership

  • Crises can serve as a differentiator among companies, revealing those that can adapt and provide leadership.
  • Companies that remember their mission and purpose beyond just delivering a product may excel during tough times.
  • The current period is seen as a test of resilience, where strong leadership is crucial.

"This is going to be a time where I think you're really going to see people differentiate themselves in how they deal with a crisis, who steps up, who provides leadership."

This quote suggests that a company's response to a crisis is a key factor in its success and can highlight its leadership and adaptability.

The Role of Statsig and Product Development

  • Statsig is a feature management and experimentation platform that aids product teams in shipping faster and making data-driven decisions.
  • It provides visualizations and a stats engine for real-time product observability, linking features to core business metrics.
  • Customers of Statsig include notable companies like Notion, Brex, OpenAI, and others.
  • Statsig can manage and test AI product features, providing insights into their impact on KPIs.

"Statsig is a feature management and experimentation platform that helps product teams ship faster, automate a b testing, and see the impact every feature is having on the core business metrics."

This quote describes the functionality of Statsig and its value proposition for product teams seeking to improve their development and testing processes.

Sequoia's Adaptation to the Pandemic

  • Sequoia Capital adapted to the pandemic by conducting a thorough analysis of their portfolio's health.
  • The firm shifted to virtual operations, including daily stand-ups and online resources.
  • Sequoia prioritized companies facing significant challenges, providing resources to help them navigate the crisis.
  • Despite the pandemic, Sequoia continues to make new investments and onboard new hires remotely.

"We've built a bunch of online tools. So we have resources where we can all look at things. We have daily stand ups using Zoom so that everybody can stay in touch."

This quote illustrates Sequoia's pivot to virtual tools to maintain operations and support their companies during the pandemic.

"We've created these online resources. And probably the most important thing we've done is to do a very thorough analysis of the portfolio health."

This quote emphasizes the proactive steps Sequoia took to assess and address the health of their portfolio companies during the crisis.

  • Sequoia continues to invest in early-stage companies with differentiated products that solve important problems.
  • The firm assesses potential investments based on how they plan to respond to changing circumstances and their flexibility.
  • Sequoia is exploring new categories that may benefit post-pandemic, such as digital health and online education.

"We continue to make investments. We formally approved two new series a investments last week, and those meetings were virtual meetings."

This quote confirms Sequoia's ongoing investment activities and their adaptation to virtual meetings for evaluating new opportunities.

"We have asked people how they plan to respond to a changing circumstance, a little bit of a test on whether they're nimble, are they flexible, or are they just tone deaf to the reality of the world we're in right now."

This quote indicates that Sequoia is considering the adaptability and awareness of potential investments in light of the current global situation.

Permanent Changes Post-Pandemic

  • The pandemic may accelerate trends such as distributed workforces due to the high cost of living and hiring in certain areas.
  • The forced shift to remote work could lead to measurable performance data and change perspectives on distributed team effectiveness.
  • Companies are likely to become more tolerant of distributed business models and learn how to work effectively with remote teams.

"I think you're going to run this experiment that's actually measurable on how people perform in this kind of an environment."

This quote suggests that the pandemic is an opportunity to gather concrete data on the effectiveness of remote work, potentially influencing future business practices.

"So I think tolerating businesses that are distributor learning how to work effectively with distributed teams, I think we're likely to see people start companies."

This quote anticipates a potential increase in distributed businesses and remote teams as a result of the pandemic's impact on work practices.

Silicon Valley and Global Idea Generation

  • Silicon Valley is no longer the sole hub for idea generation.
  • Companies are increasingly starting up in diverse locations globally.
  • There's a need for venture capitalists to adapt to this change by either traveling more or conducting online assessments.

Silicon Valley doesn't have a monopoly on idea generation, and I think many more people will start companies elsewhere. So we probably need to be more willing to fly, or if not fly, given health issues, do online assessments of companies.

The quote emphasizes the shift in the startup ecosystem away from Silicon Valley and the need for venture capitalists to adjust their methods of engaging with companies due to this decentralization and health concerns.

Venture Capital Investment Strategies

  • The geographic organization of venture capital firms may change due to the rise of remote companies.
  • Firms need to consider how to categorize investments in companies that do not have a fixed office location.
  • There's a trend towards global partnerships and knowledge sharing within venture capital firms.

Our team in India is an investor in a fabulous company called Freshworks... We're one partnership globally. We've done some really clever things behind the scenes to make sure that we feel like a single partnership and how we share knowledge and share compensation and things like that in a way that makes it feel good.

This quote discusses how venture capital firms are handling investments in companies that operate globally and the importance of internal collaboration and compensation structures to support a unified approach to global investment.

Venture Capital Funding in Economic Downturns

  • Venture capital firms may adjust their pace of investment based on economic conditions.
  • Historical investment behaviors, such as slowing down before a downturn and accelerating afterwards, can be analogous to strategic driving techniques.
  • The current economic climate may affect Limited Partners' (LPs) ability to commit to venture capital, potentially reducing the amount of capital deployed.

We slowed down in 2019 not because we had some crystal ball, again, that this was going to happen, but things didn't quite feel right. If anything, I want to accelerate out of this.

This quote reflects the cautious approach taken by venture capital firms when market conditions feel unstable, with the intention to capitalize on opportunities that arise during and after economic downturns.

Impact of Market Fluctuations on LPs

  • LPs may face over-allocation in private markets due to public market drops.
  • LPs could experience cash flow issues affecting their venture capital commitments.
  • Endowments may be more reliant on their investments due to potential decreases in donations and philanthropy.

Now, with public markets dropping so much, you can get into a situation as an LP where you aim to have, say, 15% of your assets in private markets total, and now you have 40% of your assets in private markets, and that can be a scary position.

The quote highlights the challenges LPs face when market volatility leads to an unintended increase in their exposure to private markets, which can create financial stress and potentially influence their investment decisions.

Crusoe Energy Systems

  • Crusoe Energy Systems is a company that specializes in clean compute cloud services for AI workloads.
  • They partner with Nvidia and utilize stranded or clean energy to power their data centers.
  • Crusoe's approach benefits both the environment and customers by reducing energy costs.

Crusoe's data centers are nothing but racks and racks of a because Crusoe's cloud is purpose built for AI and run on wasted, stranded or clean energy, they can provide significantly better performance per dollar than traditional cloud providers.

This quote describes Crusoe Energy Systems' unique business model that leverages unused energy sources to power data centers, offering cost-effective and environmentally friendly cloud services for AI applications.

The Square IPO Experience

  • The Square IPO was a challenging time due to negative press and pricing issues.
  • Focus on execution and patient investment strategies can lead to long-term success.
  • The Square IPO serves as an example of enduring through market misjudgments and achieving better returns through patience.

And then to see the way that it popped in the first day, it was still not a great outcome, even at the close price at the first day. But I felt that we left so much money on the table. So the way to react in my mind was to rally the team and to talk about just, we can't control our stock price. What we can control is our execution.

The quote reflects on the initial disappointment of Square's IPO pricing and the subsequent decision to focus on internal execution rather than stock price, which ultimately led to greater returns for investors who remained patient.

Venture Capital Outlook and Contact Information

  • Focus on the long term and solving real problems is key for venture capital success.
  • Ruloff Bota provides his contact information for listeners interested in reaching out.

Yeah, I think it's focus on the long term, solve real problems.

This quote encapsulates the philosophy of maintaining a long-term perspective and addressing genuine market needs as a guide for venture capital investment strategies.

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