Pat Grady: Sequoia Partner on Investing Lessons from Doug Leone, Roelof Botha and Alfred Lin | E1174

The conversation features a deep dive into the venture capital world with insights from a seasoned investor at Sequoia Capital. Key themes include the importance of founder-market fit, the role of desperation in driving success, and the balance between humility and ambition in maintaining relevance. The discussion highlights Sequoia's rigorous diligence process, emphasizing the significance of understanding both the market and the founder's potential. The guest shares personal reflections on early influences, the fear of irrelevance, and the importance of contributing meaningfully to the world. The dialogue also touches on the dynamics of team building, the challenges of maintaining a competitive edge, and the evolving landscape of global technology markets.

• The speaker grew up in a small town, Gillette, Wyoming, which instilled a sense of curiosity and a desire to explore beyond the confines of a familiar environment.
• Despite a happy upbringing, the speaker felt a "desperate need" to discover what else the world had to offer.
• The speaker's greatest fear transitioned from boredom to irrelevance, defined by a lack of contribution to the world and personal relationships.

"I think my one-liner would be happy but desperate... you just have this desperate need to figure out what else is out there."

• Explanation: This quote highlights the speaker's motivation driven by a sense of longing to explore and achieve more, despite a content upbringing.

"When I say irrelevance is my greatest fear, it would be the point at which I am not a good husband, I am not a good father, I am not a good partner, I am not contributing to the world around me."

• Explanation: The speaker defines irrelevance as failing to contribute meaningfully to personal relationships and society, which is a driving force behind his actions.

• The speaker does not regularly measure personal success but acknowledges the importance of self-assessment.
• Matthew McConaughey's method of evaluating life in quadrants (friends, family, work, marriage) is mentioned as a potential model for self-assessment.
• The speaker conducts an annual scorecard to evaluate different life aspects, using a red, yellow, green system to identify areas for improvement.

"I actually have a scorecard that I do once a year and it has different buckets on it and it's similarly red, yellow, green."

• Explanation: The speaker uses a structured approach to self-assessment, reflecting on personal and professional growth annually.

• The speaker is uncomfortable with the label of "successful," attributing achievements to favorable conditions rather than personal merit.
• The speaker discusses the influence of being part of a prestigious firm like Sequoia and the advantages it provides.
• Success in venture capital is seen as a combination of timing, market conditions, and the support of a strong institutional brand.

"The fact that I've been associated with some nice companies may not have much to do with me; it might have everything to do with the circumstances."

• Explanation: The speaker attributes success to external factors, emphasizing humility and the role of favorable conditions in achieving success.

• The speaker discusses the importance of humility in venture capital, acknowledging both successes and failures.
• There is a concern about attracting individuals who want to join a prestigious firm versus those who want to build something great.
• Maintaining an underdog mentality and avoiding complacency is crucial for continued success.

"You're attracting people who want to be part of something great, not people who want to build something great."

• Explanation: The speaker emphasizes the importance of recruiting individuals who are driven to create and innovate, rather than those seeking prestige.

• The speaker discusses the impact of brand hits, distinguishing between fair and unfair criticisms.
• Fair criticisms are related to investment failures, which are seen as the firm's responsibility.
• Unfair criticisms are often based on misunderstandings about the firm's workings and are less concerning.

"The thing that hurts me is not people talking about our mistakes; the thing that hurts me is when we actually make mistakes."

• Explanation: The speaker is more affected by the firm's actual mistakes than external perceptions, highlighting accountability and responsibility.

• The investment process involves crystallizing a thesis and stress-testing it to ensure its validity.
• The speaker values clarity in investment theses and does not prioritize contrarianism for its own sake.
• The importance of understanding both the market and the founder is emphasized, as they determine the potential and actual success of a company.

"The crystallizing the thesis part of it... that is the declarative statement: We should invest in Zoom because... A spectacular founder, B someday every room will be a zoom room."

• Explanation: The speaker stresses the importance of a clear and concise investment thesis as the foundation for decision-making.

• The market sets the potential size of a company, while the founder determines the actual outcome.
• A strong founder can overcome market limitations and drive a company to success.
• The speaker prefers investing in exceptional founders in modest markets over mediocre founders in large markets.

"The market determines how big a company can get; the founder determines how big the company will get."

• Explanation: The speaker highlights the critical role of founders in achieving a company's full potential, regardless of market size.

• HubSpot is used as an example of a company that succeeded due to strategic decisions by its founders, despite initial market and product challenges.
• Key decisions included focusing on SMBs and acquiring performable to enhance product offerings.
• The speaker praises the founders' ability to execute transformative strategies that led to long-term success.

"If you look at HubSpot, mediocre product in a crappy market... one strategic decision after another, he and Dharmesh just absolutely nailed it."

• Explanation: The speaker credits HubSpot's success to the founders' strategic vision and execution, demonstrating the importance of leadership in overcoming market challenges.

• Emphasis on creating a product that is so compelling it sells itself, avoiding reliance on traditional sales methods.
• The goal is to achieve a 10x return on investment, rather than settling for lower multiples.
• The strategic decision-making process is highlighted as transformative for business success.

"Nobody is allowed to touch the sales business; the sales business has to stand on its own two feet."

• This quote underscores the strategy of ensuring that the product's quality and appeal are sufficient to drive sales without external intervention.

• Two primary factors: founder-market fit and the vector describing the founder.
• Founder-market fit involves understanding both the problem and solution aspects.
• The vector includes direction (motivation) and magnitude (exceptional traits or track record).

"For founder market fit, people tend to commingle two distinct variables in here: the problem variable and the solution variable."

• This quote explains the importance of separating the understanding of the problem from the ability to create a solution, both crucial for founder-market fit.

• Early entrepreneurial activities are indicators of potential success.
• Personal history and motivations, such as overcoming challenges, are significant in assessing founders.

"One of the most clear signs to me of an exceptional entrepreneur is they always start early."

• This quote highlights the importance of early entrepreneurial experiences as a predictor of future success.

• Simplistic presentations by founders can be misleading, leading to missed investment opportunities.
• The ability to articulate a clear and compelling story in a short time is a valuable trait in founders.

"Sometimes the very best founders can articulate things in a complete and compelling way in five or ten minutes."

• This quote reflects the insight that simplicity and clarity in a founder's presentation can sometimes be undervalued.

• Key components: sourcing, picking, winning, building, and harvesting.
• The importance of being in front of opportunities early and having a strong point of view.
• The challenge in picking due to inherent uncertainty and the need for an apprenticeship model.

"If I were to go across the value chain, I'd say on sourcing we are eight or nine out of 10."

• This quote indicates confidence in the firm's ability to source potential investments early and effectively.

• Emphasizing the apprenticeship model, allowing new investors to learn from experienced partners.
• The importance of diverse perspectives and learning from a variety of successful investors.

"The answer on getting better at picking is not to erect a bunch of scaffolding around people to try to help them make better decisions."

• This quote suggests that developing investment skills is more about experience and mentorship than rigid systems.

• Different methods exist for sourcing talent, with some focusing on volume and others on quality.
• Recognition of individual strengths within the team, such as David Khan's dual focus on volume and quality.

"David Khan is an absolute force of nature... Some people are high volume, some people are high quality; he's both."

• This quote acknowledges the significant contributions of individuals who excel in both quantity and quality of sourcing.

• The competitive nature of securing investment opportunities, likened to a "knife fight."
• Building relationships with founders is crucial for success, beyond just the firm's reputation.

"It is an absolute knife fight every time, and we try to have a team and a culture where even if your business card meant nothing, you could still be put in position to win."

• This quote emphasizes the importance of personal relationships and trust in winning investment deals.

• Example of strategic investment in ServiceNow, despite no immediate need for funding.
• The role of problem-solving and adding value beyond financial investment in securing deals.

"We invested 52 million for 20%, and for anybody keeping track, that is 260 post on 25 million of ARR generating 20 billion in cash."

• This quote illustrates a successful investment strategy that involved identifying and solving operational challenges, leading to a valuable partnership.

• The impact of Doug Leone as a leading figure in venture capital, known for his deep understanding and commitment.
• The transition of roles over time, from being the primary decision-maker to a senior advisor.

"He was the tip of the spear... He was the best there's ever been because he would fully commit to being present."

• This quote captures the essence of Doug Leone's approach to venture capital, highlighting his deep engagement and effectiveness in building relationships with founders.

• The speaker recounts a breakfast meeting with Doug, where Doug ordered a highly specific meal.
• The speaker learned to eat faster to keep up with Doug during their travels.

"I remember meeting him for the first time... he ordered the most incredibly specific breakfast that took about 5 minutes to describe."

• The quote highlights Doug's meticulous nature and the speaker's adaptation to Doug's pace.

• Discussion on whether investors significantly impact enterprise value creation.
• Comparison between big teams and smaller, more concentrated teams in venture capital.
• Emphasis on the importance of a small, knowledgeable team for providing exceptional experiences to founders.

"We wanted to keep the team as small as possible... concentrate The Experience concentrate the knowledge in the smallest possible number of people."

• The quote underscores the strategic choice to maintain a small team to deliver high-quality support to founders.

• The use of technology and data science systems to enhance investment decisions.
• The internal data platform aids in identifying companies worth meeting but does not make final investment decisions.

"We don't want to get to the point where the technology platform is like pumping out buy signals... we do want it to get to the point where it can tell us whether or not we should meet a company."

• The quote illustrates the balance between leveraging technology for efficiency and maintaining human judgment in investment decisions.

• The Arc program is deemed a success based on founder satisfaction and potential financial returns.
• Founders appreciate the program's focus on teaching how to build a business rather than just raising funds.

"Other incubators or other accelerator programs teach us how to raise our series A... Sequoia teaches us how to build a business."

• The quote reflects the unique value proposition of the Arc program as perceived by participating founders.

• The importance of experimentation in staying ahead but with a focus on successful outcomes.
• Past decisions, such as entering and exiting markets like India and China, evaluated for timing and strategic alignment.

"The burden of proof is on the experiment... unless it is a wild success, shut it down."

• The quote emphasizes the need for a high success threshold for continuing experiments.

• The rigorous process of hiring investment talent, balancing science and art in candidate evaluation.
• Differentiating between DNA hires and experience hires based on role requirements.

"You need to figure out what are the few things that are absolutely essential and make sure that the person absolutely nails those things."

• The quote highlights the focus on essential qualities in candidates during the hiring process.

• The distinction between executives who dictate to founders and those who serve them.
• Effective executives are characterized by humility, curiosity, and a service-oriented mindset.

"They view their job as being in service to the founder... the unbelievable lack of ego, the humility, the curiosity."

• The quote describes the qualities that make certain executives particularly effective in supporting founders.

• Challenges in determining the right time to sell or hold investments.
• The balance between programmatic selling and strategic decision-making for maximizing returns.

"There are companies that we sold way too soon... there are also companies that we held on to for too long."

• The quote illustrates the complexity and impact of timing decisions on investment outcomes.

• The choice between programmatic distribution and strategic holding in public markets.
• Success stories of strategic holding leading to significant gains.

"The way that we have chosen to do it is to try to be really good at it... companies like Square where... it was a multi-billion dollar gain."

• The quote showcases the benefits of having a strategic approach to public market investments.

• The speaker identifies a shift in personal strengths and weaknesses over time, particularly in sourcing versus picking investments.
• Sourcing is considered a young person's game, while picking benefits from experience and detailed analysis.
• Mid-career investors are often seen as the best due to a combination of experience and youthful tenacity.

"Ironically, I'm probably weakest now where I was strongest 10 or 15 years ago, which is on the sourcing piece."

• The speaker acknowledges a change in personal capabilities over time, with a current focus on picking investments rather than sourcing.

"Picking really benefits... the more experience you have, that experience compounds, the knowledge compounds, your picking algorithm gets better."

• Experience enhances the ability to discern between good and exceptional investments, requiring detailed analysis.

• Having Sequoia on a startup's cap table provides significant advantages, particularly in fundraising and market positioning.
• Competitors cite signaling risk, but data shows a signaling advantage with higher valuations in subsequent rounds.
• Sequoia is considered a premium product, offering substantial benefits at early stages.

"If you have Sequoia on your cap table, chances are your life just got a lot easier for the sake of future fundraising."

• Sequoia's involvement increases the likelihood of successful fundraising and reduces future dilution.

"Most Founders at the very early stages are willing to... pay something different for a premium product than you pay for a normal product."

• Founders recognize the value of Sequoia's involvement and are willing to accept different terms for the benefits it provides.

• The tiebreaker in investment decisions often comes down to the quality of the founder.
• The hardest part of the job is balancing internal dynamics and maintaining a team of superstars.
• Premortems focus on maintaining humility and a sense of urgency to avoid complacency.

"The tiebreaker always comes down to the founder... the best Founders are going to surprise you by finding more TAM."

• The quality and potential of the founder are critical factors in investment decisions, even if market potential is uncertain.

"The premortem for Sequoia has nothing to do with the financial markets... and it has everything to do with staying hungry, staying humble."

• Internal culture and attitude are seen as more significant threats to success than external market factors.

• Data on investment decisions shows that consensus or contentiousness does not predict success; conviction matters more.
• The presence of strong conviction, even if not unanimous, is a key indicator of potential success.
• Political voting and the clarity of conviction are important considerations in decision-making.

"Whether something is consensus or contentious actually doesn't matter... the thing that matters is presence of conviction."

• The strength of conviction in an investment decision is more important than whether it is a consensus or contentious choice.

"A lot of times people are mingling bravado with conviction... if you vote a nine because you're actually a nine... that's great."

• Genuine conviction should be distinguished from bravado, with true belief in an investment being rare and valuable.

• Notable founder meetings include Eric Yuan and a trip to Sweden for ClickTech, highlighting the importance of passion and perseverance.
• Lessons from mentors like Jim Goetz emphasize the value of foresight and understanding people.
• Insights into future trends, like the potential of cloud computing, can guide investment strategies.

"One was Eric Yuan... he was so full of joy and energy and enthusiasm because of this product that he was building."

• The passion and enthusiasm of founders can be a significant factor in memorable and successful investment decisions.

"Jim's two superpowers... his ability to see the future and... to figure out people and what motivates them."

• Understanding future trends and effectively managing and motivating people are key skills in venture capital.

• The speaker believes in the transformative potential of current foundational models in AI, even without further advancements.
• Personal mentorship is valued, with relationships built on genuine interest, hard work, and shared goals.
• The importance of living one's life authentically rather than auditioning for it is highlighted in personal and professional contexts.

"Even if you were to freeze the capability set of the current Foundation models... it would revolutionize trillions of dollars worth of Industries."

• The speaker sees immense potential in current AI capabilities, with significant economic impact expected from optimization and application.

"You made it very easy for me to be kind to you because you're the sort of person that I wanted to be in business with."

• Personal mentorship is based on mutual respect and the desire to engage with earnest, hardworking, and genuine individuals.