In a revealing conversation with Ben Gilbert and David Rosenthal, co-founders of Pioneer Square Labs and hosts of the "Wired" podcast, Sequoia Capital partner Alfred Lin shares insights into Sequoia's investment philosophy and the art of identifying transformative startups. Lin, who has a storied background as CFO of Link Exchange and COO of Zappos, underscores the importance of a 'prepared mind' in recognizing opportunities in nascent markets, as demonstrated by Sequoia's early bets on Airbnb and DoorDash. He also emphasizes the power of compounding in both startup growth and personal development within venture capital. Lin's approach reflects Sequoia's long-term strategy of nurturing founders and their visions from inception to market dominance, a philosophy rooted in the firm's origin and its commitment to building an enduring institution.
"I'm Ben Gilbert, and I am the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle." "And I'm David Rosenthal, and I am angel investor, based in San Francisco."
These quotes introduce the hosts, Ben Gilbert and David Rosenthal, and establish their credentials and the context for the episode, which is to explore Sequoia Capital's investment approach.
"Alfred, you are the CFO of Link Exchange, and tell me, networks, the co-founder of venture Frogs with Tony Shea, and then, of course, the COO and chairman of Zappos until its sale to Amazon. Today, Alfred is a partner at Sequoia, where he manages the early-stage business in the US and sits on the boards of Airbnb, Doordash, Fair House, Instacart, Reddit, Zipline, and more."
This quote details Alfred Lin's significant experience in the tech industry and his current role at Sequoia Capital, highlighting his involvement with successful companies.
"We often talk a lot about prepared mind, because chance favors the prepared mind, as Louis Pasteur would say."
This quote encapsulates the philosophy that underpins Sequoia's approach to investment, emphasizing the importance of being prepared to capitalize on opportunities.
"This business is going to be won by both having a differentiated strategy, but also a person and a team that was going to be very, very focused on operations."
This quote explains the importance of operational expertise and strategic differentiation in the success of a business, which are key factors in Sequoia's investment decisions.
"The simple questions are you've heard before, why now? Many of these ideas have people have thought of in the past?"
This quote highlights the importance of timing in Sequoia's investment strategy, questioning why the current moment is right for a particular business idea.
"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs."
This quote introduces Pilot, a company that offers comprehensive financial services to startups, which is relevant to the audience of the podcast.
So imagination about that and what happens when everything goes right is really important. So we do ask, if everything goes right, what does this company become?
This quote highlights the significance of considering the optimal outcome for a company's future during the investment process.
Do you find that founders know this at the seed stage?
Ben Gilbert questions whether founders can foresee the potential success of their companies in the early stages.
Everybody knows where all the large markets are and it's generally a bloodbath when you enter those markets.
Alfred Lin discusses the competitive nature of large, obvious markets and the strategic advantage of entering non-obvious markets.
It has a lot to do with the sponsor.
Alfred Lin explains the importance of the sponsor's role in advocating for a company within Sequoia.
Travel is a global network effects business.
Alfred Lin provides insight into the travel industry's dynamics and the rationale behind investing in companies like Airbnb.
But you have to dream that if you get enough of the supply, it should be a network effects business.
Alfred Lin speaks about the importance of envisioning and aiming for network effects in a business model.
Our sponsor for this episode is a brand new one for us, Statsig.
The host introduces Statsig, the sponsor of the episode, and explains its services and relevance to product teams.
That's a great question.
Alfred Lin responds to a question about how market size factors into investment decisions and the potential for growth in seemingly small markets.
"You could see that that was going to be a trend for some period of time."
The quote highlights the recognition of cloud computing as a significant trend that would shape the startup ecosystem for years to come.
"There's that amazing moment that we talked about in the Airbnb episode where the YC startup school where Bezos sort of launched AWS to startups, was the startup school that Brian, Nate and Joe went and attended before they did."
This quote emphasizes the pivotal role AWS played in the early days of startups like Airbnb by providing an accessible platform for technology deployment.
"Those trends that carry you are quite know, I often talk about there are three components of a pitch, and some founders do all three well, and most founders do the first one well, which is like, what's your vision of the world?"
The quote underscores the importance of vision in a startup pitch, which is often well-articulated by founders.
"You've experienced personal pain, that this is not the right way to do this. You show how passionate you are."
This quote captures the emotional and personal investment founders should convey when presenting their vision and the problem they aim to solve.
"Then you have the realities of today. Paint the pictures of what's going on and why this is broken, how you can fix it."
The quote stresses the need for founders to present a clear understanding of the current market and its deficiencies, offering a credible solution.
"But you do have to sort of show us how exactly you're going to get from a few thousand listings at Airbnb to more than that."
This quote highlights the necessity for founders to provide a roadmap for growth, demonstrating how they will achieve scalability.
"The very important things in evaluating an opportunity are the market size, because no one ever started a huge business in a small market, and the potential for large gross margins."
The quote reflects the traditional investment wisdom that big markets and high gross margins are essential for significant business success.
"It's not about margin percent, it's about margin dollars."
The quote clarifies that the absolute value of gross margin dollars is what truly matters, rather than the percentage margins.
"The winners get a disproportionate amount of the market cap. And if that's true, then they also will. By just simple logic, investors then want to invest in the winners."
This quote explains the trend of successful companies receiving more capital, which further solidifies their market position.
"We at Sequoia want to identify the most important companies of tomorrow as early as possible."
The quote encapsulates Sequoia's strategy of early engagement with promising startups to support their growth over the long term.
"Talent is evenly distributed and opportunity is not is a quote that lots of people have said, we're doing this, we're sort of expanding around the world because we want to be a global partnership."
This quote underscores Sequoia's belief in global talent and the firm's commitment to identifying and nurturing it worldwide.
"Sequoia is structured in a very decentralized way. Each group makes their own investment decisions, each geo makes their own investment decisions."
The quote describes Sequoia's decentralized structure, which allows for local decision-making and responsiveness to specific market conditions.
"The early stage team is about 15 people. It's not a big team, but the way we think about it is while there's a lot of opportunity, each one of us are only going to make one or two seed investments, or one or two venture investments a year."
This quote reflects the intentional small scale of Sequoia's early-stage team, focusing on meaningful engagements with a limited number of startups.
"We want to bring the future to fruition. It's not just about making the investment. We don't really think about buying low and selling high. We think about helping founders reach their full potential, bring the future that they envision to reality."
The quote highlights Sequoia's philosophy of active partnership with founders beyond just financial investment, aiming to realize the founders' visions for the future.
"We think about whether the company has brighter prospects in the future than they do today. And if that's the case, then we continue to hold."
This quote emphasizes Sequoia's investment philosophy that prioritizes a company's long-term growth potential over immediate returns.
"You're just a lot better off focusing on the long run than on any short run swings up or down in the market."
This quote underscores the importance of maintaining a long-term perspective in investment decisions, rather than reacting to short-term market fluctuations.
"It's a testament to compounding, the thing that people don't get right."
This quote highlights the common misunderstanding of compounding's impact over time, which is a critical concept in investment returns.
"The tangent of it looks very linear, and it's not that far off from being linear or you draw the line wrong."
This quote explains that at any given point, compounding can appear linear, but it's the long-term view that reveals the exponential growth.
"Crusoe's data centers are nothing but racks and racks of a."
This quote emphasizes the specialized nature of Crusoe's infrastructure, designed specifically for AI workloads.
"Energy is the second largest cost of running AI, after, of course, the price you pay Nvidia for the chips."
This quote highlights the significant cost of energy in AI operations and how Crusoe's model addresses this cost factor.
"Don starting out and calling it Sequoia capital instead of valentine capital."
This quote refers to the foundational culture set by Don Valentine, which emphasized building an enduring firm rather than focusing on personal branding.
"You have to be a constant learning machine."
This quote captures the necessity for continuous learning and adaptation to succeed in the venture capital industry.
"You can lose money even though if you got the investment thesis right."
This quote illustrates the unpredictable nature of venture capital, where correct analysis does not always guarantee financial success.
"You're not going to get your biggest gains on day one."
This quote stresses the importance of patience and long-term commitment in the venture capital industry to see substantial returns.
"There are no real requirements for this job, right?"
This quote emphasizes the lack of a single formula for success in venture capital, suggesting that various backgrounds can lead to success in the field.
"The focus on the enduring, which is one of our tenets."
This quote underlines Sequoia's principle of prioritizing long-term, sustainable growth over short-term achievements.