Special Sequoia Capital's Investment Playbook (with Alfred Lin)



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.

Summary Notes

Introduction to Pioneer Square Labs and Sequoia Capital

  • Ben Gilbert is the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle.
  • David Rosenthal is an angel investor based in San Francisco.
  • Sequoia Capital has a history of early investments in companies with a combined worth over $3.3 trillion.
  • The episode discusses Sequoia's investment strategies and their internal playbook.
  • Alfred Lin, a partner at Sequoia, has been on the boards of DoorDash and Airbnb, both of which had successful IPOs.

"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 Lin's Background and Role at Sequoia

  • Alfred Lin was the CFO of Link Exchange, co-founder of Venture Frogs with Tony Hsieh, and COO and chairman of Zappos.
  • As a partner at Sequoia, Lin oversees the early-stage business in the US.
  • Lin is on the boards of several companies, including Airbnb, DoorDash, and Reddit.
  • He emphasizes the importance of team effort and credits founders for their courage.

"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.

Sequoia's Prepared Mind Approach

  • Sequoia focuses on a combination of great founding teams and markets.
  • Founders often come from solving their own pain points, which may not initially consider the market.
  • Sequoia prepares by understanding market potential and growth.
  • The concept of the "prepared mind" is attributed to Louis Pasteur, meaning chance favors those who are prepared.
  • Sequoia's proactive work includes identifying trends, reading extensively, and holding "blue sky sessions" for inspiration.

"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.

Sequoia's Investment Strategy

  • Sequoia evaluates markets, founding teams, and the fit between founders and markets.
  • They consider the operational capabilities of founders and their strategies.
  • Sequoia passed on early investments in food delivery services like Grubhub but later recognized the potential in DoorDash due to its focus on merchants and suburbs.
  • Founder-market fit is crucial for Sequoia's investment decisions.

"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.

Sequoia's Market Analysis and Decision Making

  • There is no strict formula for Sequoia's market analysis.
  • Sequoia identifies trends through reading, structured thinking, and interacting with founders.
  • They ask critical questions like "Why now?" to understand the timing of market opportunities.
  • Sequoia looks for companies that will be significant ten years into the future.

"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 as a Sponsor

  • Pilot is an accounting firm for startups and growth companies, endorsed by Sequoia, Index, Stripe, and Jeff Bezos.
  • Pilot focuses on accounting, tax, and bookkeeping, allowing companies to concentrate on their core product and customers.
  • The service aligns with Jeff Bezos' philosophy of focusing on what makes a business unique.

"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.

Imagination in Venture Capital

  • The importance of envisioning a company's potential success is emphasized.
  • Imagining the best-case scenario helps to understand what a company could become.
  • It's easier to identify why a company might fail than to predict its success.

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.

Founder's Vision at Seed Stage

  • Founders may or may not be able to predict the company's future at the seed stage.
  • Market dynamics can change significantly over ten years.
  • Great founders envision a superior future for their industry.

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.

Market Understanding and Entry Strategy

  • Non-obvious markets with good tailwinds are preferable for startups.
  • Entering large, obvious markets can be challenging due to competition.
  • Startups should seek white space and entry strategies that avoid direct competition with large incumbents.
  • Innovator's Dilemma: Startups can capitalize on low-margin opportunities overlooked by larger companies.
  • Differentiation and superior products are key to gaining market share.

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.

Internal Debate and Conviction at Sequoia

  • The role of the sponsor within Sequoia is crucial in painting the picture of the company's future.
  • Conviction is built over time with each investment round.
  • Evidence of a company's potential is sometimes apparent through its growth and market reception.
  • Overcoming challenges is part of a company's journey to success.

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.

Global Network Effects in Travel

  • Travel is seen as a global network effects business.
  • Winning the supply side in travel can lead to capturing the demand.
  • Sequoia's conviction in Airbnb's global potential justified further investment.

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.

Realizing Network Effects

  • Dreaming of creating network effects is part of the investment thesis.
  • Understanding the concept of marketplaces helps in envisioning future network effects.
  • Prepared minds can conceptualize future success even when not evident at the time of investment.

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.

Sponsorship by Statsig

  • Statsig is introduced as a sponsor for the episode.
  • Statsig's feature management and experimentation platform is highlighted.
  • The platform's capabilities in aiding product teams to make data-driven decisions are explained.

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.

Market Size and Investment Decisions

  • Market size is a common reason for venture capital investment rejections.
  • Non-obvious markets have the potential to grow significantly in the future.
  • Trends and technological advancements can transform small markets into large ones.
  • Investors and founders must work together to envision the market's growth potential.

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.

AWS and the Democratization of Technology

  • AWS allowed individuals to easily start coding and deploy on the cloud without significant upfront investment.
  • This trend was recognized as a potential catalyst for a surge in startup activity.
  • The accessibility of AWS was crucial for startups like Airbnb, which was founded by designers and a coder who likely did not want to manage server hardware.

"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.

The Three Components of a Successful Pitch

  • Founders should start with a vision of the world they want to create, stemming from personal pain and passion.
  • The current realities must be addressed, explaining what is broken and how the startup intends to fix it.
  • Founders must connect their vision to the present, showing the path to growth and scalability, even if they don't outline the entire journey.

"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.

Market Size and Unit Economics

  • Market size and potential for large gross margins are critical factors in evaluating a business opportunity.
  • Gross margin dollars are more important than gross margin percentage, as high volume can compensate for lower percentages.
  • Unit economics are crucial because businesses are ultimately valued on profits.

"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.

Sequoia's Investment Approach and Global Perspective

  • Sequoia aims to partner with important companies from the seed stage to IPO and beyond.
  • The firm acknowledges that it won't catch every great company early, so it remains flexible to invest at various stages.
  • Insights from global operations are shared within Sequoia, contributing to a better understanding of market dynamics and consumer behavior.

"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.

Sequoia's Operational Model and Time Horizon

  • Sequoia maintains a small, focused team for early-stage investments, emphasizing deep partnerships with founders.
  • The firm's history suggests a shift from short-term gains to long-term value creation and support for portfolio companies.
  • Sequoia balances the need for long-term investment horizons with the fund structure and the expectations of limited partners.

"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.

Investment Strategy and Long-Term Focus

  • Sequoia Capital does not prioritize short-term gains but focuses on the future prospects of a company.
  • They pride themselves on high as-held multiples compared to the net multiples of the stock they distribute.
  • The firm chooses founders who aim to build enduring companies and helps them focus on the long-term aspects of their business.
  • Sequoia prefers to distribute shares to limited partners (LPs) who can then decide whether to sell or hold, rather than selling the stock themselves.

"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.

The Power of Compounding

  • Understanding compounding is crucial, but humans often struggle with exponential projections.
  • Early stages of compounding may appear linear, and it's usually more evident in hindsight that a business was compounding.
  • The COVID-19 pandemic serves as an example of exponential growth, highlighting the surprise and difficulty in reversing compounding effects.

"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 and Clean Compute Cloud

  • Crusoe is a clean compute cloud provider for AI workloads, partnering with Nvidia.
  • Crusoe's data centers utilize stranded, wasted, or clean energy, offering better performance per dollar than traditional providers.
  • The environmental benefit comes from using energy that would otherwise be wasted, lowering costs for customers.

"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.

Building an Enduring Institution

  • Sequoia Capital's success is attributed to its culture and focus on passing the firm to successive generations in better shape.
  • The firm does not view ownership in the traditional sense but as stewardship for the future.
  • Sequoia looks for partners with high IQ, EQ, and hustle, who can influence and work effectively with founders.
  • Continuous learning and improvement are essential, with an emphasis on the long-term perspective.

"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.

Venture Capital Insights

  • Venture capital is described as a humbling business where outcomes can be unpredictable.
  • Success in venture capital requires a blend of intelligence, emotional intelligence, and relentless pursuit of opportunities.
  • The business rewards long-term engagement, and early losses can precede significant gains that take time to materialize.
  • Sequoia seeks individuals who are not only intelligent and diligent but also focused on building enduring value.

"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.

Qualities for Success in Venture Capital

  • Sequoia Capital values raw ingredients such as high IQ, EQ, and hustle in potential partners.
  • There are no specific requirements for success in venture capital, highlighting the diverse paths individuals can take.
  • A focus on enduring qualities and the ability to contribute to long-term success is crucial.

"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.

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