Distilling 50 years of won lessons at Sequoia Capital

Transcript

um can i ask you to keep the conversations for in 30 minutes 30 minutes more focused i think if everybody's here is to hear what these guys have to say so let's make sure we can hear what they have to say um so welcome pat and sean very nice to have you over they're coming from sequoia and they will be talking about uh basically hard-won lessons from 50 years at sequoia capital so i will let you introduce yourselves thank you very much for being here and just a last reminder at the end of this talk then there is a break you're all welcome to have a kind of coffee or a glass of water and then the room will be closed for the mentoring session for founders who've booked those mentoring sessions

so everybody that is not a founder who has booked or a vc that is giving mentoring session will be asked out and we will welcome everybody again i mean all the investors again tomorrow morning from 10 a.m for the pitch sessions so the stage is yours and thank you for being here wonderful thank you for having us and thank you all for being here too um my name is pat this is my partner sean you can see sean dress for the occasion i did not i've been at sequoia for about 15 years during which time the two sides of sequoia two sides is quite i'm extremely boring this is true shawn is perhaps the most interesting man in the world uh during all the time that i've been at sequoia shawn has lived about 13 different lives including

founding a company that was bought last year for more than a billion dollars buying his first bitcoin in 2011 maybe 2012 um being behind enemy lines in a variety of military contacts i'm not allowed to discuss anyway so sean sean is deeply crypto native has been for more than a decade um i am the dummy who is smart enough to hire matt huang the founder of paradigm at sequoia and then dumb enough to not buy my first bitcoin until 2016. so anyway we're complimentary um from sequoia we're going to try not to talk for more than like 10 or 15 minutes because we want to make sure that whatever happens in here you guys get whatever you want out of it so we have maybe 10 or 15 minutes of talking on the slides um the title here is building to endure we are

painfully aware that the last thing you need is like yet more vcs pontificating about what to do during hard times um and yet our founders have told us that some of this stuff was actually useful so we thought we'd package it up and just share a little bit of it today so that's what we'll try to get through good cool um and the first question might just be who is sequoia so one of the reasons that we think we have a lessons may be worth sharing is because we have been around for 50 years which means multiple economic cycles multiple technology platform shifts multiple generational transitions any number of things that should have caused us to go out of business and yet we've managed to persist part of that is because we care deeply about the two

sets of constituents you see on this page so on the left side these are the founders we serve we view our mission as helping the daring build legendary companies from idea to ipo and beyond on the right side these are the causes who give us their money and so one thing that people do not know about sequoia our money comes from what we call great causes non-profits foundations the picture at the top there represents the work that the moore foundation does in climate change the picture at the bottom represents what the welcome trust does with mental health all of our money not all of our money 90 plus of our money comes from great causes so when founders do well important problems are solved and we've been able to contribute more than 30 billion dollars to great causes over the last 10 years or so

which we're quite proud of um we're global at this point we try to meet founders where they are these are the locations where we have physical offices but we have investments on every continent except antarctica um one of the benefits of having been around for 50 years is we've made a ton of mistakes we've gotten to see a ton of mistakes and so one of our objectives in working with new founders is to help them make new mistakes and avoid the mistakes that have been made in the past and everybody tends to have a favorite on this slide i think the drunken parade leaders is my favorite and you can imagine what that might mean um tell us if it's your favorite drunken so drunken parade leader is somebody who has had so much of their own kool-aid that they fail to see

reality for what it is and they continue to march down the street beating the drum and leading everybody behind them as you can imagine that is a tough way to run a business in the real world so one of the other benefits i haven't been around for 50 plus years is we've gotten to kind of see the different waves of technology as they've stacked up on one another going back to fairchild and the advent of the silicon-based transistor for which silicon valley is named in the 1970s people started to build systems on top of those chips apple with the pc microsoft with the operating system oracle with the database by the 1980s those systems had been connected up into networks and showed up in the corporate environment led to the advent of package

software in the 1990s networks became public facing actually fun facts just for fun when did the internet get hit 1 million users anybody in what year did the internet hit 1 million users not a bad guess 91 better guess 1987. and so this is actually relevant in the context of crypto because sometimes it takes a very long time for the reality of the technology to catch up to the potential of the technology in the case of the internet solid 20 years from a million users until the time when it really started getting into the plateau productivity anyway 2000s the internet became mature enough to support

complex applications otherwise known as the cloud 2010s those applications started to be delivered on mobile devices gave us better ways to communicate with companies like instagram and snap whatsapp and tick tock better ways to share resources with companies like airbnb and uber and doordash and then finally in the 2020s we will only know in retrospect what the theme of the decade actually is this is not meant to say data crypto as a category this is meant to say data and or crypto data we think snowflake is probably one of the foundational companies of this theme crypto ftx is certainly doing a nice job but there will be many more um before i head it off to sean to say a couple words about our view on crypto i also just want to

not as a way to brag but just we are lucky enough that our founder ran the go to market at fairchild semiconductor which is this company uh for about seven years before starting sequoia which means that he was kind of at the fountainhead of all of these waves of technology that have come since and so you can see the grayed out logos are ones that we've had no association with the colored logos or ones that we're lucky enough to be in business with we're far from perfect but we've managed to kind of catch some of the relevant companies in each theme and we hope that that will prove to be true for crypto as well thank you pat and pat is very humble i mean he runs our growth team at sequoia he's one

of the most successful sas investors of the last decade or so but also a very clear thinker so this slide you know better financial system better internet this is a very poor attempt it's just kind of better financial system maybe that's crypto better internet maybe that's web 3. for me personally i took a trip in 2008 i went backpacking from argentina from chile up to los angeles overland it was all all over land just on like ten dollars a day and that trip for me really just ingrained in in my skull how

like how lucky i was to grow up with kind of the financial system that i had in america or access to in america and i just one of the things that i think a lot of people have missed with when when skeptics or critics come in about crypto they're really talking about crypto's inability to solve problems maybe in the most developed places in the world and so for me having this experience and there were many others helped kind of motivate me to think about financial issues for people coming from developing nations and i just think that's a really important part of the future of crypto to take that even further like say for d5 in my opinion a lot of the d5 building over the last five years has been

kind of solving first world problems has primarily been you know solving problems for crypto whales and and you know people in developed developed worlds um i actually think where d5 will have more long-term success is in the developing world where the banks and financial system is just so so immature and even rigged against people living there and so i would encourage some of the d5 founders to kind of maybe maybe take that longer term view better internet not in this room but like when you talk to most people in the world they get very defensive when you talk about web 3. um you know for me i think about web3 as an internet with a few different

properties like probably different identity layer different payment layer and one other subtle thing which is like what we've been calling trusts backdoors so you know the ability to if if your service provider abuses trust or does something really bad kind of give you the ability escape hatch to to leave and go somewhere else more easily than in the past um but nine i would argue that web 3 will be probably 95 the same and built on the same infrastructure as web 2 and so it's i think one of the traps that people in the community have fallen into is um like not drawing that distinction that 95 or more will be the same but then there will be a couple like small very very powerful things on top of it

you know in addition to permission less ability to have a bunch of apps talking to each other next slide um so we got in this slide we've got a couple of our crypto portfolio companies that we're very lucky to be partnered with but we've also got you know fintech and consumer and some of the companies we've been lucky to partner with in those areas as well and i would say for sequoia like our strength and one of the things we view is our kind of job is to help be this bridge that you know as long-term believers and crypto like but also people that

you know know that there's a lot of problems and that'll be the next few slides like we want to help bring some of the lessons from you know our history and fintech and and consumer applications and all that because a lot of times a lot of times crypto problems are yes they're different but a lot of times like 95 percent is the same as what's kind of already been learned in the past and so anyways we this is something we take really seriously next slide um so you know pat had this slide up earlier i would just say you know we're long-term incredibly bullish about crypto like i i personally believe nothing is ever certain you know like covid came out of nowhere and made a lot of companies that were on a

great trajectory stumble and similarly like it was a tailwind that helped a lot of companies that were probably gonna die like be very successful i couldn't have predicted kovid i think they're it's still not guaranteed that crypto will be like the biggest trend of the next decade or two but i hope it is and i think it has personally i think it has a better shot than any other technology platform out there right now so anyways we really are long-term bullish but you know we're near-term very realistic like this is going to be a really this is a hard time like crypto has had many cycles in the past um and has obviously made it through and i

i deeply believe that crypt is going to make it through here but there are some differences about this particular cycle like most of the last 10 years the last three cycles the global kind of macro environment has been up and to the right you know interest rates have for the most part been going down the last few years or the last decade um and you know there was this tailwind of bitcoin having which had a huge impact and likely catalyze some of the some of the like subsequent bull runs which you can think of as shrinking the the circulating supply of bitcoin like in a very non-linear way um

you know the next having like we're getting to the point where that's a very small fraction of circulating to supply like it's every every having should have a small and small impact on on kind of catalyzing a new bull market it's a global macro storm right now there's a lot of liquidity on the system so anyways i hope it's just like another cycle with roughly two year bear market but i think we all need to you know plan for the worst and there's a chance that this is a longer more pronounced bear market than crypto seen before um so anyways basically i already talked about this so i'll pass it back to you pat well one thing that we just want to distinguish here is people tend to co-mingle the concepts of cycles right so people tend to commingle the concept

of a platform shift with the concept of a market cycle and these two things are related but distinct so a platform shift new technology emerges new things become possible new frontiers are pushed a market cycle is the fed decided to hike rates asset values go down right now these two things are correlated because technology has such an outsized influence in the world and therefore like the economy does not exist absent technology and vice versa but they're also distinct and so this is how you reconcile the idea of being long-term really bullish but near-term very realistic um so somebody on our team found these pictures i'm not sure what they googled to get them the point is that like yesterday everything was fun and puppies

were happy and tomorrow there's a burnt out building and that obviously is not great um some more of the qualitative aspects that compare to this the environment that we've all been in for many years now people are innocent until proven guilty the environment we're heading into and possibly already in people are going to tend to want to see things before they believe them i'm not going to read all of these you guys can kind of see the compare contrast here but one of my favorite is this uh the one at the bottom that says in the environment the last handful of years people have been able to grow fat which means either use venture money or print money basically just money was free so you could kind of use that to solve all problems the environment that we're heading into now as money becomes scarce the resource that has to be

deployed is brain cells which is not to say that people have not been deploying brain cells it's just of all the resources that go into building a business as money becomes more scarce you gotta overcompensate in other areas so it's gonna be harder but the result is you're gonna be building muscle which means you're gonna have fundamentally stronger companies than you would if the free money environment had continued so what do we do and this is kind of the gist of the conversations we've been having with our founders over the last couple of months kind of three steps embrace the new reality chart a new path and then go execute so we'll we'll spend a couple minutes on each of these and then as promised try to get to questions first one on embracing new reality sean already talked about this a bit and i'm

sure everybody in this room understands this um more than more than they they wish they did um last 15 years bull market fed balance sheet has been growing interest rates have been low you can see the bump for the global financial crisis you can see the bump for for pandemic today things are very different this is the fundamental shift between what happened to the financial crisis and what happened to the onset of the pandemic like we are now on the opposite side of the table from the vet their policy is trying to rein in the money supply which means making money more expensive this this is the difference when people try to compare this market cycle the global financial crisis of course that's not the only thing going on the world is a mess we've got war in ukraine we've got a pandemic

which you know i'm curious to know how many of us end up with coven after this event like supply chains continue to be a mess which is exacerbating the inflation issues as is labor force participation which continues to drop uh automation is taking away jobs et cetera et cetera so there's a lot of kind of messy stuff happening right now this is the punch line of adjusting to the new reality which we've already talked about a bit yesterday money was free maybe not literally free but pretty close um tomorrow money's going to be expensive and it's just a reality we all face which means that we have to be more careful with our investment of the incremental dollar something that might have been a smart investment last year might not be a smart investment this year because the cost of that money just went up

that's the gist of it and now sean we'll talk about charting a new path next slide it's time to adapt you know it's time it's time to evolve darwin is a biology goat next slide um our partner doug leone in the financial crisis coined this phrase survival of the quickest and this is something that you know we we've used as a principle for how we kind of think about change and what what this chart is trying to show

is you know the green company if you move quickly when there's some shock and in this case to me the shock is that we went and this is not about crypto this is this is in general like public markets any technology company until four months ago like companies were rewarded and kind of valued based on their growth rate no matter how efficient they were and the game just changed like now it's all about less about your growth rate is more about how capital efficient you are and so this is non-linear this big change and the companies that adapt to that quickly uh make the hard decisions and kind of become default alive and grow from there like that the green comp the green line is supposed to represent that

the orange line is supposed to represent the company that you know all thing all all else being equal doesn't make any changes like assumes that there's going to be a short-term uh blip that it's going to be just like past cycles that they have enough money to get the promised land like it just sequoia in the 50 year history you know and doug was been there for over 30 years and was steward the last 15 years or so like doug has seen this better than almost anyone like those companies oftentimes get to the point where you run low on cash you're not hitting your milestones you don't look good relative to your peers can't raise more money you know and everything just you end up with nothing so next slide

um as a principle i mean this is self-explanatory but just as a as a principle think about what could go wrong and like what the future could look like and you know ask yourself what decisions do you would you wish you have made had that happened and that feeds into the the decisions that you plan to make and you know this is also pretty self-explanatory but i would say the thing that is probably the least obvious here is in a bull market you hire a lot of people that you know

joined for the sugar high they joined for for you know to be in what was clearly the next platform because it was the cool thing to do and a lot of those people you know when you're in a bear market are just not passionate and so there's there's like one of the best things you can do is just really um check in with your team and give give people you know an out and really assess like are they are they in it for the right reasons and are are they you know is everyone aligned i was going to say a couple more words on this like what just conceptually there are economic incentives and there are social incentives economic incentives take care of themselves and

the market is good people make money when the market is bad people do not social incentives are up for up to you to define right and so if i go back to the very first slide of this presentation where we're showing the great causes that are the source of money for sequoia we probably talk about that internally more than any other investment firm because it is part of what gives us a sense of purpose and so when our portfolio is up of course that's nice but when our portfolio is down we don't despair because we have this underlying sense that the work we do is important and part of that is us drinking our own kool-aid part of that is sort of this um this brainwashing that we do of ourselves but i think that's actually a useful thing so that the social incentives are aligned around the

quality of the work itself because for the next handful of years the quality of the work itself is going to is going to be where people get their gratification like there aren't going to be a lot of get-rich-quick events over the next couple of years we could be wrong but we would plan for that to be the case and so as long as you have strong social incentives around the quality of the work and solving important problems for your customers then you'll have people on your team who are still motivated and excited to come to work in the morning versus the kind of mercenary get rich quick mentality which is going to evaporate okay keep going no you do this one um so

what can you do to you know prepare we're already you know we're already a few months into it and so hopefully some of you have already thought about these things um i think one of the things that i've been very surprised with crypto is almost no crypto company has a cfo uh it's it's a dirty word in crypto but is actually one of the highest leverage jobs you can get even as a crypto company um you know and in terms of charter path to sustainability i would just think of that as like be default alive you know if if you're if you're default alive then when the next bull market comes whether that's a week from now or which i mean in east like spend a good week

or or whether that's you know five years from now like you're one of my personal lessons and i think a lesson from sequoia but one of my personal lessons having been in tech the last 15 20 years i've seen a lot of companies that were just absolutely struggling and just by simply being alive you know i told pat story earlier there's a company that is a friend had a biopharma company for and for eight years was just deeply deeply struggling and then covet happened got into covid testing and the company has just been unimaginably successful i've just been really surprised by if you get the right if you have the right long-term trend it's just your job to stay alive and so that's biggest advice

cool uh we have gone longer than we said we would so i'll try to finish this in like one minute so step one embrace reality step two chart new path step three execute uh this is one of our favorite quotes you cannot overtake 15 cars in sunny weather but you can when it's raining and so this is actually a wonderful opportunity to take market share to add great talent it is actually a great opportunity to attack assuming that step number one survive and then attack um survival does not quite equal building an enduring company it is a precedent condition for building an enduring company but they are not one in the same here are some of the things that we have found present at some of the enduring companies over the years

uh finally what the last few months have taught us building a company crypto is in fact building a company and the rules that apply to building a company also apply in crypto and so with that we will take questions if anybody has questions [Applause] so thank you um for the presentation i want to say that of course um past performance is not an indicator for the future performance but you are you are doing great guys so okay let's start with that

and uh you were talking about crypto you are bullish so on the long term and you said something that tilted to me which is plateau of productivity it rises me about the adaption and hype uh cycle of garter i suppose that you you know when you use it and i have actually in these questions a double interest which is what as a theoretical part because i'm i'm actually a university teacher and also practical part because i'm a founder of our newly crypt newly founded crypto company what are these kind of theoretical and technical indicators you use on your daily uh

analysis because we we all know if you use it that the garner life cycle is something that is scientifically not proven but it's highly used you know in the market so if you have any okay i say that if you're any kind of cheat code like that i kindly asked to share um well i'll give a general answer and then sean might have better uh color so in talking about the hype cycle it kind of presupposes this why now question right like why is now the right time for this thing to emerge and there tend to be two components to a why now people oversimplify and be like oh it's because the iphone odds because bitcoin they're usually two components right one component is the technical trigger and

think about that as the technology out piece of the story that is what allows this thing to exist the second equally important and this will get to the answer your question component is the resultant change in consumption behavior and so because this new technology exists all of a sudden there is something that people or businesses think they need and then this virtuous cycle begins where the consumption allows for new technology to be funded which allows for more consumption and it kind of goes back and forth and back and forth and back and forth right and that's generally the pattern anytime a new technology emerges the question of where we are in the cycle has to do with how much of the consumption behavior has taken shape right and so in the early days of heck in the early days of

computing in the early days of the internet in the early days of crypto a lot of it is what you might call hobbyist behavior it goes from hobbyist to opportunists and it goes from opportunist to mainstream we are probably shy of mainstream at this point and i realize that literally hundreds of millions of people own digital assets at this moment but the use cases are still somewhat endogenous to the system meaning it's either making money or it is financial services that are again sort of internal to the system there is of course some entertainment there are some other use cases but i think we're probably we're probably shy of seeing some of the mainstream consumer use cases that are going to take this to you know its full potential but sean i'm curious

what you'd say i'll say relatively quickly i think about the gartner hype cycle a little bit differently i think about it mainly that there will be some catalyst that creates a positive feedback loop that brings in a huge amount of interest into something both in terms of like people investment all these things and usually the underlying technology is not ready for the hype it got in that and like as the thing goes up and so you're left with a lot of investment in an area that doesn't meet up to the hype and then it takes a long time for people they feel like they got burned all that it takes a long time for people to be able to revisit it but in that process of drawing in all this attention

you know some really amazing things get built and then the next wave that comes back can build something much much better and maybe there's something real you know the fiber optic cables in the 90s there was over building phase uh you know with solar panels like the clean tech bubble in the mid 2000s like there's just literally hundreds of examples of this and so i just crypto one of the things that crypto benefits from is the cycles are so fast like because it's all software because you can build things with very small teams we can recover very quickly the challenge though is that like the bigger the burn like the bigger the fall the harder it is to recover from that and

you know like there's a risk that regulatory pressure like becomes so extreme in the next two years whatever that it takes a few like five years or six years whatever to bounce back and i hope that's not the case but i just that's kind of how i think about the hype segment sorry guys we're out of time sorry about that um so thank you everyone thanks so much for those who are founders we will see you tomorrow and after tomorrow during the pitch days and tomorrow evening for the networking drink there's drinks tomorrow five to seven here with all investors and startups and founders and otherwise i'll ask you to kindly leave the room which is booked for one one feedbacks

[Applause] thank you so much super interesting i love that there is an entire site on people and like