E12: An Inside Look Into Sequoia's Strategy & Operations, with Alfred Lin

0:07Welcome back to Turpentine VC, a podcast where we discuss the art and science of building successful venture firms, VC to VC. I'm joined by Alfred Lin today, who of course needs no introduction, but has been a partner at Sequoia Capital for over 13 years and has invested in Airbnb, DoorDash, and more legendary Silicon Valley companies. We dive into the unique ways which Sequoia operates as a firm in this episode, why they don't actually track AUM, why they launched the Sequoia Capital Fund, the decision-making behind creating Sequoia Arc, and more. If you like what you hear, please do subscribe and leave us a review.

0:42We also started a companion newsletter, which sends the top three insights of each episode straight to your inbox. We'll link it below in the show notes. Without further ado, here's my interview with Alfred. Alfred, welcome to the podcast. Thanks so much for joining. Thank you, Eric, for having me on the show. It's great to see you. Always. So we're going to deep dive into how Sequoia operates. But first, I want to get into Sequoia's DNA. You know, some firms have a great 10-year run. It's rare for firms to have an excellent 50-year run. Give us some of the history and explain how you guys do generational transitions so well.

1:20When Don decided to call Sequoia, Sequoia Capital and not Valentine Capital, it set the stage for what he thought he wanted to build, which was to build something that was long-lasting. And so that set the stage for having one of the most important things about our culture, which is to be sometimes unconventionally and extremely obsessed with the long term. Another part of our culture is our desire for holding ideas in tension. We often talk about having two opposite ideas and holding that intention at Sequoia, whether it's individual performance and teamwork at the same time, whether it's performance and doing the same thing over and over again, but at the same time being innovative.

2:07These are the type of things that we think about. And also a lot of what we think about for ourselves and the founders that we work with is about being supportive and also demanding at the same time. On top of that, I think the transition is one of, I've experienced this both as an operator, because I was at two Sequoia-backed companies, and also internally. I've been here for now 13 years. And I saw the transition from Don to Michael and Doug, and then from Michael to Doug and Jim, and then from Jim to Ruloff. And so all of these things happen over a longer period of time than is apparent to many people on the outside.

2:50Let's go deeper into firm building, because firms are these kind of amorphous, sometimes nebulous, structurally in terms of how they operate and kind of all the different dimensions of soft power that are involved. How have you sort of cultivated your firm building skill set or chosen in terms of where you choose to get involved and where you can make the biggest impact? I think the one thing that we've been more focused on recently is around the culture of innovation. And in 2019, Pat and I ran the U.S. offsite. And Sequoia fashion is not just to have a boondoggle of an offsite and then discuss things and review what happened in the past year.

3:34And it's a boondoggle. We actually gave homework assignments. We asked everybody to write a business plan in 2019, what 2030 will look like. Back to thinking long term. So that's 2019, we'll implement in 2020. What do you think we can get accomplished in a decade? And that's a business plan. And then on top of that, we asked people for their view of what 2030 would look like as a pre-parade and a pre-mortem. And the pre-mortem is always around complacency. So that's our biggest risk. And so if complacency is going to be our biggest risk, then to combat and counter complacency, make sure you don't rest on your laurels, but also you have to continue to innovate.

4:24And so we've been very focused on lots of things around innovation over the last three to five years because of that offsite. One of those examples are the fact that we launched ARC and we launched the Sequoia Capital Fund. So in one sense, we are going earlier, we show up earlier, and we stay longer because of the Sequoia Capital Fund. And that is something that we'll continue to see us doing, which is to figure out ways to continue to help the daring, the legendary companies from the idea stage, from ARK, all the way to the IPO and beyond, which is where the Sequoia Capital Fund comes in. Yeah, that's a great overview.

5:10We'll get to both of those products in a second. And I like the 2030 phrasing as well. But first, let's go backwards just to get context here. On this podcast, we've talked about firm structure, how firms are structured. we've talked about with a few firms we talked about with a16z and their you know massive fund and kind of like vertical funds basically and they've chosen to specialize collection of funds and then we've also talked to kleiner who's tried to go really big in in a bunch of different areas and then also you know gone back to basics as it were and and use it you know 10 years in the future it's also interesting to go 10 years past when you think about you know sequoia in um 2012 2013 why don't you talk about how the firm is structured today?

5:53Maybe in contrast to some of the examples I mentioned, what is the structure that you guys think is best, sets you up for success and how that's evolved over the past decade, perhaps? The early stage team is slightly larger than when I joined in 2010. So today, I think we have approximately 16 investors. Back then, we've had approximately 12 investors on the team. So in some sense, the structure is about the same. And I think that that's been deliberate because we want to have a small team of investors focused on early stage investing, growth stage investing, and then helping our companies build for the long term.

6:41All we have done around structuring is add around in terms of company building. So ARK is a company building program. Many of our operators, our talent team, our marketing team, our partnerships teams, they're helping our companies with company building. So yes, we've added to the team in other areas, but in some sense, the structure of Sequoia has been pretty much the same for a long period of time. The AUM has been significantly increased, right? The scale, maybe the structure is the same, but the scale has massively increased? We don't really track AUM at Sequoia. So it's one of those things that everybody seems to care about in the venture capital industry.

7:26We only care about what the fund size is that we're investing out of. We have approximately a$200 million seed fund. We have approximately a$700 million venture fund. We have approximately slightly less than a$1.5 billion growth fund. And we have an expansion fund for the companies that are global but pre-public. And then we have the Sequoia Capital Fund. And the addition has been the Sequoia Capital Fund recently. and we split out venture into seed adventure on the early team, and growth has been expanded from growth and expansion. But that's about it. It's not that complicated of a business and from a structure standpoint.

8:13But the idea is to be able to work with founders from idea to IPO and beyond. So we can invest pre-seed and seed out of our seed fund. We can invest in the Series A out of our venture fund. We can invest out of the Series B and C for our growth fund. For very select companies that we have a long-term relationship, we may invest free IPO out of our expansion fund. And then for the Sequoia Capital Fund, any of these funds that distribute the shares can go into the Sequoia Capital Fund because we think it's a long-term company that we want to hold. So for the Sequoia Capital Fund, I think it's been criminal in some sense that we didn't think about this earlier.

9:02I mean, we distribute these shares and our LP is just immediately, most of them immediately sell these shares. Imagine if you had just held Google. Not when we distribute it, but held it to today. Imagine if you had held NVIDIA to today. I think that the simple math would be something to the effect that we invested in Google, I won't use round numbers,$11 million in 1999. Today it would be worth probably$100 to$110 billion today. That compounding is why the Secorah Capital Fund exists today. and we wish we had had it back when the company went public. But the same is true with NVIDIA. NVIDIA was started as a seed investment in 1993.

9:55And I think our total investment in the company ended up being$4 million and it would be worth close to$60 billion today. Oh my God. And so not every company will compound the same way. But back to thinking about the long term, one of the things that we talk about here is having a long time span of discretion. We work with founders that with a decade of time can turn a seed of an idea into a product, then into a company, into a business, into a company that then can become a market-leading company, a category-defining company, that can become a legendary company. And if it does, over a time span of 10 years, they can turn a seed of an idea into a billion-dollar company, a$10 billion company.

10:49You let them compound that over 30 years in the right hands, you can turn it into a trillion-dollar company, which is what happened with NVIDIA and Apple and Google. Hey, we'll continue our interview in a moment after a word from our sponsors. That's a great overview of the capital side. I want to go into the arc and sort of the pre-company side because I've marveled at how this inspired me to start on deck is how YC has this incredible business model where they get hundreds, now over a thousand of companies a year where they get 7 % more now in exchange for a few months of working with them. um you know the uh yc you know helped airbnb at the very beginning um sequoia comes in and and you know does the does the investment in later rounds puts a lot more capital and a lot more work in and while sequoia did phenomenal on that investment which which you you led yc also did phenomenally and was able to do you know hundreds and thousands of more companies with with less work and it feels like this incredible business model.

11:55And I'm curious why firms like Sequoia or anyone else who has a great, good enough brand to be able to do it didn't compete head on earlier. I'm curious if one, you accept my sort of praising of their business model and two, why didn't that happen sooner? That's an interesting question. I let this pop up a level. YC has done a lot for the entrepreneurial ecosystem. I don't envy them that they came up with them with this idea i'm like we should applaud them for that and uh we should and we partner with yc a lot because they they are very good um and so why not partner with them and so i don't think of ourselves as competing with them on specifically about arc and yc we didn't launch arc because we thought yc was a better business model in fact i don't think ARK and YC are similar in many ways.

12:50We specifically are about building the company for the long run. We're trying to teach the best ways of company building that we've learned at Sequoia for the last 50 years. So we're not about the next quarter in our program. We're about the next decade. Could you see ARK getting to, if it's 10 companies a year or whatever it is at the moment, could you see it 10Xing to 100 companies a year? What could be the future of ARK? Well, I think we're running ARC cohorts three times a year. So one time in Europe and two times in the US. And there are about 10 companies in each cohort. I can't imagine it scaling much beyond that.

13:31It's not in our DNA to scale the number. we want to scale the opportunity of the invest of the companies we decide to back and so the scaling is we we decide to pick these 10 or 12 there's a dozen companies in a class and we want to scale their potential not scale the number uh and this is a different way of thinking we talked about the perm company we talked about arc because the feedback loops are so long in terms of knowing if you're being successful or not, what are the metrics by which you hold yourselves in terms of how do you know you're winning relative to the best of your peers? What are the sort of leading indicators that you particularly care about and track as a firm to make sure that you're the best?

14:18At the end of a decade, five to 10 years, you'll know, you'll have a scorecard of the companies that you decided to partner with, how much we invested, and then what the distributed value is. But before that, the question is always, do you look at markups? Yeah, we look at it, but we heavily discount that because we've seen lots of situations where markups are not being adjusted for market conditions or how the company is doing over a longer period of time. So we don't really look at that that much, but we do look at how's the company doing? every six months we have a semi-annual portfolio review where we go through every single company that's in our portfolio not the ones that have gone public and that are have been distributed but the ones that still exist in our portfolio and we we we look and we look back on what they told us they would do and we measure that that's one way to see whether the companies are on track And that's on the company building side.

15:29But specifically what you're asking is, okay, how do you break this business up? There's so many different parts of this business. There's sourcing. And are you doing a good job of getting in front of the right opportunities? And those are easy to define and measure. How many interesting companies are you taking a look at? There's picking. Among all the interesting companies that you decide to look at, which one did you decide to pick and why? How clear were your memos or your due diligence? How good are you at being a partner to the sponsor and coming up with good questions for them to think through?

16:10So it's not necessarily that I'm the sponsor, I'm fully responsible for it. My partner has also helped me see more clearly on the opportunity for this company. How have you helped and assisted in the picking with due diligence? Are you being a partner by calling a bunch of customer references and founder references to help out your partner? Then once you pick, you've got to win it. And that's very easy to measure. We decided as a partnership that we want to make this investment. Do we win or do we not? Usually we win. And then after that, it's company building. I think company building measurements are exactly what we just talked about, which is about portfolio reviews.

17:01How is a company progressing? and are you taking a lead role on the board to bend the arc of that company? Many of the companies that we work with, we judge ourselves on whether we're the first call of the founder when they have something to discuss. So it's very easy to measure some of these things. We also measure MPS of the founder, et cetera, but very simply, are you the first call? Outside of the GP structure, when you think about firm building, What have you guys learned about where do you get the most bang for your buck in terms of what to invest in, in terms of platform services or things outside of, hey, individual partners making investment decisions that adds the most value to founders?

17:46The founders will tell us what they find valuable. And we're not very loud outside, but every now and then we will say something. And the black swan memo was right before COVID shutdowns happened. When we were coming out of COVID and emerging, it's about adapting to endure because the market conditions were a little interesting. Interest rates are rising at a very fast clip. And so cost of capital has increased. What do you need to do to change your posture of investing? Because cheap capital has gone away. These things are few and far between in terms of us speaking loudly. But we are not just speaking to our founders, but we're also speaking to the ecosystem about what we think the right thing to do is.

18:34But you'll find that every now and then you'll find that we make some dramatic changes. ARK was launched two years ago because we found that we had over time been innovating on the program. And it started with Ruloff launching something called AMP. And it was actually for post-Series A companies where we're collectively teaching company building so that if I were trying to channel one of my partners, I just have my partner go up there and talk about it. If I wanted to talk about strategy, I'd just have Ruloff talk to them about strategy. And he loves talking about strategy. And if I wanted to talk about how a growth investor would think about how to value your company because you're at growth stage, just have Pat get up there and teach valuations and how he looks at financials.

19:30I can do that too because I'm a former CFO, but you just think about how everybody has their really strong competencies and channeling each of our partners and doing what they do best. And over time, we heard the feedback that what people really wanted was something that was a little earlier, not for companies that had product market fit. AMP was post-product market fit. We created something called the company design program because many of our seed companies that we invested in wanted the program, but they wanted it changed so that it was a little earlier. And then we changed the company design program to ARK because that's what our founders wanted us to do.

20:18So we're constantly coming up with new ideas, but we're also constantly iterating. And so we have this concept at Sequoia about from idea to impact. And there are lots of people who have ideas that don't take the initiative. So you have an idea, take initiative, try to run with it. It doesn't have to be perfect. But then you take initiative and then you iterate and get it to some level of high standard that would fit what our founders want. And then eventually you'll get impact out of that. So it's the idea, initiative, iteration, and then impact. Yeah, on those dimensions, there's a number of inflection points by which you can focus or try to add the most value.

21:06There's the coming up with the idea. There's helping them get in front of customers or introduced to customers. There's helping them hire an early team to bring the product to market. There's helping them fundraise. And presumably, you help across all dimensions. But have you found that there's a sweet spot or inflection point that you think investors can add the most value? and other ones where, hey, the founding team should really be taking care of this and investors shouldn't be as focused on it? Or how do you think about the different things that startups need and where investors should have the most value?

21:39One thing that we think about is the balance across the team. And if you look at Airbnb, Brian, Joe, and Nate, they're very different, but they complement each other. And so we look for outlier teams, but sometimes the outlier team is not completely balanced out and you want to fill in here or there or elsewhere. And so I think it's important to look at it from a bespoke perspective on how you can help. We like generally to give people frameworks and show them how it might have been done at another company, but then they have to do the work and do it themselves. So you can teach people how to recruit and what other companies have done, but they need to put it into practice.

22:24And so maybe that's where we would draw the line. I want to go back to the conversation you said you had a few years ago with your partners when you were talking about 2030. And some of the takeaways from that offsite you mentioned were that you started ARK and you went early stage, you went late stage with the Permacapital Fund. What are other ways in which you think venture might be different in 2030? Like in the same way that you said Sequoia isn't that different structured wise in the last 10 years. Do you think 10 years from now, it's going to be pretty similar? Maybe a couple of other big products like ARK and Perm Capital?

23:00Because there was this idea a few years ago that, hey, venture is going to evolve and become more data-driven, or there's going to be new types of products or new types of platforms, and it's not just going to be the same thing that it has looked like for the past decades. Where do you stand on how do you expect venture to evolve in the future? You should expect this business to always be, in almost any industry and any business, to be somewhat barbelled. There's just truths about the business that is not going away. And so in some sense, that's not going to change. And then there are things that you're constantly innovating because areas that are interesting to invest in changes, the type of ways that you find new investment changes.

23:47But in terms of innovation, your job is to continuously figure out what new ideas that you need to have to continue to make yourself front and center. And the one thing to always think about is just to be customer obsessed. We have a line at Sequoia about being customer-obsessed first and then competitor-aware second. And then I learned that from Amazon in some sense. Bezos always talks about we only listen to our customers. And it's not exactly true. He does have a benchmarking group, so he knows what his competitors are doing. but really just if you listen to your customers they will tell you what they want and doing that is half the job the other half of the job is to invent on behalf of your customers well put we've been we've been talking about firm strategy but of course firm strategy is synonymous with partner strategy so talk about what makes for a great sequoia partner today how has it changed over time and how is it perhaps different than other firms?

24:57I've heard Sequoia partners described as they're killers, they're stone cold killers in the positive sense. I'm curious how you think about what distinctly makes it a Sequoia partner. Well, my partner, Pat, likes to use the term highly competitive with a heart of gold. And I think that encapsulates both the supportive and demanding aspect that we hold ourselves to as well as we hold our founders to. And I think the words were used very, very deliberately because hyper-competitive in the sense there are people who are driven. They go to the gym every day and they work out every day, but they're not a competitor.

25:40Competitor means that you will get on the field and take the shot. And the highly competitive part is there's three seconds on the clock okay are you gonna take the shot how many people are gonna be like screw it it's three seconds on the clock i don't know if i can make it i'm not gonna take the shot at that point there's a set of people who will and then there are people who will take the shot and then the question the next question is will you make it um you're not gonna make it every single time but what is your chances of lasting for the whole game and there's three seconds on the shot clock and you still, you just are hyper-focused on making sure that you get the ball and you take the shot and get the shot in.

26:20And then the second part of having a harder goal, I don't think you can do this job if you don't care. And you got to care for your founders, you got to care for the company, you got to care for its employees. It's just a lot easier when you care about the eventual outcome and in a way that is not about money or about the IPO or about the dollars gained. It's about the fact that you're helping build something that didn't exist before. Many of the founders that we back, they start their company because they see a problem in the world and they want to go fix it. And we want to help them fix it. And we want to go change the world with them.

27:12And I think that that's what we look for in our partners. And so one way to think about it is there is a P &L, but you're going to take, I don't know, somewhere between 30 and 60 shots in a career if you work in this business for 20, 30 years. What are those slots? What are the name of the founders that you're filling those slots with? What are the names of the company that you're filling your slot with? And do you feel good about that? Do you put care in which names you're going to fill each box with? Hey, we'll continue our interview in a moment after a word from our sponsors. Picking a great investor is perhaps in some ways different than picking a great founder.

27:57And you don't always pick your investors who previously founded big companies before or who achieved great notoriety or something or a big audience or some big deal flow mechanism because you at Sequoia already have the brand, but it seems like you really bring on people who are certainly extremely accomplished and extremely well thought of, but who really want to dedicate themselves to the craft of being a great investor, which is perhaps different than being a great entrepreneur. I think the dedication is important for both. If you're going to be a great founder, you're going to be dedicated to your craft.

28:35And if you want to be successful at Sequoia, you will need to be dedicated to your craft. And the craft here is about sourcing, it's about picking, it's about company building. And it's across all those dimensions. And not everybody will have every single one of those things checked off when they join. But it's willingness to learn from your partners. It's willingness to leverage your partners because we think of ourselves as winning as a team. The way we win as a team is we leverage each other for sourcing. We leverage each other for picking. We leverage each other for company building. And, you know, back to some of the examples, we use ARC.

29:23Why do we have ARC? Because every single person has maybe their very special area that they can teach. Well, there are specific areas that I'm just not as good at. So both at Airbnb and DoorDash, if it wasn't for Bill Korn, I don't know if we would have gotten the best choices for VPs of engineering and CTOs at each and every stage of the companies. And it's because I leveraged my partner, Bill, that allowed me to help Tony and Brian pick the best CTOs for their stage of company at that time. Many of the questions around company building I got from my partners because they read the memos and they asked very important questions.

30:07And they became first order issues at board meetings. And that allowed me to go focus on those issues with the founders at DoorDash, at Airbnb and various other places. So what we like to think about is we like to bring together the team and have people who are different from each other. But what we like is to have them come together as a team and be able to look at a problem. And in this case, it's evaluate a company. Or during portfolio view, evaluate the performance of that company and have a 360 view. Someone will have a view from finance. Someone will have a view from operations. Someone will have a view from sales.

30:55Someone will have a view on product. And we can look at it, look at that problem from a 360 degree view. And we often tell the founders that we back, if you get one of us, you get all of us. And that is, I think, very different than how a lot of funds and firms work. I'm curious, given that you've gone from early to late, why not go even, what do you think about the incubation stage? We had General Catalyst come on and talk about the billion-dollar creation fund for incubations. I'm curious, what are your thoughts basically about venture firms incubating companies and how you think about Sequoia?