Uncapped #28 | Roelof Botha from Sequoia

Roelof Botha joined Sequoia in 2003 and serves as the managing partner and steward. Roelof led early investments in YouTube, Instagram, Natera, and MongoDB among others. He currently sits on the board of Natera, Unity, Block (fka Square), MongoDB, Ethos, Pendulum, Airtime, and Flow Engineering. Roelof also co-led Sequoia’s backing of Elon Musk’s acquisition of Twitter (now X) in 2022. Prior to Sequoia, Roelof was the CFO of PayPal and led the company’s IPO at the age of 28, and later through its acquisition by eBay. We covered: Paranoia that drives success Venture not being an asset class Full contact conversations Cost being the secret to Silicon Valley The next trillion dollar markets --- Timestamps: (0:00) Intro (0:52) Becoming the steward (5:16) Keeping healthy paranoia (9:26) Drivers of joy as a leader (11:17) Current venture playing field (13:38) Venture is not an asset class (18:50) Advice to new managers (19:47) Decision making at Sequoia (30:11) Investing across stages (37:12) Component of cost (46:57) Conflicting investments (50:48) The next trillion dollar markets (59:30) Team building --- More on Roelof: https://x.com/roelofbotha https://www.sequoiacap.com/people/roelof-botha/ More on Jack: https://www.altcap.com/ https://x.com/jaltma --- https://linktr.ee/uncappedpod Email: [email protected] --- This episode is presented for informational purposes only and does not constitute investment advice or an offer to sell, or a solicitation of an offer to buy, any securities. The discussion herein similarly does not constitute a solicitation with respect to any Sequoia fund or an offer of investment advisory services. Investments identified herein are discussed solely for illustrative purposes and there is no guarantee that current or future investments of Sequoia will be similar in quality or kind.

• 0:00Speaker 00

  When you're in my shoes as sort of part of the third generation to run the partnership, there's this enormous burden that Sequoia has been at the top of its game for a long time.

• 0:07Speaker 01

  Yeah.

• 0:07Speaker 00

  And we have these legendary companies that we've participated in. It was something like thirty percent of the total value of the NASDAQ is comprised of companies we were investors in when they were private businesses.

• 0:16Speaker 01

  I still don't understand how that happened, but that's crazy. Yeah.

• 0:18Speaker 00

  And so there's this expectation of, can you keep going?

• 0:22Speaker 01

  I am super excited to be here with you today and I was just commenting to a friend that I was gonna mess up your name before we started. So I haven't done this before, but could you introduce yourself?

• 0:31Speaker 00

  My name is Roelof Boetan.

• 0:33Speaker 01

  I'm not even gonna try, but you know, I've been really looking forward to this. This was also probably the best pre-chat conversation I've had, where it turns out we both had a detached retina and this miserable surgery. So I feel like you'd have gotten to bond with you over that. It was brutal. I hated it.

• 0:48Speaker 00

  Misery loves company and we can certainly bond over that experience.

• 0:51Speaker 01

  Spikes in your eye. Okay, here's where I wanted to start. I was thinking about trying to put myself in your shoes and you're running what I think is widely considered the best, strongest, most storied venture capital firm. And you've been running it for three years now. And the first place I wanted to start was, tell me about your mentality on day one, when you became, you know, the head, the steward of Sequoia? And how has it evolved over three years? And what has updated for you in your mentality as a leader of the firm?

• 1:21Speaker 00

  Interesting. So Sequoia has a long history of generational transfer. And so we have a very interesting culture where we, hence the title stewardship. We are momentarily, we have the privilege of working in Sequoia and we have a duty to leave it for the next generation. And so even when I joined in 2003, I had the sense that there were people ahead of me who were willing to invest in me and nurture me and train me in a mentorship fashion. And maybe down the road, I'd be in a leadership position at Sequoia. So I think it says a lot about the culture that we have. And so we don't have a lot of discontinuities in our leadership. So when I joined and Michael Maritz and Doug Leoni were running the partnership.

• 2:00Speaker 01

  Yeah.

• 2:01Speaker 00

  Don was still around. Don interviewed me. As the founder, he wasn't overbearing, but he was present and he provided counsel without having to be in the room. And if there was a disagreement, he respected that. I became the steward actually of the US business in 2017. Jim Getz and I had been running the US venture business since 2010. And in 2017, I took over all of the US business when Doug was our senior steward globally. And then, as you say, in 2022, I became senior steward. And then, but I think the point is that really that there's a lot more continuity than you may think from the outside.

• 2:35Speaker 01

  Yeah.

• 2:35Speaker 00

  This week alone, I've spoken to both Doug and Jim. Both of them have been leaders here before about interesting topics that I needed their input on or wanted their input on. Not because they have the right to it, but because I want their help. And that's the kind of spirit we have at Sequoia.

• 2:49Speaker 01

  When you think about sort of what that, you know, that steward role means. It struck me when I was speaking with Peter at Benchmark. And one of the things I thought was really cool was there was this sense that it's like bigger than you. And when there's this thing that's been going for a long time and it's been passed from leader to leader and you're thinking about the future. Obviously, that's got some impact, but I'm curious how that shows up like day to day. Because like, you know, maybe we can get into this, but take it like the opposite extreme. Like, I just got started. Like, obviously, there's not, like, the steward concept makes no sense to me yet. Like, I'm just at the beginning.

• 3:24Speaker 00

  Congratulations, by the way, on your new fundraising.

• 3:26Speaker 01

  Yeah.

• 3:27Speaker 00

  Two hundred and seventy five million?

• 3:28Speaker 01

  Yeah, that's nice.

• 3:29Speaker 00

  Very nice.

• 3:29Speaker 01

  It's a start.

• 3:30Speaker 00

  Get another competitor?

• 3:31Speaker 01

  Absolutely, I'm a big one, a hundred percent.

• 3:34Speaker 00

  Collaborator, hopefully.

• 3:36Speaker 01

  Yeah, exactly, for now, you know. But I think I'd imagine in your shoes that daily, there is a sort of presence behind it of like, this thing is, this thing is big. And it's, there's something before me, there's something after me. Does it impact the way you make decisions or how you operate?

• 3:51Speaker 00

  It comes with an enormous amount of pressure.

• 3:53Speaker 01

  Yeah.

• 3:54Speaker 00

  I would think. You know, Don obviously made a wise decision to not call it Valentine Ventures, which was a pretty viable option at the time. And most people would have put the names of the founders on the door back in those days for most professional services firms. And he called it Sequoia for a reason. Square trees can live to be 2,000 years old. He wanted to have a partnership that would outlive him and invest in companies that would endure. So that was an important ingredient. I suspect it surpassed his expectations, just as we are sometimes, often.

• 4:23Speaker 00

  Always. Surprise to the upside by our winners. But then when you're in my shoes as sort of part of the third generation to run the partnership, there's this enormous burden that Sequoia has been at the top of its game for a long time.

• 4:35Speaker 01

  Yeah.

• 4:35Speaker 00

  And we have these legendary companies that we've participated in. It was something like thirty percent of the total value of the NASDAQ is comprised of companies we were investors in when they were private businesses.

• 4:43Speaker 01

  I still don't understand how that happened, but that's crazy. Yeah.

• 4:46Speaker 00

  And so there's this expectation of, can you keep going?

• 4:48Speaker 01

  Yeah.

• 4:49Speaker 00

  Now, don't screw it up. And that comes with enormous pressure at some level. And so there's an important dynamic of how do you leverage this incredible platform that you have? I mean, I think we all feel privileged that we can do the best work we could possibly do because we have the benefit of the Sequoia brand.

• 5:03Speaker 01

  Yeah.

• 5:04Speaker 00

  We can win investment opportunities, open doors for our founders, help them do things for their companies, to help them realize their ambitions that I wouldn't be able to do if I was anywhere else. And that's an incredible privilege. And yet we have to continue to innovate. Because I think there's a real temptation for leaders in industries to end up resting on their laurels. And you end up with the innovator's dilemma where they stand still and they quickly become yesterday's winners. So if you, actually, I did this exercise when I joined. If you look at the top venture firms in Silicon Valley in nineteen ninety, the majority of them no longer exist. There's a long half-life in the venture business, but there's no guarantee that you will succeed long-term. And so there's this insecurity that we have at Sequoia that really drives us. And it comes out in the sort of people we recruit.

• 5:46Speaker 01

  Yeah.

• 5:47Speaker 00

  The culture we have, the idea that we need to be both performance-focused but also innovative.

• 5:52Speaker 01

  How do you keep the paranoia or the sense that like, you know, we're only as good as what we did yesterday? Because what I observe is there's a lot of firms that are good but not Sequoia, where there is much more of a sense of, you know, comfort and sort of, maybe resting on laurels is too strong. I think like ventures competitive in twenty twenty-five. And I think most people are working hard. But I would say Sequoia is, you know, if there's a quadrant of like, how successful and longstanding the firm and how paranoid, like Sequoia somehow seems like it's really got both, which is weird.

• 6:24Speaker 00

  It's not always the easiest place to be, by the way.

• 6:26Speaker 01

  Sounds stressful, by the way.

• 6:27Speaker 00

  It is very. Actually, if you come upstairs to our office where the investors go grab coffee and snacks. On the wall, wall to wall, in each individual's handwriting, we have printed the handwriting that says, "We are only as good as our next investment." And so every single day, when I go grab a cup of coffee and I look at that wall, I see my own handwriting and it's a reminder. "We are only as good as our next investment. We cannot rest on our laurels." And so I think some of that is the sort of people you recruit. Some of that is the culture that we hone at Sequoia. We care so deeply if we lose an investment. We are very diligent about looking at the coverage analysis of what our competitors invested in. And did we have a shot at that investment? Did we miss it? Did we not understand it?

• 7:11Speaker 00

  Is there a category that's emerging that we're slow to identify? We obsess about that. So I think it's a cultural trait. You have to nurture that.

• 7:19Speaker 01

  And the cost is that it's stressful, right?

• 7:23Speaker 00

  Yes.

• 7:25Speaker 01

  That's the only way.

• 7:26Speaker 00

  Yeah, but you know, winning feels good.

• 7:27Speaker 01

  Yeah, of course. It's interesting where, actually, I'm curious because, you know, if you're the Yankees, you expect to win. Is there any dynamic where it's like you become so deeply seated that it, that the pain of losing hurts more than the joy of winning? Or how do you basically keep culturally this paranoia? And, you know, we've got to stay there and keep it joyful? Where it's not just the sadness of losing and a relief when we win, but like a joy?

• 7:56Speaker 00

  I think you'd find that most people who are very driven and competitive will say that there's an asymmetry and that the pain of a loss is far greater than the joy of a victory. I think you'll find that with most people that are driven and successful. And so I don't think you can wash that away or wave that away. I think it's a reality. We have tried over the last decade especially to do more to celebrate our victories. One of my partners, Jim, gets used to talk about how, you know, we don't do celebration well at Sequoia. I think after the YouTube acquisition, we literally spent about 15 minutes. We huddled around the reception area of our office and we said, "Great." And then it was back to our desks. And and he was a little bit surprised that we don't take more time to celebrate.

• 8:37Speaker 00

  So we've tried culturally to embrace celebration more and also to tell the stories. So one of the things I'm really proud of is every time there's a successful outcome. You know, most recently, we had the Klarna IPO, the Figma IPO earlier this year, the Wiz acquisition. And we were early investors in all these companies. We would write an email internally and we would celebrate not only the person who was then the board member, but everybody else that had an influence in that success. The person on our talent team that recruited that key executive that made a difference. Or, you know, the communications team that helped craft the narrative for the IPO story. Or our legal team that spent endless hours figuring out, you know, some nuance around governance or how the company was structured. Sometimes the people who did diligence or who found the company were not the people who were the board members by the time there was an exit.

• 9:22Speaker 00

  And so we celebrate everybody's contribution because we also play a team sport here.

• 9:26Speaker 01

  What for you is like the most enjoyable part? Is it about the companies you're working with? Is it like something to do with the team? Is it like a purpose thing that's like greater than the day to day? Like what drives your sort of satisfaction now?

• 9:41Speaker 00

  Interesting question. There are a couple of answers to that. I mean, probably the most important one is leaving Sequoia in a phenomenal place. And, you know, I'd love nothing more than, you know, a decade after I'm I'm long gone at Sequoia, being able to look at the team and see them flourish. That is probably the thing I think about most. And if the team flourished, that has a lot of inputs to that. That means that we've maintained a certain culture while we've continued to innovate. And it means that we're serving our founders. It's the development of individuals that I get a tremendous amount of joy in. You know, whether it's a young person who joined our investing team and a decade later I see how they're flourishing.

• 10:20Speaker 01

  This is my favorite part of running a company.

• 10:22Speaker 00

  With individuals, yes.

• 10:23Speaker 01

  Yeah, just getting to see your team grow. And, you know, you, you know, somebody joins when they're early in their career and then you just see a completely different person five years later. It's very gratifying.

• 10:31Speaker 00

  Yes, and the same with founders. I mean, the founders I've worked with, with, I think about MongoDB when we were an early investor in 2010 and what happened to them. I think about Jack when we first invested in Square 15 years. Years ago and the kind of company it's evolved into and how Jack has developed as a phenomenal business leader. I look at some of the the more recent investments we've made because you know I've helped us lead three investments this year in a variety of categories. Not all the investments are um publicized yet, but one of them is a, you know, is a young founder. First time company, he's a solo founder and we had a fabulous thirty minute conversation yesterday about some of the challenges that he's dealing with and just having a sounding board of me being able to talk to him to help him navigate a tricky issue. So much gratification that comes from that, the ability to pay it forward.

• 11:16Speaker 01

  Totally. When you think about Sequoia and its position in like an evolving venture landscape, I'd be curious to hear at sort of a zoomed out level, how you're reading sort of the playing field today. And obviously we've got like a bunch of dynamics happening at once, like you've got AI obviously is like the big tech wave that's going at the moment. There's others too, but like that's the dominant one. You've got like a bunch of firms that are really scaling capital. Some are, you know, new, some are older. Um, you've got firms that are institutional and sort of have been around for a long time. You've got sort of new up and coming founder led firms. I'm curious, when you think about that whole landscape, are you able to sort of give like a summary lay of the land of how you maybe like see things? Or what's your framework for the venture world right now?

• 12:01Speaker 00

  So we have the benefit of seeing seeing many cycles over fifty years plus at Sequoia. Obviously, the scale of what technology impacts today is different from what it was a decade ago, two decades ago. Technology just affects far more of the world than I think we could have imagined. So the scale is different, but you know, history doesn't repeat, it rhymes. And I see echoes of nineteen ninety nine, I see echoes of what happened in two thousand and eight, I see some echoes of what happened in twenty twenty one.

• 12:29Speaker 01

  Happening now.

• 12:30Speaker 00

  Happening now.

• 12:31Speaker 01

  Yeah.

• 12:31Speaker 00

  The claims that are gravity defying. You know, this is different. Mm hmm. You know, and I sort of go back to the principles of investing. You think about the truisms of Benjamin Graham's teachings. I think those remain. And things got a little unhinged in ninety nine and it was different this time and it wasn't. And then it was different in two thousand eight and then it wasn't. And so I I just worry about that a little bit. That AI will have a tremendous impact and some of their innovations that you mentioned, whether it's in robotics, whether it's happening with stable coins and how that might change financial services. There's a lot of innovation happening. I'm really excited about the future we're going to build. We inevitably overestimate these in the short run. Yep. And underestimate them in the long run. You know, I'm reminded of the fact that it seemed pretty obvious in two thousand, two thousand one that e-commerce was going to be dominant.

• 13:15Speaker 00

  And yet here we are twenty five years later and e-commerce is not even twenty percent of US purchases. It's crazy. It's incredible. It's taken a long time. Think about how long it's taken us to do unbundling of cable. Didn't it seem obvious that media should go this way? And so I think human behavior changed a little more slowly than technology is presenting us with. So I I think it'll take a little bit more time. I don't think venture is an asset class. Why not? It doesn't support the numbers. So there was a lot of analysis back in the nineteen seventies and eighties with, you know, the capital asset pricing model. And people figured out that there's this asset class that supposedly has uncorrelated returns. And a bunch of asset managers deem that they need to invest a certain percentage of their endowment or foundation or pension fund into this thing called venture capital.

• 14:00Speaker 00

  If you look at the data, they're basically twenty companies per year on average over the last twenty, thirty years. Then have ended up being worth in realized exits, a billion dollars or more, just twenty companies. Despite a lot more money plowing into into venture capital, we haven't seen a material change in the number of companies that are outcomes that are that large. And I think part of that is that there's a lot more talent than really interesting ideas or interesting companies to be built. And I think we're spreading a lot of that talent thin right now, similar to what happened in nineteen ninety nine, by the way. Yeah. So when you look at the data, the amount of money going into venture capital right now in America is in the order of $250 billion a year. And the numbers, you know, these are all estimates. Let's just say it's $250 billion a year.

• 14:42Speaker 01

  Need a lot of exits.

• 14:43Speaker 00

  Well, let's just do some very simple arithmetic for a second. $250 billion going in every single year. If you assume that the firms generate 12% IRRs net, net of fees and carry, which isn't that great, by the way. I mean, over the last three or four years, the Nasdaq has compounded at 16, 17%.

• 14:58Speaker 01

  Right.

• 14:59Speaker 00

  Let's just say 12%, not spectacular. Basically, just average performance. You'd need a 3.7x roughly.

• 15:05Speaker 01

  On 10 years.

• 15:06Speaker 00

  On a seven-year exit horizon. So I'm being a little bit aggressive with that. I mean, maybe it won't even be that good. So 3.7x on 250 billion, that approximates to a trillion dollars a year.

• 15:15Speaker 01

  Coming out.

• 15:16Speaker 00

  Coming out. By the way, that means, and that's what the investors own. So let's say that the investors own two thirds of the company, to make the arithmetic simple. That's 1.5 trillion annually in company exit value.

• 15:27Speaker 01

  Yes.

• 15:28Speaker 00

  Just think about that for a second.

• 15:29Speaker 01

  Where's that coming from?

• 15:30Speaker 00

  Well, Figma's worth what?

• 15:32Speaker 01

  It's a lot, but it's.

• 15:32Speaker 00

  Forty-ish billion. I mean, that's.

• 15:34Speaker 01

  Let's say it's worth, you know, 0.03 trillion. So, you know, if you start thinking in trillions and Figma gets you 0.03 trillion.

• 15:41Speaker 00

  You need 30, 40, 50 Figma's every year.

• 15:45Speaker 01

  Yeah.

• 15:46Speaker 00

  To make that arithmetic work. It just, I don't see that many companies of that scale every year. So the only thing breaks is the return assumption doesn't hold.

• 15:55Speaker 01

  Yeah.

• 15:55Speaker 00

  And so venture is a return-free risk.

• 15:58Speaker 01

  Hmm.

• 16:00Speaker 00

  Not a risk-free return.

• 16:00Speaker 01

  That's terrible. Yeah.

• 16:02Speaker 00

  You are better off investing in the index or holding T-balls, honestly. And so I don't think venture is an asset class. Asset classes scale if you add more money. You can build more real estate. There's a lot of equities. There are, you know, trillions and trillions of bonds to be purchased. Venture capital doesn't scale with more money.

• 16:18Speaker 01

  I agree with you, but just to take collective, sort of just to take sort of like, what would the collective argument be that like, you know, the, that the herd is all betting is happening? I guess there could be two things. One argument would be these companies are going to be bigger than ever. This is kind of roughly what Mark Andreessen said on the podcast, was something like, there's going to be multi-trillion dollar companies in a way that there haven't been in the past. And you look at. AI and SpaceX and Anthropic and Anduril and so on. And there's a lot more coming out than there ever has been before. That's argument one. I guess the other argument is everybody thinks they're a better than average driver. Everybody thinks they're better than average allocator as an LP and a GP. And so, yes, the overall asset class isn't doing well, but I as a particular OP know how to pick the good ones.

• 17:00Speaker 01

  And so the top decile is going to be great. Do you think that there is wiseness in the number of dollars going in like where the, you know, overall industry is like, does it make sense? Or is it collectively smart or collectively stupid?

• 17:14Speaker 00

  Well, firstly, I agree with Mark that the scale of the outcomes are completely different today and will be even bigger in the future than there are now. So I'm not trying to be a Luddite saying that, you know, we should go back to the way the business was.

• 17:24Speaker 01

  Yeah.

• 17:25Speaker 00

  You know, when I was at PayPal, there were roughly 300 million people on the planet that had access to the internet and most of them were on dial up. And today we have what? Four billion people with, you know, high speed mobile devices connected to the internet. We have all this data. So the world is completely different and the scale of the outcomes is much, much bigger. So I completely agree with that. It's just that I don't think there are enough of them.

• 17:45Speaker 01

  Right. No, I hear you. The nuance you're saying is there might be one and a half trillion dollar companies, but is there one every year?

• 17:52Speaker 00

  That's tough.

• 17:52Speaker 01

  Doesn't seem like it.

• 17:53Speaker 00

  That's the thing that is really challenging this equation. I just don't think there are enough to make the math work for it to be an asset class. Is it an industry? Absolutely. Does it account for a lot of innovation in America to keep our economy competitive? Absolutely. Does it drive an enormous amount of job creation? Yes. All of those things are true. I just don't think it's an asset class. It's that particular word that I have an issue with. And the amount of money I think is an excess of what the industry can bear to generate good returns. So that is my quibble. And people thought that, you know, gravity, we'd gotten rid of gravity in 2021 and that we're going to have so many more spectacular outcomes. And it just did not prove to be true.

• 18:31Speaker 01

  Yeah.

• 18:31Speaker 00

  Not enough to merit the amount of money going in. So I think there's a little bit of the prospect theory.

• 18:36Speaker 01

  Yeah.

• 18:36Speaker 00

  Think about Kahneman and Tversky's original paper. I think there's a little bit of, you know, people are risk seeking in this domain where take a chance. Maybe I'll be lucky, you know, maybe I'll get the double zero on the roulette table and, you know, now's my chance. I think that drives more of this behavior.

• 18:50Speaker 01

  Let's say you were like, you know, on my board at Alt Capital. What would you be pushing for me if you were like trying to give me advice or trying to push on the thing that a new manager, you know, getting started needs to do to be successful. If you want to build something that lasts, what would you be harping on?

• 19:06Speaker 00

  The network you build, the tributaries you develop for getting access to interesting emerging investment opportunities. This is not a business that you do sitting at a desk, right? You need to get out there. You need to be able to meet people and understand where interesting new founders are thinking about building businesses. And part of that is being smart where they want to have a conversation with you. So you need to, you know, study up if it's not your field necessarily. Can you study up on the categories that they're innovating on? So that you can have interesting conversations that are memorable to them because it is a competitive business. And then you need to be congenial. People want to do business with people.

• 19:46Speaker 01

  Yeah. When you think about the best investments that you've made over the last, I don't know, let's say five years or something. Do you feel like more of them are deals that were controversial at the time and you picked something that was hard to pick as a firm? Or do you think it was deals that were clearly good and competitive? And you won them through relationships and effort and all the rest?

• 20:08Speaker 00

  A bit of both.

• 20:09Speaker 01

  Yeah, yeah. Like if you had to like bucket them, do you feel like it's like a good mix?

• 20:13Speaker 00

  It is a good mix. I mean, Zoom with a Z.

• 20:16Speaker 01

  Yeah.

• 20:18Speaker 00

  Or Z as I grew up saying, was one of those investments that was not controversial. We all thought it was spectacular. The company was already generating cash. Eric had built a truly differentiated product in video conferencing. And sort of belied all the naysayers that that was a tough category. And the challenge was winning the investment. And we were able to win that investment. And that was, that was a case where we were all above the line, so to speak, in our internal voting system. And then there are other ones that are maybe a little more controversial where it's, you know, it's a little more fuzzy. We had one actually last year. It's in the, it's a company called Aspora. They provide non-resident Indian remittance services and they're

• 21:00Speaker 00

  Built on stablecoin infrastructure. So they're really reinventing the whole process and not dealing with the interbank system that's expensive and cumbersome and slow and non-transparent. And honestly, that was a case where I didn't quite get it. I was the one person who listened to the presentation and I really liked the founder path. I thought he was super dynamic and I was a little bit worried that there were a lot of risks in the business. And then I looked at the the assessment from the rest of the team and I figured out I'm the one who doesn't quite get it today. Maybe I maybe I didn't sleep well. Maybe I got out of the wrong side of the bed this morning. And so we looked at the vote distribution and I said, despite my inclination, we should absolutely make this investment. We did. And when we did the first portfolio review, um, I was relieved that we did make the investment because the company is absolutely flourishing and I'm glad I I didn't block it.

• 21:45Speaker 01

  Which is actually probably super important as a firm leader to be like, you've got, you know, things about, you know, your vantage point that are going to help. But trusting the team in those kind of cases, obviously, it's a good, good reminder.

• 21:55Speaker 00

  Yeah. And I think the, thank you for saying that. The, the, the one thing we've realized, um, when there are controversial decisions, you, you sometimes have one or two people who don't quite get it. And we make consensus investment decisions at Sequoia. Actually, when I joined Sequoia, it blew my mind that that was the case. It's sort of, I thought that committees were the, you know, this is exactly where bad ideas happen. And then I understood that Sequoia has this approach to teamwork, which means that every time we make an investment, it's our investment. It's not your investment, it's our investment. And it means that six months down the road, when you need help hiring somebody or you have a strategic question, I'm helping you. I'm, I'm not going to brush it off and say, it's your problem. You, you made that investment over my objection. So I understood the power of us making investments as a team.

• 22:37Speaker 00

  But that means that sometimes you have a controversial investment where one person is a negative and everybody else sees it. And Airbnb was a little bit like this. When the three founders came in, it was, I mean, it was Airbnb and breakfast at the time. It was just the three founders. It was a nascent company and there were a few people in the partnership who had, who struggled with this idea that really strangers are going to stay in each other's rooms. I mean, Is that gonna happen? Those people were willing to go with the conviction of the sponsors and gave the full support after we had the conversation and didn't block it. So I think we've tried to harness that kind of decision process. You still have a forthright conversation, but we empower those who have conviction.

• 23:13Speaker 01

  Do you need to ultimately get a unanimous yes from like as part of the deal there? That like there's a sponsor and they have to convince other people? Or can you get through somebody who's like, I still think we shouldn't do this?

• 23:23Speaker 00

  What we've done with our wedding distribution as we discuss investment opportunities is we wanna have a full throated, full contact conversation, as we call it. And it has to be about the merits of the investment, by the way. It's nothing personal. As soon as you walk out of the room, it's as though nothing had happened.

• 23:38Speaker 01

  Yeah.

• 23:39Speaker 00

  Cause it's very important.

• 23:40Speaker 01

  It's so hard to have that. It's so powerful when you have it. It requires a lot of, I mean, maybe you could do what people don't like each other, but I feel like you have to like each other and you have to trust each other.

• 23:48Speaker 00

  The key is to trust each other, by the way. And one of the things we do when we have our off sides, we do these check-ins with each other.

• 23:53Speaker 01

  Yeah.

• 23:54Speaker 00

  And almost every time we do a check-in, somebody cries. At least one person cries. And people talk about what's happening with family health issues. They talk about challenges they're having with one of their portfolio companies, whatever it is. We have an incredibly transparent conversation with each other and it's, we've done all these other things to build trust. Cause that's what you need. You need that, that well of trust if you're gonna have these kind of investment conversations.

• 24:17Speaker 01

  Yeah.

• 24:18Speaker 00

  So the idea is to lay it all out. And if I don't quite see it the way you do, I'm gonna give you my full opinion. And then at the end of the conversation, if I feel that you've really listened to my objections, you've weighed them, you've digested them, maybe you've come back a week later and you've actually answered some of the diligence questions and you say, listen, Driloff, I hear your objections, but I see it this way. I then have to decide, am I gonna block it? Or am I gonna say, I'm glad you heard it. I don't quite see the same way, but I'm gonna ride with your conviction.

• 24:46Speaker 01

  Yeah.

• 24:46Speaker 00

  And that's part of the nuance of a subtle investment conversation that we have to get right.

• 24:50Speaker 01

  Yeah. And if you don't have that, the alternative is like, I think this is a terrible idea and I'm just gonna like graciously bite my tongue and then like complain about it to somebody else in the firm later, which I think is a common state of dysfunction in venture.

• 25:02Speaker 00

  Yeah, we have this phrase, front stabbing.

• 25:04Speaker 01

  Mm hmm. Like if you're saying something bad, say it to them. Yeah, it's really hard. It requires a certain culture. It's hard.

• 25:11Speaker 00

  And that's why I'm exhausted at the end of Mondays, by the way.

• 25:13Speaker 01

  Yeah, but.

• 25:14Speaker 00

  At the end of a Monday partner conversation, I think our whole team feels this way because we're thinking about making really consequential decisions. By the way, it's part of why we keep our Mondays very light. Like Mondays, it's like the Olympic finals. This is where we make investment decisions. That's what we're getting paid to do.

• 25:29Speaker 01

  How do you avoid people being afraid to give you like the front stab? Cause I'm sure you want it.

• 25:34Speaker 00

  You're right, because um.

• 25:35Speaker 01

  It's hard.

• 25:36Speaker 00

  We want the triumph of ideas, not the triumph of seniority. It's really important. So um to give you one sense, we had an offsite in 2019 where we were debating student strategic decisions for Sequoia. And we asked each team member to write a pre-mortem and a pre-parade for Sequoia in 2030. So this was in 2019. So it was roughly a 10-year horizon. And this pre-mortem pre-parade, we put in our investment memos as well. And then we anonymized each person's write-up. Because we wanted to be untainted by the name or the seniority of the individual. We only wanted to focus on the merits of the ideas. And the criticisms and the, you know, you know, what might go right, what might go wrong. When we do an initial vote on an investment on a Monday, we do it anonymously.

• 26:19Speaker 01

  How many people are in that Monday meeting? Like, how big a group can you have looking at things together?

• 26:24Speaker 00

  So we separate our early team and our growth teams' conversations. And then we get everybody's vote, even if they're not yet a managing member, because we want everybody's input. So it's roughly a dozen people. For each fund, we only have six technical decision-makers, because we think you want to have a small number of people actually feel the accountability in the heat for the final investment decision.

• 26:41Speaker 01

  Six is good.

• 26:42Speaker 00

  But we have a dozen people who would vote, because somebody who might have joined a year ago might have the right insight. It might be the person who just graduated.

• 26:48Speaker 01

  Yeah.

• 26:49Speaker 00

  Who has a fabulous connection or a fabulous insight on a new emerging technology. We want to harness their insights. But we look at an anonymous vote distribution. And if you look at that and you go, hmm, we have, we have three people that are below the line. That's interesting. And and how do we tease that out in the conversation to really have a a proper conversation?

• 27:07Speaker 01

  When you think about like um natural limits to scaling a venture firm effectively, obviously, we just talked about like the money in money out thing. It would strike me, and I was like, you know, we're very, but it would strike me that

• 27:19Speaker 00

  How many people do you have in your firm?

• 27:20Speaker 01

  There's uh three others besides.

• 27:21Speaker 00

  You plus three.

• 27:22Speaker 01

  Yeah.

• 27:22Speaker 00

  And are they all on the investing team or is some of that?

• 27:24Speaker 01

  We all kind of, I mean, it's so early that we're all sort of like working together. You know, and I'm like, they're all earlier in their career than me. But like, it's a team that like what you're describing, like I trust a lot and who will tell me when I'm, you know, when they think what I'm saying is stupid or when I don't, I will very much defer to their judge, like their judgment, I think, I don't have any particular reason to think that my judgment's any better. And so, you know, there's advantages and disadvantages to all this stuff. But I think of it very much as like a team where um I know about myself that I'm too optimistic and I believe in people too much and I think any idea can work and I am dreaming about the future all the time. I just know about myself.

• 28:02Speaker 00

  You and I are like.

• 28:03Speaker 01

  I need to be balanced.

• 28:03Speaker 00

  Naive optimism.

• 28:04Speaker 01

  Yeah, I need to be balanced with people who remind me that most companies aren't big. And this is how it works. That's like my starting point in the world is I like go around liking everybody. So you just gotta be careful if you know that's your state.

• 28:13Speaker 00

  Interesting, but by the way, it's useful sometimes to point to devil's advocate. So now again, when we have a situation where everybody's above the line, I might privately message somebody in the Zoom chat and just say, listen, do you mind being the devil's advocate? And just, just so we can actually have a proper conversation and reassess.

• 28:28Speaker 01

  Yeah.

• 28:28Speaker 00

  So you might want to think about that as a technique. It certainly helped us a bit.

• 28:31Speaker 01

  But like, I would think that past a certain size group, it becomes like, I felt this with like my exec team at Lattice, where, you know, we would go through these evolutions where, you know, the exec team grows and grows. And then at some point, the exec meeting becomes useless. And then we would split into like a broader exec and a senior team meeting or whatever. And like that, that evolution happened many times.

• 28:47Speaker 00

  Yeah.

• 28:47Speaker 01

  I would think there's some limit to the number of people you can have working on a team. You know, you talked about like, you know, going deep enough with people that people can like share things that make them cry. Like you just can't do that with a big group.

• 28:57Speaker 00

  Yes.

• 28:57Speaker 01

  I guess that's a limiter to what a venture firm can do.

• 29:00Speaker 00

  I completely, or at a subunit decision making. So we have an early team and a growth team at Sequoia. So the early team, we have about a dozen people in the room. The growth team, we have about a dozen people in the room.

• 29:09Speaker 01

  Right.

• 29:09Speaker 00

  No more than that, I think, to make effective investment decisions.

• 29:12Speaker 01

  Yeah.

• 29:12Speaker 00

  Cause you need that trust, you need that sense of camaraderie. You also need enough time with each other. You know, we have, you know, of all the GPs, I think it's Sequoia now, everybody's been here basically for at least five years. So we've had many years of working together and understanding each other's nuances and traits and quirks.

• 29:29Speaker 01

  You can have a heated discussion, yourself friends afterward.

• 29:32Speaker 00

  Exactly. So, and I think there's a lot of behavioral science research on group size, you know, for effective decision making. And it doesn't, it's about the upper bound of what you can do. You know, there's this phrase that the camel is the horse that was designed by the committee.

• 29:45Speaker 01

  Yeah.

• 29:45Speaker 00

  We don't have a committee making decisions. We have a small group of people making decisions. And I think, by the way, that's one of the conclusions of that 2019 offsite we had was for us to be a leading firm in 2030. We thought we had to keep our, our investment team small. It was so important for us. I mean, in total, we have about 25 investors at Sequoia. That's it. And what we've done is we've invested in technology to give us more superpowers. So we don't have to grow the size of the team.

• 30:10Speaker 01

  To the point about what's coming out, there's not that many companies that are going to drive all of the returns. And so you shouldn't need that many people to find your way into those over time, I would think, particularly when you can invest at many stages. I mean, the caveat here would be at early, it seems extremely hard to catch everything. One of the things that I'm jealous of that you have is multi-stages, you can miss things at seed and the A, and you can track it. And then you can go lead the B and the C if you want to. And that does seem like a powerful thing. Obviously, you know, the earlier the better. And we chatted for a little bit before about how like you kind of always need to be in the business of early, I believe, which I strongly believe that. But it does seem like you have the advantages where like on some level, I imagine if I'm, you know, in your seat, I would be like, I need to,

• 30:55Speaker 01

  no matter when I, I need to be in every important company at some point, roughly speaking. Is that kind of how you think about it?

• 31:02Speaker 00

  It's the right price. I mean, we don't want to, it's a way of running the business of buying posters. We want to be business partners to founders that make a difference and build great long-term companies. And in almost every single case, we are on the boards of these companies by the invitation of the founder who wants us at their side as they navigate, you know, tricky issues in their business. Alfred is still on the board of DoorDash years after it's gone public, helping them think through their international expansion strategy and becoming a. The last mile of commerce in general, I'm still on the board of Mongo and Square, which were investments from, you know, more than a decade ago because the founders still want me on the boards. So I think we, we want that association. You're right that it's convenient in some level that you might catch them later, but that's also risky because it means that you, there's a risk of complacency.

• 31:47Speaker 01

  Yes.

• 31:47Speaker 00

  It's like, oh, I don't have to make the seed investment. If, if it works out, I'll catch them in 12 months or I'll catch them, you know, for the B. And so we obsess about making the right decision at every single stage.

• 31:58Speaker 01

  Just never let yourself off the hook.

• 31:59Speaker 00

  You can't, I mean, that's, and by the way, part of the joy is being able to participate in the company building journey from the get go. Helping those founders from, from that initial idea before line of code was written.

• 32:10Speaker 01

  It's a totally different relationship.

• 32:10Speaker 00

  And navigating all the tricky issues along, I mean, there's so much, by the way, just from a fun point of view.

• 32:15Speaker 01

  Those are the formative, that's the formative time.

• 32:17Speaker 00

  It's so much fun to be part of the company, you know, from those early stages. And so we love that and we love doubling down on companies when, you know.

• 32:24Speaker 01

  I mean, I do think when you join a series B or C and you've got special people, you know, like, I know, like Pat Grady or Ravi Gupta or Andrew, you know, it's like, there's people who can still become kind of the partner of record, even at the B or the C, even as a great A member. So, you know, it's not so late that the, all the like glue is dry or something like that.

• 32:43Speaker 00

  Oh, absolutely. There's a tremendous amount. I mean, that's part of why we remain on boards of companies sometimes after they go public.

• 32:47Speaker 01

  There's still a lot to do from there.

• 32:48Speaker 00

  There's a long runway and that's why we created this Square Capital Fund in 2022 because we believe so much of the upside can be in these companies long after they go public.

• 32:56Speaker 01

  Yeah.

• 32:56Speaker 00

  I mean, to give you a sense, ServiceNow, HubSpot, MongoDB, all in recent memory, Palo Alto Networks, these are all companies that are 10x returns after the IPO. So we believe there's a lot of money to be made for LPs after the IPO, but there's also a lot of fun company building to be done. So you're absolutely right that there's a lot of company building all along the way, but it's so much fun to be part of it from inception. And so we can't rest on our laurels. We just can't take comfort in the fact that we might catch them later. I mean, you know, Figma is an example of a company that where Andrew helped us lead the investment from our growth fund. We led the series C and boy, the early team, you know, we're kicking ourselves, you know, at the time that we first met Dylan.

• 33:35Speaker 00

  This idea of the browser being sufficiently performant to realize Figma's vision, it wasn't quite yet obvious and we didn't get it right. And boy, do we beat ourselves up for not getting it right.

• 33:45Speaker 01

  Yeah.

• 33:45Speaker 00

  We're delighted we got it later.

• 33:46Speaker 01

  Yeah.

• 33:47Speaker 00

  But we keep trying to, to learn from that lesson.

• 33:49Speaker 01

  It's also like when you do it early and then you lead, you know, like I think with WhatsApp, you led like a bunch of rounds and you end up with like these unbelievable results. Like you, you can only have those dynamics happen when you, you know, really just keep doing all those early rounds, I guess, too. So there's that.

• 34:03Speaker 00

  Yeah, we've often doubled down, whether it was at ServiceNow, whether it was at WhatsApp, whether it was MongoDB, Unity, Airbnb, DoorDash, I mean, a lot of these examples where we've kept on investing in great companies down the road.

• 34:14Speaker 01

  I find that more impressive almost than a single good investment decision. Even like, you know, one seed investment, I'm like, obviously it's still impressive when you get a good one or, you know, it's sad when you miss it, when you do it wrong. But like, um, there's so many of these decisions when, you know, the first decision, a first, you know, round decision, where you're on the cusp and you barely pass or you barely, you know, say yes. To me, when firms can do the round over and over and keep making a correct decision, you know, in a, you know, market can train where they seem to be overpaying or they seem to, you know, they own 25%, but they lead a whole nother round where they don't really have to, they're already so exposed. There's something more impressive about that to me. It seems harder to do, especially I would imagine like, you know, once you're already like a few rounds in, there's something about that that really impresses me.

• 34:58Speaker 00

  We don't always get it right, but I, I agree with you that it's, it's impressive when it can happen. And part of it is the psychological anchoring we're all subject to. You know, we just invested in this company seed.

• 35:09Speaker 01

  Now it's 10 times more expensive five months later.

• 35:11Speaker 00

  Really? I mean, why, you know, so we doubled down on a company called Listen Labs recently, Alfred and Florian building this company to bring AI to market research. Companies on fire. Love this investment. We made a seed investment, you know, roughly two years ago and then we doubled down on the series A. But we own a lot, we're in the seed and why don't we let somebody else lead the A? And it's, it's a very interesting conversation to have. And then you plunge in and you make the series A investment and you're delighted. Now the next question will be the B, obviously.

• 35:39Speaker 01

  I would think it takes a lot of, it takes a very clinical mindset to be untethered to that stuff.

• 35:44Speaker 00

  Yeah, clinical, unemotional, without being a sociopath.

• 35:47Speaker 01

  Yeah, that's a tough balance. Maybe a little sociopath sense about it for some people, I don't know.

• 35:50Speaker 00

  One of the things I've really thought about a lot is behavioral economics and psychology and how it applies to investing. And we're all subject to it. I'm, you know, I'm as guilty as the next person of falling prey to heuristics. The key is when you can identify and name them, and when you educate your team about it, and we can all hold each other accountable to it, you can get over these biases more effectively.

• 36:13Speaker 01

  Yeah.

• 36:13Speaker 00

  And we actually have started to put this in some of our investment memos, where we'll actually write down the biases the author thinks they're guilty of as they're recommending a particular investment. Cause the more you can name it, the more you can discuss it and look at it clinically to the point that you're making.

• 36:27Speaker 01

  I've heard of some firms where you're not, where the partner who did the initial investment is not allowed to make the call on a double down because it's too hard, they believe it's too hard to like dissociate yourself. And that you can either have the version where you just like become too obsessed and you go native and you're just like, this is back into the end of the earth, or you know, the other direction where you're like, you know, all the warts and nooks and crannies. And so you just like, don't see it as cleanly as somebody who's coming in with fresh eyes or something, which I thought was kind of an interesting way to go around it.

• 36:55Speaker 00

  We definitely get fresh eyes on it. We still want to harness the inside of the person who is working closely with the company and complement that with somebody who brings a slightly third party perspective.

• 37:05Speaker 01

  A lot of focus right now in like AI software company goes to the product, which is obviously very new and interesting and AI is powering that. I'm curious to talk to you about the other side of it, which is like the cost structure. I know you've spoken about this, you know, in other places, but I find it very interesting and kind of under discussed. Before getting into how it applies in like AI times, which I think is like new, interesting dynamics. How do you think about the component of costs for a startup building a company, its product, its go to market, everything?

• 37:33Speaker 00

  It's a very unsexy thing to talk about, you know, because what, certainly what most journalists want to write about is the snazzy new product innovation and the features that are so cool and whiz bang. And then I tell people, cost is the secret of Silicon Valley and they look at me very puzzled. And unpack it for them slowly, which is, I think relentless cost reduction is actually a far bigger. Ingredient to Silicon Valley's success than most people realize. And some of that makes technology available to many more people. And it democratizes access, if you want to think about it that way, whether it's the little square reader that turned every mobile phone into a credit card terminal, whether it was the way that SpaceX reduced the cost of travel to space by an order of magnitude, or Google's innovation in its data centers.

• 38:15Speaker 00

  If you just look at industry after industry, um, cost reduction has enabled technology's ubiquity. And so I think people need to obsess about that. There are two pieces of it. One is the gross margin that goes into the cost of your particular product. And the other one is the fixed cost of running your business. I think today, partly because of cloud infrastructure, mobile technology and now AI, the basic cost of running a business is lower than it's ever been. I think it's a continuum, by the way. So, um, 25 years ago, when I was the CFO at PayPal, we would cut checks to Oracle for databases and Sun for servers. Five years later, when YouTube came around, we were using MySQL, Memcache, a bunch of really good open source software, and we're starting to use the beginning of cloud infrastructure.

• 39:00Speaker 00

  We didn't actually have to stand up a Kolo facility. We could use commodity servers. Google obviously took that to another extreme. When YouTube was acquired, it had about 50 people in the company. I think in WhatsApp was acquired by Facebook, they had about 30 odd employees. When Instagram got acquired, another company we invested in early on, Kevin and Mike, uh, that company had about 20 people, roughly speaking, at the time it got acquired. And I think there's this potential that you're going to end up with a company that has literally single digits of employees and is worth a billion dollars.

• 39:31Speaker 01

  Definitely.

• 39:31Speaker 00

  I think that's around the corner. And it's this incredible, um, availability of infrastructure for scaling and, you know, it, it, it's a magic time to be a founder. So that's on the fixed cost, but you still need to think about your marginal cost. And I think the, the founders that really succeed in my mind are obsessed with understanding how they drive down the cost to serve their customers. And they end up with very high gross margins.

• 39:55Speaker 01

  Why is it so important to have high gross margins? I mean, I like on some level, you could be like, oh, well, you want to make, you want more money dropped to bottom line, but I think it's deeper than that. So I'm curious, like, why does this rise to the level of like a secret of Silicon Valley?

• 40:06Speaker 00

  I think there's a misunderstanding where people often think that price is a competitive advantage. What's the secret to your company's success? Well, I'm going to price lower. Like, that's not an advantage. Cost is an advantage. If you have a fundamental cost advantage of a competitor, you might price the same. And just end up with high gross margins. Maybe you price a little lower. Maybe you have the same gross margin percentage as your competitor, but you can price below them and gain market share because your costs are fundamentally lower. And so I think the reason I obsess about costs is it gives you the degrees of freedom to choose how to play the game. And when you think about being powerful in business, when you dictate the rules, that's how you can end up succeeding.

• 40:43Speaker 01

  Yeah. If you're talking to a founder about this and they say, I don't have higher, I don't have lower costs right now, but I will. And in the interim, I can raise a ton of money because of X, Y, Z. Does that argument land for you? Or do you say that is like, that's just like a hope and a dream? And we don't, we don't think about it that way.

• 41:01Speaker 00

  The question there is, what is the logic training? Is there evidence to support the hypothesis? So when we were an early investor in DoorDash, we led the Series A. Tony showed us the unit economics that he had at a city level. And there was a point in time when the company needed to raise expansion capital, where the burn rate was increasing. And so if you looked at the company's financially superficially, you might have concluded that, you know, it isn't building a viable business. But if you peel the onion and you went down to a basic unit level and you actually understood the profitability in a particular town, town by town, you saw that the business was working. And the reason it was burning more money is they were expanding and building new markets, but they perfected the playbook.

• 41:39Speaker 01

  Yeah.

• 41:39Speaker 00

  And I think that's the kind of diligence that you need to understand. So that's why we doubled down on DoorDash to the earlier conversation. And we're delighted we did because Tony understood the unit economics of his business.

• 41:51Speaker 01

  Yeah.

• 41:51Speaker 00

  And he has a detailed understanding of his business, which is unrivaled.

• 41:55Speaker 01

  I also think in the long term, this margin question is, to me, it basically tells you what you can afford to spend building your company. One day you want to make money as a company. So let's just say you want to be profitable. You've got like 100% of your revenue that you can spend on everything. If you've got 80% of that left for R and D, go to market, everything else, like that like affords a certain envelope. Whereas if you've got 20% left, it's like, okay, how many companies have a really good R and D org? That's 6% of revenue, like not many. Like most of the great ones, for whatever reason, like the R and D orgs seem to be a lot higher than that. And maybe that'll change over time. But I also think of it as this like offense, where it lets you spend a bunch more on project marketing.

• 42:35Speaker 00

  Profits are power.

• 42:38Speaker 00

  Profits are power. That's what you want to focus on. So I mean, that gives you the interesting thing about empires, by the way, relative to just regions or countries or nations, empires have flexible borders and relentless ambition. And I think about the great companies have those two characteristics. Flexible borders means they keep on innovating and pushing the boundaries on interesting new innovations. They expand into categories that maybe were unanticipated, a novel, you know, unexpected, and they're relentless.

• 43:05Speaker 01

  Yeah.

• 43:05Speaker 00

  And that ambition is part of why you create these great companies, but you need profits to fuel that.

• 43:11Speaker 01

  I want to just connect really quickly to the like cost structure in AI world because obviously margins on a like if SaaS companies before AI were often eighty percent, a lot are lower now. They're not like zero, some are zero, but a lot are sixty or four, you know, whatever. But like, there are these costs in there. And then everybody's kind of collectively assuming that like the price of intelligence will go down at like a certain rate. And so you can kind of capture market at a, you know, certain speed and, you know, these markets are blue ocean right now, but they won't be for long. And so like, when you're triangulating and reasoning through these dynamics right now, how do you look at this when you see a company that's a SaaS company with a forty percent margin because they're using a lot of compute?

• 43:53Speaker 00

  So I think this is a really good question. It's a contemporary question because a lot of people are looking at the current margin structure of these, especially AI application companies and wondering if it's a sustainable or a good business, given the margin structure. And there's so many parallels to think about. In general, in business, there's this idea of an experience cost curve, that as you increase production in a particular industry, production, you know, conceptually, you end up with a very predictable curve in how costs decrease. And there's an economist and a British economist, Wright, back, I think in the nineteenth century, originally coined this and actually modeled it very accurately. If you go back to what happened in the photovoltaic industry, solar today is less expensive than we thought it would be fifteen years ago. And solar is actually producing more electricity

• 44:37Speaker 00

  today than we had predicted fifteen years ago. You don't read about this often. People often think that solar was overhyped 15 years. It was actually underhyped. We fail to understand how it compounds. And a lot of people have written about, you know, humans don't intuit compound interest. Anthropologically, you know, understanding compounding didn't benefit us in, you know, when we were hunter gatherers or whatever the case is. And so we don't quite anticipate that. And so I remember in the early days of cloud infrastructure, people were dismissive. I remember at MongoDB, when we went from being a on prem software company to building Atlas, our cloud databases as a service, initially, our gross margins were basically zero. And people were wondering, well, are you going to build a real business, you know, being a cloud database as a service?

• 45:19Speaker 00

  Because the cost is so high, but we had confidence that you would drive this cost down. There was such a clear curve that you could walk down. And today, the company has fabulous gross margins. The same is going to happen in AI. I think, you know, if a company has product market for today, the cost of tokens is going to keep on coming down very aggressively. I think the algorithms are going to improve, the scale is going to increase. You have open source models that are going to compete against some of the proprietary models. And I wouldn't not invest or not believe that the company isn't going to be able to improve its gross margins. I would bet on that all day long.

• 45:47Speaker 01

  Do you think that we, in some sense, need the rate of progress of frontier models to slow? Because the faster that they're progressing, the more people are willing to pay for the frontier and then the margin improvements never come? Or do you think they'll come even if the models keep getting better and better for the next 20 years?

• 46:05Speaker 00

  Oh, I think they'll keep coming because the the application space is very, and I spoke to one of our founders, Max, who runs a company called Fair. And he described to me how they're using an ensemble of different models for different use cases in the company.

• 46:17Speaker 01

  And they use some cheap ones in some cases and expensive ones in some.

• 46:20Speaker 00

  Exactly. In certain cases, the application is relatively low value and paying for the latest, greatest frontier model doesn't make economic sense, but they they can sacrifice the quality and speed with an open source model. And the cost benefit works in that particular application. And in other applications, it doesn't. They need to use the frontier model.

• 46:38Speaker 01

  So it'll basically be in a world where you'll use the frontier for some percentage, but not 100%. Probably. Some very cheap stuff for some large percent, probably.

• 46:45Speaker 00

  Depending on depending on the cost benefit, you know, and I love the fact that if the frontier models keep pushing, you'll get a continuum, you'll have so many choices for picking the right model for the use case that you have.

• 46:56Speaker 01

  To go back to something you said earlier, that I thought was interesting, that, you know, empires are relentless ambition and open borders.

• 47:04Speaker 00

  Flexible borders.

• 47:04Speaker 01

  Flexible borders.

• 47:05Speaker 00

  Not open borders.

• 47:06Speaker 01

  Not open borders. Let's cut that for the team. I'm just kidding. We can keep that. There's companies that are like that too, which presents an interesting problem, which is conflicts that the founder feels that the VC doesn't feel. You know, a company thinks that a space that they're not in today is one that they may or may not be in in the future, and they'd really prefer that you don't stamp, you know, the nice green Sequoia logo on that company because it might be on the roadmap in a few years. Please don't do it. What do you say? Like, how do you handle this situation? Because I think like, I think going back to limiting factors for venture scale, conflicts present another one, which is when you're deep enough with the founder, it is feels treasonous to invest in a competitor. But those borders are fuzzy when companies are empires.

• 47:48Speaker 00

  And I think we at Sequoia have a distinct challenge when it comes to this because we're your business partner. I think if, I think sometimes if you're an early seed investor, I think seed investors can maybe invest in several companies in a category.

• 48:02Speaker 01

  Yeah. But so can the super growth investors.

• 48:05Speaker 00

  So can the super growth investors because they're often on taking board seats and not involved with helping with the strategic guidance of a company. And so I think it's, it's a firm like ours, it's in the middle where we really are your business partner of choice, where, but you've chosen me and, you know, I'm, you know, you are my thought partner to help me figure out how to achieve will dominance.

• 48:24Speaker 01

  Yeah, exactly.

• 48:25Speaker 00

  I don't want to share you with anybody else. And so we feel that pain probably more than most. In some situations, we've invested in companies that subsequently became competitive. So we invested very early in both Stripe and Square. And so, you know, John and Patrick had Stripe at some point realized that they had ambitions to move into spaces that Square was competing in. And Jack, over time, realized that he wanted to compete in some areas that were Stripe is competitive in. I think candidly, the companies have more in common and can work together very well. And I've introduced them to each other. And I think there's more partnership opportunity now. But there was a time where the two viewed each other as competitive. And so when John and Patrick would give the partnership an update, I would actually not join the meeting. And I was not allowed to read the investment memo and I, in our internal

• 49:10Speaker 00

  systems, I actually couldn't access any of the information about Stripe because we wanted to make sure that we preserve the sanctity of their information distinct from anybody who was working with who they deemed to be a competitor. So sometimes it happens that, you know, subsequent to our investment, because we were early investors in both, they converge. So this happens to us frequently. I think the real challenge is at entry point.

• 49:33Speaker 01

  Yeah, because the convergence is like no harm. I mean,

• 49:35Speaker 00

  Yeah, it sort of, you know, it happens subsequently. And what do you do when it's a very mature company that has an ambition on a space? So

• 49:42Speaker 01

  Yes. And those companies often have 17 ambitions going at once, you know, that look adjacent to them when they get to a certain size.

• 49:49Speaker 00

  Yeah. So, I mean, it comes down to a conversation and having, you know, is this really in your bullseye? Or is this an adjacency in an option value? Because, by the way, often if we don't invest, somebody else is probably going to invest in this company. And so, you know, you're going to deal with them as a competitive issue. And so we want to have a conversation with our closest business partners to really understand, is this really one of your top five issues?

• 50:12Speaker 01

  Yeah.

• 50:13Speaker 00

  Or is this a peripheral issue that you can live with?

• 50:15Speaker 01

  Yeah.

• 50:15Speaker 00

  And it's a conversation because we're in a relationship business with our founders. So sometimes we do walk away from investments for competitive reasons.

• 50:22Speaker 01

  And I guess it's probably a judgment call about how deep is the partnership? How much do you agree or disagree with the founder? How upset are they? And you basically just have to make these ongoing business judgment calls.

• 50:33Speaker 00

  Yes. But that's, that's what we get paid to do is render judgment, one of many things.

• 50:38Speaker 01

  I want to talk about a couple of the sort of areas around AI. I want to start with robotics. It seems to me that it really ought to work. A couple of the podcast guests I've had have sort of walked out, you know, like Vino and Colsa, for example, have like walked out these articulations where I left being like, this is the next trillion dollar market for sure. I'm curious where you think about a market like that, where it seemed like it could be a, you know, expensive, ubiquitous, completely new type of product. How much time do you spend on something like that?

• 51:08Speaker 00

  Vern and I agree on many things.

• 51:12Speaker 00

  We've worked on a few companies together. And on this one, I agree with him too. I'm very optimistic about the future of robotics. Some of that is enabled by AI. You know, we made an early investment in Deepak and Abhinav, who are the founders of Skilled. They're building a foundation model for robotics out of CMU. And it's incredible to see what they're able to do with commodity hardware and infusing it with the knowledge and the systems that they have. You get these off-the-shelf robots that are imbued with the ability to just walk stairs, climb stairs, navigate new environments they've never seen, open doors, do dishes, you know, do house cleaning work, all the sort of things you'd expect from a future of robotics.

• 51:52Speaker 00

  So whether it's that, Roman, who's the founder of Robco in Germany, you know, he's building automation for, you know, small, medium-sized enterprises. Often they're struggling to hire people. And so robotics is a fantastic solution for them. I now have two examples, like immediate recent examples in our portfolio where we partnered early with these founders and I'm seeing the results. You know, Cobot is another example, Brad Porter, who built most of the robotics at Amazon. We backed that company. They're seeing traction with their business too. I guess here.

• 52:21Speaker 01

  Is it like self-driving cars where like there's going to be, you know, some large number of years between, oh my goodness, the tech works to like, oh wow, we're what, riding Waymos around? Like, are we, is it that kind of ramp?

• 52:31Speaker 00

  No, I think it's a little bit different. The challenge with autonomous vehicles is the, the risk of fatal crashes, which is part of why we don't see Waymos on freeways just yet. The challenge in robotics is a little different. Most of robotics until recently, I mean, obviously robotics is a massive, massive industry, but they're typically very large machines that are relatively dangerous and they're cordoned off from humans. I don't know if you've visited a Tesla factory. When I bought my first Tesla, it was such a fun thing to go see the Tesla factory and you see all these robots, you're like, wow, this is so cool. But because of the risk of harm to humans, they had to be kept separate. I think the beauty of this age is when you get computer vision in these robots and they can interact with us in our normal environment, that unlocks so much more possibility.

• 53:13Speaker 00

  And if you can get them into a form factor that is not likely to cause human harm, I just think it unlocks possibilities. Look, at some level, we already have robots. I mean, you have Roombas running around cleaning floors and things like that. I mean, at a small scale, we already have some of the early inclines. And I think we're going to stair step our way into this.

• 53:29Speaker 01

  I mean, if it gets to something generalizable in the home, it should be truly enormous, I would think.

• 53:33Speaker 00

  You're right about that, but both Skilled and Robco, well, all three of them, Skilled, Robco, Cobot. All of them have revenue today, actually serving customers in a variety of different use cases, whether it's hospital systems, whether it's airport security, whether it's small manufacturing firms that need robotic assistance to help them scale. All these companies have revenue. They're actually up and running today. And so I don't think this is a lab experiment where you see the demos, but who knows if it's real.

• 54:01Speaker 01

  Like it works, it just has to get everywhere.

• 54:03Speaker 00

  It works and it's slowly progressing into more and more areas where the cost benefit of it makes sense. A lot of it comes down to the cost of human labor, by the way.

• 54:10Speaker 01

  Yeah.

• 54:11Speaker 00

  And part of the reason Japan has roboticized so much more than other countries is because the cost of labor got very high.

• 54:16Speaker 01

  Mm hmm.

• 54:17Speaker 00

  And so it made economic sense for them to do so.

• 54:19Speaker 01

  That should be the case here, too, I suppose.

• 54:20Speaker 00

  And that's part of what's changing is the cost of labor in America is changing and that necessitates that. So if you think about, you know, the way the minimum wages have gone for the restaurant industry in California, for example, it's driving many more restaurant chains in California to try to figure out solutions for automation because otherwise their business models don't work anymore. It's actually one of the favorite books I read this summer was How Economics Explains the History of the World.

• 54:42Speaker 01

  Hmm.

• 54:43Speaker 00

  And it's, you know, just because you invent something doesn't mean it'll be applied. It needs an economic driver. And I think that's precisely what's happening now with robotics, too.

• 54:50Speaker 01

  We're back to costs.

• 54:51Speaker 00

  Exactly.

• 54:53Speaker 01

  Other than robotics, what are some of the other big, like societal level things, whether it's education or government or healthcare? What are like other like big, big areas that you think outside of like business applications that AI you think is going to matter a lot in the next few years?

• 55:11Speaker 00

  Healthcare is one. I'm enamored with in particular genetics.

• 55:17Speaker 01

  Hmm.

• 55:17Speaker 00

  Sequenced the human genome 25 years ago. It's actually the 25th celebration of that. That was an enormous research initiative to get to that point. By the way, the cost of sequencing the genome follows one of these phenomenal cost curves.

• 55:30Speaker 01

  Yep.

• 55:30Speaker 00

  If you've ever seen these plots, it's actually faster than Moore's law in how the the cost of sequencing has dropped dramatically. And that's opened up so many more possibilities for us, whether it's prenatal screening, which is basically ubiquitous now in America, whether it's helping do oncology screening, organ transplant rejection screening. Newborn analysis, you know, one of the, one of my friends at Stanford in the genetics department has got this technology to be able to do a whole genome sequence. He developed originally for the NICU unit at Stanford where they can sequence a full human genome in hours. Cause they have these babies where you need to understand their genetics very quickly to make clinical decisions that are life-saving. And so I think about all these possibilities around the field of genetics, they're incredibly powerful.

• 56:15Speaker 01

  Yeah.

• 56:16Speaker 00

  And that's a dividend we keep on benefiting from as that cost curve rides down. So I think genetics is super interesting. And then I think about AI, by the way, in the healthcare industry, either, you know, we only have about a million physicians in America. It's stunning.

• 56:30Speaker 01

  It's not that many.

• 56:31Speaker 00

  And we have got a population of roughly three hundred and fifty million. We only have a million physicians. What can we do to make them more productive? Partly by giving them tools. So, you know, we partnered early with Daniel at Open Evidence. That company is now being used by something like forty percent of American physicians.

• 56:45Speaker 01

  Which is great because by the way, like if you speak to physicians who have been doing it for a while or you speak to a new one, it like seems clear that like a newly minted doctor today is like exhausted and overworked and there's like too many patients and like they're rushing through things and they're documenting and the patient experience changes. I don't know why it seems somehow different. I don't know if the ratios change or something else changed, but it seems like if you talk to older doctors, like something's different.

• 57:10Speaker 00

  Well, I think the burden, the ratio of patient to physician has changed because I don't think we're, we're not creating, it's probably not the right word. We're not educating as many physicians as we need to support the level of population we have. So the burden per physician has increased. So we need tools to help physicians make better decisions, but it also need, need to alleviate their administrative burden.

• 57:29Speaker 01

  Yeah.

• 57:30Speaker 00

  So, you know, the US healthcare industry is something, I think it's sixteen, seventy percent of US GDP is spent on healthcare.

• 57:36Speaker 01

  Yeah.

• 57:36Speaker 00

  Roughly one in five dollars in healthcare is for the administration of healthcare.

• 57:40Speaker 01

  Yeah.

• 57:40Speaker 00

  So if you think about that, it's almost a trillion dollars a year.

• 57:43Speaker 01

  I mean, they're typing in epic a lot.

• 57:45Speaker 00

  So, you know, we have a company called Freed that's helping with automating the workflow for a physician. So it's not helping with the clinical decision making the way that Open Evidence is, but Freed is helping just automate the workflows. How do you take a dictation of the patient visit and automatically understand how to write the record? What is the follow-up appointments that need to be scheduled? What are the referrals you need? What are the prescriptions to follow up? And if you can save a physician an hour or two a day of admin work, I mean, that is pretty dramatic in their, their day-to-day lives.

• 58:14Speaker 01

  Yeah. Are there any other areas in particular outside of the robotics, healthcare? Are there any other like societally important things that have you like particularly animated?

• 58:24Speaker 00

  This may sound cold, but I think money is societal.

• 58:28Speaker 01

  What's cold about that?

• 58:30Speaker 00

  You know, sometimes people feel that money is dirty or whatever. I think, you know, at the end of the day, commerce and capitalism has been the

• 58:37Speaker 01

  The financial system.

• 58:38Speaker 00

  The financial system is the biggest boon to human welfare. And when we improve the efficiency of the commerce system, I think it has massive societal benefits. And one of those in my mind is stable coins. And the way that we are using stable coins to rewire our financial infrastructure. A lot of our systems were built decades ago with what was the best technology at the time, but it's dated and it's slow. And so we have this ability to use stable coins to reinvent that. And Stripe is one of the companies at the forefront of this with some of what they've developed. They also bought a company called Bridge that we were an early investor in. And Bridge is being used for international transfers. I mentioned this company, Aspora, that's helping at a consumer level with international transfers.

• 59:21Speaker 00

  And so I think there's a really interesting possibility for us to completely change our financial system and make it far more efficient, ultimately for businesses and for consumers.

• 59:30Speaker 01

  As a final sort of topic, what I wanted to ask you about was your team and how you think about building the team, the composition, who you want to attract, what values and activities you want to sort of promote or dissuade. My first guest on Uncapped was Sean Maguire, who I love. I think he's awesome. And he's also like a polarizing figure. He says a lot of stuff online that I'm like, go Sean, and a lot of people are frustrated. And on first glance, it could seem like Sequoia is this extremely professional, not like overly sort of bombastic place, but Sean, you know, says what he feels online and is an important member of the firm and is a great investor.

• 1:00:11Speaker 01

  And so I guess my first question is, is that a sort of tolerated edge of the center of Sequoia's culture or is that in some ways like the heart of it?

• 1:00:21Speaker 00

  I think it's the heart of it. And it actually goes back all the way to Don and his own streak of irreverence. Don told me a story when I joined where he was going for an interview at IBM. And he was sitting in the waiting room for this interview and he noticed how everybody was wearing the same navy blazer. And he just thought, wow, this is a place of conformity. And he realized then that he needed to move to the West Coast and break out on his own. And I think that streak of irreverence actually runs very deep in Sequoia. It's part of why Don backed the sort of founders he did. When he backed Steve Jobs, who at the time, I believe, wasn't wearing shoes and maybe had just come back from a trip to India and was not bathing regularly. Maybe it didn't smell that great. Don saw through that. And so we've always had this view at Sequoia that we're backing the underdogs, the unknown, the defiant.

• 1:01:07Speaker 00

  You know, our founder prototype is somebody who's a little unusual. These people want to change the world, the audacity to change the world and the will to do it. And we need to reflect that on our own team. And so we have always had a band of kind of quirky people. My partner Doug always said, we want to recruit people to Sequoia who want to be pirates, not people who want to join the Navy. And to me, Sean is like that. We want to have a band of pirates at Sequoia. And that's how we think about our team composition.

• 1:01:34Speaker 01

  Yeah, it's really hard to build something outlier as a founder. I think if you yourself don't have some outlier or out of distribution traits.

• 1:01:43Speaker 00

  Absolutely. And by the way, an outlier is not one standard deviation from the mean.

• 1:01:47Speaker 01

  Yeah.

• 1:01:48Speaker 00

  You know, Alfred, my partner, talks about this. An outlier is, you know, not two, not three, probably four standard deviations from the mean. And these people are crazy enough to start companies and they actually want to change the world.

• 1:01:59Speaker 01

  Yeah.

• 1:02:00Speaker 00

  The other thing I'd say about Sean, and as it applies to the rest of us, and this is my partner Pat Grady, who I think you've spoken to. He had a great way of saying this, which is we look for people who are hyper competitive, but who have a heart of gold. Cause you can sometimes get people who are hyper competitive, who are individual contributors, don't want to play team sport and don't necessarily look out for the others. And we need people who have a heart of gold at Sequoia. People who bleed Sequoia Green, people who go do whatever is necessary to help a founder succeed, but also look after the wellbeing of their own teammates. And anybody who's actually had an opportunity to speak to Shaun would know that, too.

• 1:02:36Speaker 01

  Somebody recently used a term to describe a sort of similar type of person as a killer teddy bear, and it really stuck with me, that it's somebody who is ultimately very high integrity, high caring, but they're like playing to win and they're gonna do what it takes.

• 1:02:49Speaker 00

  I love that, yeah.

• 1:02:50Speaker 01

  All right, this was extremely fun and it means a lot that you took the time for this, so I wanna say thanks and really enjoyed it.

• 1:02:56Speaker 00

  Thank you.