Editor’s Note: This is the third in an occasional series on how the most successful early investors build their portfolios. And, of course, my take.
Every time we invest in a little company, it’s a battle against the odds. We’re always outgunned by companies that are far larger than us, who have threatened us and the founders with extinction. It’s incredibly thrilling to prove everyone wrong.
– Mike Moritz, Senior Partner, Sequoia
Nobody does startup investing better than Sequoia Capital.
But with all due respect to Mr. Moritz, this ain’t no David vs. Goliath (with Sequoia as David).
Sequoia is a big and powerful venture capital outfit. Many consider this venture company the Goliath of Silicon Valley.
Its string of hugely successful IPOs began with Apple in 1980. Others that followed include Oracle, Cisco, Yahoo, Google and LinkedIn.
Last year saw several of Sequoia’s portfolio companies achieve liquidity.
WhatsApp was sold to Facebook in February for a cool $19 billion. Natera IPO’d in June at a valuation of $872 million. Sunrun went public in August at a valuation of $1.4 billion. And HubSpot joined the NYSE in October at a $759 million valuation.
Sequoia has nurtured and prodded 17 of its early-stage-invested companies into Unicorns. That’s a 5.5% capture rate – the best in the business.
Sequoia is the real deal.
It experiences a consistent stream of exits. And it’s gotten better over time. See this chart…
Sequoia Excels at Many Things
For one, it’s decisive. Founders recall pitching to Sequoia in the morning and getting a handshake deal that afternoon.
And it’s loaded with technical expertise. From growth hacking (Roelof Botha, Alfred Lin and Bryan Schreier) to deep sector knowledge (Michael Goguen and Jim Goetz) to product development (Bill Coughran).
It allows Sequoia to help its companies with the big stuff as well as the small stuff.
Other attributes that have contributed to its success include…
- Lots of due diligence. For example, co-founder Brian Halligan of HubSpot says Sequoia wanted to have as much information as possible in place before nailing things down. Sequoia invested in two of HubSpot’s rounds. It paid off handsomely when HubSpot IPO’d in October 2014 at a valuation of $759 million.
- Finding companies in the low-rent office districts (and outside the manicured golf courses). “We don’t go there,” says senior partner Doug Leone in a Forbes article. “That’s not where the next founders are.”
- Culture of mutual respect. Leone views the company as a big Italian family that often clashes but comes together at the end of the day.
- A “buy and hold” policy. Sequoia didn’t always believe in buying and holding. Back in 1979, it sold its Apple stock after holding it for just 18 months. Ouch! It now holds shares of some companies for a decade or more.
Another Way of Looking at It
Some people think I can be cynical at times (to put it kindly).
And if I were so inclined, I’d take the view of veteran venture investor Jerry Neumann.
Neumann says it’s not hard to invest in the most promising young companies when all the founders heading the best startups bow and scrape before Sequoia’s powerful partners.
It’s a great quote, so here it is in full…
Sequoia has a reputation not for turning lead into gold, but for turning gold into platinum. They can get a great company an awesome outcome. This means that any entrepreneur who has a great company, who can raise money from any VC on earth, raises it from Sequoia. Pretty sweet for them, eh?
And perhaps not so sweet for you, Neumann implies.
Giving Sequoia so little credit is a bit harsh, in my opinion. Out of the 200 startups it interviews every month, it usually picks two. It does a pretty good job of picking the best ones.
But Neumann has a point. See how Sequoia sources its deal flow…
Its biggest source is the world’s top accelerator: Y Combinator. No surprise there.
Can we assume that Sequoia has the pick of any Y Combinator graduate it fancies?
Sure… with the occasional exception.
You and I don’t live in that world. Sequoia does.
Which makes the one trait about Sequoia I haven’t talked about even more remarkable.
And it’s something you (and I) can adopt.
Check Your Egos at the Door
Humility or paranoia. Take your pick. Whatever it is, Sequoia’s got it.
Big egos aren’t allowed to run amok.
“If you talk for more than 90 seconds at a time, you’ve probably gone on too long,” says partner Aaref Hilaly (in this Forbes article).
HubSpot’s Halligan says it never talks about its successful exits. But it does talk about the ones that got away, like Pinterest and Twitter.
So despite all the kudos Sequoia gets in the press and from its portfolio founders… and despite the fact that its successes have made many of them small fortunes…
It remains motivated by a fear of failure.
It is what drives Sequoia’s singular culture and ultimate success.
- Hard work. Meetings at 4 a.m., for example.
- Fixing mistakes. Sequoia now realizes it wasn’t flexible enough when considering Twitter. (Sequoia took a pass when it wasn’t offered a big enough stake in the company.)
- Constant striving for improvement. Partners gather each Monday morning to debate investment prospects and review existing portfolio companies. “It’s about getting to the right decision, rather than being right yourself,” says Goetz.To sustain this culture amid a bevy of huge successes can’t be easy. But Sequoia does it.
- Humility. Fear of failure. Investors would do well to follow Sequoia’s example.
This is what I suggest…
Regularly review your mistakes. Don’t get greedy: hold on to your winning companies. If your portfolio isn’t doing so great, work harder. If it’s doing well, remain humble.
You can always do better.
Sequoia’s track record isn’t perfect. But its mindset is definitely worth emulating.
Invest early and well,
Founder, Early Investing