Sequoia Capital Part II (with Doug Leone)

Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

David: Hey Acquired listeners, instead of a cold opener, we want to use this space to dedicate today’s episode to the late Don Valentine who passed last year.

Ben: We are excited to be working with Sequoia today to bring you something really special for part two. And with that, on to the show.

Ben: Welcome to season six episode two of Acquired, the podcast about great technology companies and the stories behind them. I’m Ben Gilbert.

David: I’m David Rosenthal.

Ben: And we are your hosts. Today, we tell part two of the Sequoia Capital story. We’re going to pick up where we left off (in 1996) when Sequoia’s legendary founder Don Valentine turned the firm over to Sir Michael Moritz And Doug Leone.

In this modern era of Sequoia since 1996, Sequoia has been the investing partner behind an absurd number of the industry-defining companies of the last 25 years including Yahoo, Google, PayPal, LinkedIn, YouTube, Reddit, 23andme, HubSpot, WhatsApp, DropBox, Airbnb, Docker, Stripe, Instacart, UiPath, DoorDash, and Robinhood.

David: Wooh!

Ben: No kidding. And while David and I spelunk into part one of Sequoia’s history on our own, we have the very best person in the world with us today to help us do part two right, Doug Leone. Now David, who is Doug?

David: Doug is the global managing partner of Sequoia Capital, in charge of overseeing the firm’s many diverse businesses, which we will get into, from seed to global growth investing across the US, India, and China. Doug first joined Sequoia in 1988 after famously cold calling Don Valentine and was the champion of Sequoia’s expansion from a single $150 million early-stage fund to the multi-billion dollar global powerhouse it is today. Welcome Doug and thanks for joining us.

Doug: Thank you very much for having me. It’s my honor to be here.

David: Great to have you.

Ben: I’d like to welcome our sponsor for all of season six, Silicon Valley Bank. Whether you are at the seeds stage scaling to Series A or beyond, SVB has the insights and expertise to help you hit your next milestone. I spoke this week with Jennifer Friel Goldstein who runs business development at SVB. Now Jennifer, today we are covering part two of the Sequoia story which picks up in the ’90s. Can you give us a sense of how different venture is today than it was back then?

Jennifer: Absolutely. Venture has changed pretty significantly from back then. Just to give you some statistics, we finished up 2019 roughly just below the record high levels of 2018 in terms of total dollars deployed, and I keep in just under $140 billion in the exponential scale of what we’re talking about now. It’s so much bigger than what we were at in the 80s and 90s, and even the early 2000s. That also includes roughly $50 billion. I think the number exactly is $46 billion by our count of fresh capital raised in 2019, which we will need to deploy over the next couple of years. And not really as focused on traditional capital. When you start to add in things like corporate venture, family offices, and all these diverse sources of capital that are really focused on the innovation economy, we’re talking about a very different industry, from the cottage industry that started out as many years ago.

Ben: Great. Well thank you, Jennifer. Listeners, you can visit svb.com/next to learn more.

Doug: We’re going to talk a lot about Sequoia during your time and its evolution, but before we do, we want to ask you to tell your story a little bit. Your family immigrated from Italy to New York when you were 11 years old. What brought your family here?

Doug: We had a bit of a World War II heritage, where my dad’s sister got married to a lieutenant, ended up in America, had a child, called mom, and now we have grandma for me and aunt in America. We were the Italian family with the American [...] My first name was Douglas, but in the church you cannot be called Douglas for the simple reason that you need to have a name from one of the 365 saints. So in Italy, I was Mauro Douglas Leone or “Duglas” as my mom and dad call me, and in school I was Mauro.

When I came here, I just flipped the two names, but a long story short, my dad saw an opportunity, maybe his career was not going so great in Italy, so an opportunity to come to America. He came here, it took me and my mom about two years without seeing my dad, and we finally came here on August 1st, 1968.

David: What did your dad do in New York?

Doug: In New York, he was a service engineer for a marine equipment company, and the most he ever made I remember was $25,000.

David: That’s amazing. So when you finally arrive in America in 1968—

Doug: By boat. On the Michelangelo, passed the Statue of Liberty to the west side of Manhattan.

Ben: Do you remember the first time you saw the Statue of Liberty?

Doug: Absolutely. I remember being outside, I remember crying day one and day two, and just being in a fog for the next five days when we did the crossing.

David: Wow, that’s amazing. So, America 1968 must have been pretty different than the world you left in Italy, right? How was adjusting and high school?

Doug: It was really interesting because what I am here today is really a product of those times. I was an only child, with aunts and uncles with no children. So, I was overloved, very warm upbringing, lots of trust, lots of love.

I came here and it was a shock to my system. It was abusive in high school. It’s not like being schooled where right now, everybody preaches you have to be good to your fellow kid and all these wonderful things. There, you get the hell beaten out of you, crap beaten out of you, emotionally, physically, and so on.

David: [...] with Jan in WhatsApp. He did the same deal. Integrated in high school and had the same experience.

Doug: That makes up the two sides of me, which is the very warm side, the very big heart, and the super-tough side, where I just don’t give an inch.

David: You’ve talked about in other talks you’ve given that we’ve listened to, that you do the Myers-Briggs test here at Sequoia. How did those combine into what your Myers-Briggs type is?

Doug: I’m not sure those affect the Myers-Briggs but this is how I test it, early on and how I changed. People think of me as an extrovert for the simple reason that if I have to turn it on, I can, especially as I get older I went from insufferable to charming. It’s amazing at what happens.

What I really am, I’m halfway between an introvert and extrovert (exactly halfway in between), and early on I was tested as a process-driven person, meaning my whole mind is a tree structure, there’s a lot of logic to it and so on. In 2012, with Mike Moritz’ step down and the relationship I had with Mike, he was the intuitive one. He was really the leader of Sequoia, I was 1A. I was the COO, if it helps. I understood that would not be a winning formula. I always thought that great COOs would make lousy CEOs. Now, I’m not the CEO here, but you get the point.

I took myself completely out of my comfort zone and understood I had to rely on intuition. When I was tested in Myers-Briggs by a lady that tested me, she was shocked by the transformation. She said, “You and Michael Dell are the only two people I’ve ever tested that have made that change.” When I hear people can’t change, I chuckle a little bit because I felt like I changed, I felt like I had to rely on my gut, and I can’t have all the answers in tree structure prior to letting people create. I can’t manage every inch. I just have to let terrific people do their thing.

David: Well, I can totally imagine the things that we’re going to talk about that you champion here at Sequoia. Doing that is (I think) what led to a large part of your success.

So, you finished high school. You must have been a pretty good student. You go to Cornell and then Columbia to study engineering, right?

Doug: I was a great student until I grew up. I went to Cornell, I got thrown out of Cornell after my first year.

David: Oh. That’s not on your bio.

Doug: My first two semester grades were 134 and 122 which is not easy to do. I did not see half of my professors because I just never went to class.

Ben: And what was behind that?

Doug: What was behind that after being abused in high school, I was never abused when I was in Italy, I was a smart kid who was athletic. In high school, that was rough. At Cornell, I became normal again because when I went to Cornell, I could speak English and all of a sudden I was one of the very accepted kids. I kind of lost my mind. In some ways, I lost the opportunity to learn but I became normal again.

Now, for a fall term, I went to a two-year school to make up a couple of classes where I got Fs, mainly math and physics, which were my strongest classes. I love math and physics. I also was working part-time doing the deliveries, talking to truck drivers, and it just showed me a range of life, of what life could become. Nothing wrong with truck drivers, don’t get me wrong. Was it right for me? Probably not. So a little bit of a carrot on a stick, I went back to Cornell, I did fine, I graduated, I went to work, and I decided that I needed to do something.

David: And that something, you end up in sales. Was Prime Computer your first job?

Doug: No. The first job was selling computers for Hewlett-Packard. I remember there were two people in the room aged 45–50, and they said, “Kid, don’t worry. We’ll split Manhattan into thirds.” I didn’t know anything so I trusted them. One got all to Wall Street, one got from Wall Street to 96 Street, and I got… By the way this is 1979, where it wasn’t safe to walk North of 79th Street.

Ben: And that’s your territory?

Doug: Mine was North of 96th [...]

David: This is pre-Giuliani and Bloomberg.

Doug: Well, pre- the fact that we became urban and so on, burned out buildings and so on. But that was a lucky break because one thing that’s up there is Columbia. I remember there was a dean of the school of engineering, Dr. Trowe, but still remember his name that came from CMU. He explained to me what the ARPANET was, and he explained to me what open systems were. And yes, I went to Prime for a year-and-a-half because I wanted to sell computers on Wall Street because I knew that’s where the money was, but that was where the short-term money was.

Ben: Was there a prestige associated with that, or was it just [...]?

Doug: Selling money on Wall Street was money. It wasn’t prestige, it was money. Prime was the second youngest company to be invited to the New York Stock Exchange. It was a go-go company. I’ve chosen well, but I realized that was only a sales career and I was beginning to crave for something more. I wanted to “make it.” What does that mean?

I remember walking on 6th Avenue and seeing all these buildings. I said, “How do people become successful? Clearly there must be more.” So I said, “Probably, I want more risk.” So I cold-called Vinod Khosla. Actually, it was Owen Brown, who was the CEO at Sun at that time. I got a job because—

David: And you heard about Sun because of [...]

Doug: Because of Open Systems. I went back to Columbia Open Systems, called Sun Microsystems, employee number, I don’t know, 56, I can’t remember, the first person in five states and I started doing volumes of business. So much so that the board wanted to know who this kid was. Vinod Khosla wanted to know, Scott McNealy wanted to know.

Ben: That’s a good sign.

Doug: And I had an idea to open Wall Street and the reason I did that, I learned of a machine called Convex, which back then was a high processing, math processing type of processing machine, and I read in Businessweek that [...] were dropping out of Yale, going to Bear Stearns and Wall Street.

What does that mean? The story was, I got a call from Bear Stearns. They said, “Can we get a budgetary quote?” A budgetary quote is somebody who has [...] just wants to know how much, and my quote was $2 million. I gave someone a budgetary quote I had met for $2.8 million. I went on vacation for two weeks. I came back and then there was a purchase order on my desk for $2.8 million. I said truly, “Holy cow!”

David: I think that’s the definition of product/market fit right there.

Doug: Exactly. So what I did is I poured all my time on Wall Street, so much that my office was a depot. Because Sun could not support the system so my office, my desk was a printer stand that I am holding for the paper with messages all around it. I had computer systems that were missing out of Sun all around me because if you are down, I’d bring you back up in an hour-and-a-half. I just drove to Wall Street with a machine.

David: So you’re a support engineer.

Doug: Oh yeah. I was doing all this volume [...] what’s going on and Scott McNealy came to see my office, he was impressed and horrified at the same time. This is [...] Sun Microsystems, we just did lots of business, and long story short, I met Vinod Khosla, venture capitalist, what the heck is that? And I want to be one of those. Boy, 134 122, how do you get into business school?

So I went to get a masters at Columbia, I got in luckily, I did extremely well, which padded the resume a little bit so I can get into business school. I went to business school and then I cold-called my way into the venture industry.

Ben: From what I could read, you sent and called 80 different firms?

Doug: Back then, there was a big green book called Pratt’s Guide to Venture Capital Sources.

David: They should publish that again today. It actually did pretty well.

Doug: I took all the venture firms in four States: Connecticut, New York, Massachusetts, California, and I just actually wrote letters because you wrote letters during those days. In California, I would say things like, “I’m going to be California,” (of course I wasn’t going to be in California), follow-up as if God knows I was coming into California.

Ben: How many entrepreneurs do you have to Sequoia now to, “I’ll be down in the Bay Area in case it happens to [...].”

Doug: Well I pushed a little and in the case of Sequoia, there was an assistant, a spicy New York person called Barbara Russell that worked for Don, did the distribution, may have been a receptionist. It was at a time when somebody did it all.

Doug: So, I sweet-talked my way with Barbara and she tells me—she’s become a very good friend, she’s no longer here, she’s retired up in Seattle—she went into Don’s office and she said “This kid may have something, you may want to spend some time with him.” So at 5:00 o’clock on a Monday, I was interviewed by Don.

David: What did he ask you?

Doug: One question, “What’s important?” and I talked for three minutes. Silence didn’t bother Don. We could be quiet for an hour and it’d be okay with him. He waited 20, 30 seconds, what seemed like an eternity.

Ben: That’s terrifying.

Doug: And then he said, “What else?” I laughed. I said, “Don, what do you mean what else? I just told you everything.” But you know? He liked how genuine I was, I think. He loved the sales approach because a great company has products from the inside out and the customers from the outside in, and he read correctly that I’d be a hustler but not in the word hustler that I would hustle, that I was smart, I was human, and he knew the question was can we reprogram him? Can we break them down into pieces and will he build himself up?

Ben: Doug, what do you think (in retrospect) are the differences between what has made you an amazing technology investor versus what you thought would make an amazing technology investor at that point in time?

Doug: It’s a difficult question for me to answer because I don’t think I thought, I didn’t know anything about what would make a technology investor. What has led to my success is I hustled a lot, these people like Jim Goetz who can product manage with a founder product. There are people like Mike Moritz who have incredible intuition. Guess what I did? I bet you can guess. I made thousands of cold-calls, I get in front of everybody. I’m not kidding when I said I went from being insufferable to sufferable over time. Charming was maybe the last five years.

David: It’s a journey.

Doug: Exactly, it's a complete journey. I just work, build knowledge, I develop a network, and with some luck—there’s always some luck—lot’s of hustles, some brain, some skill, I was able to generate some of the ideal flow and had a very lucky good start. My first three investments were IPOs, which was good, but it also builds a false sense of confidence because after that, I thought I knew something and I woke up one day in 2001, I looked at my ten boards and I said “Oh my God. There’s not a winner there.”

It was an early success, go through the abyss (and I see investors here go through the abyss), and when someone goes through the abyss, you got to let them pull themselves out. If they come out the other side, they’re terrific. I went through the abyss and then I went.

Ben: What were those first three that were IPOs?

Doug: There was Arbor Software, which is a darling software company that went public and then merged with Hyperion. When it went public, it was the largest win Sequoia ever had. A company called INS, which is a services company built on the notion that companies cannot swallow routers as fast as they’d like to swallow routers and therefore we could have a services company. A company we took public and sold for $7 billion to Lucent. $7 billion in 1998 was a lot of money, and a company called Renaissance Software, which was a Wall Street trading system, which was really my strong point, I understood what I was looking there.

Ben: I did not know that was a Sequoia Investment.

Doug: A funny story in the case of Arbor Software. I was here for three years. I almost got thrown out. People wanted me out. Don is the one that saved me, “Give the kid more time” kind of attitude, and I needed to get something done. The founders of Arbor were two weeks from personal bankruptcy.

That night, they came to my house. I said, “You got to get a deal done, I got to get a deal done. I think you’re investable.” We created the presentation that got presented the next day to Sequoia. The inside I had (and Don Valentine helped for that), they understood the problem. As consultants, they understood the domain of the pain. They just didn’t know how articulated in a fundraising pitch.

We created a pitch and we—I say we even though as Sequoia—got the company funded. The partners trusted me so much that one partner (I won't tell you who), the only reason why he did it is because there was a credible co-investor in his mind, nothing to do with what I knew or said, but we get the deal done and we got the investment made, just starting with two people, not a line of code, a seed (if you will) back then, although it was a Series A, $2 million, and we made it.

David: We ended part one of our Sequoia history with Don in 1996 calling you and Michael into a conference room and passing the firm over to you, what was that day like for you? I assume these three companies have become winners.

Doug: I could imagine the conversation to, “We should may Doug a partner.” I'm sure it was an easy one. In one case, I had a track record and the other case, I remember the insufferable part. The conversation must’ve gone around, “What is he going to be like if he’s a partner? Is he going to be turned into a monster?” kind of conversation, which I didn’t, obviously.

It's not as black and white as Don turned it over to Mike Moritz and me. I actually went back and looked at carry allocation, not because I want to see how much carry got. I wanted to see if my memory serves me right. It turned out that Mike and I had more carry than the other folks. It wasn’t a black and white. It's yours. We were the ones with the track record. I got promoted to GP. I had 1/10 of the carry of Don Valentine, the Sequoia VI, and a year into the fund, Don said we ought to change all the carry and make us all equal.

He understood that he needed to make sure the young people were not going to act like associates, even though they were partners. He flattened the partnership in Sequoia VI and now it's  Sequoia VII. It was more Mike and I were the more aggressive ones, the ones that have a bit of a track record. I remember Don sat with Mike and I and he didn't say, “You are the leaders.” He did not anoint us, but he had a conversation just with the two of us. Don had a green sheet of paper with all the things an investor does and check marks next to what he's willing to do. He pushed the paper as he always would and said, “You figure out if you want me around and this is what I'm willing to do.”

We offered carry in that fund. We gave carry to Don the next fund, which turned out to be the Google Fund. We actually took good care of Don. We gave some carry, not GP carry of a couple more funds, never aggressively asked for it. I remember when I had to walk into Don's office and tell him, “No more carry,” three funds later, and he chuckled. He said, “What took you so long?”

Mike and I were the two (if you will) more senior. We rotated the partners meeting, who would write down the company, who was the leader of the partners meeting for year two, until Mike stepped up and said, “This is not going to work.” He offered to be the one doing it. We all agreed. He did it, and it became that Mike was really one and I was 1A. Just two. I don't want to rewrite history, 1A. We have exact comp. Mike was the CEO (if you will), I was a COO, we’re a partnership, and that's how we ran Sequoia until 2012, when Mike stepped down for health reasons.

Ben: Doug, as a point of clarification, when you say Sequoia VI, Sequoia VII, can you explain a little bit about that?

Doug: They're the funds, the successive funds. Sequoia VI was the 6th fund where I became a general partner. It was the last really true partnership with Don was full, full time. Sequoia VII, Don was a general partner. He had less and the partnership was run by five or six other partners and then Mike Moritz took the lead and I became 1A.

Ben: Give us a sense of what early stage fund number are we on now.

Doug: We are in XVII.

Ben: Got it.

David: Okay, so right when this happens, the transition to Sequoia Fund VII, the whole world is changing, because Sequoia originally and Don came from the semiconductor industry, and then there was the PC software wave, but now the internet is here.

Doug: Well, not yet. There are actually a few parts. First of all, Sequoia V was $67 million because of a truly lack of ability to raise more money. We had raised the growth fund for $165 million that we don't know what to do with. In fact, we invested the growth fund and the average check size on that fund was $2 million. That turned out to be a 4.5X net fund, which is a terrific performance because we invested like a venture fund. When we raised Sequoia VI, which turned out to be the Yahoo fund, the returns from V were not yet visible. When Mike and I went out fundraising Sequoia VII, the limited partner said, “Who the heck are you guys?” and we lost some clients. We lost some big clients.

Sequoia V turned out to be a fabulous fund, Sequoia VI an incredible fund, Sequoia VII a spectacular fund, Sequoia VIII—the Google fund—an amazing fund. Mike, I, and the other partners got an incredible start. Then 1999-2000 happened. We did not know the meaning of the word clawback. For you listeners, what clawback means is when your funds are doing so poorly that now you owe a lot of money back to your limited partners. We had war room meetings here at Sequoia in 2000 where we owed more than our net worth, and how do we get ourselves out of that.

Ben: Is that of the fees that you’ve already taken as compensation?

Doug: It’s fees and carry, maybe we had an early win and we took carry and the rest of the fund is a turkey and we owe not only—

David: Because you assumed when you have early wins, you assume that the funds are going to continue to carry but if it’s not—

Doug: Let me make things more difficult. In that early win, you're given shares that you hold and they're good as zero, so you [...] that. You hold the shares in your account because it's 1999, those are not real companies, their shares are as good as zero. We had warm conversations and we had a choice to make. The choice to make is to borrow a line from golf (and I don't play golf) called mulligan. Most of the venture industry considers the funds of that period called the Mulligan funds. They’re crappy, they lost money but you know what, it's a do over.

We took the opposite approach, no one was going to lose money at Sequoia Capital, so we took funds that were 0.3X, meaning if it’s $100 million, that fund was worth $30,000 or in that case was $300,000 or $500,000 is worth 30% of that and we brought them up to close to 2X just by giving up fees, not collecting them, and reinvesting money. Every time we had a gain, we reinvested and reinvested because we wanted to have the pride of never losing money. Those were formative times for the [...].

David: It would’ve been so easy for you guys [...], “We're going to take a loss on this. We’ll start a new fund that we get fees on.”

Doug: You got it. Well think about it. Sequoia IV is the Cisco fund, Don Valentine. Sequoia V, younger team, older team, terrific fund. Sequoia VI, Yahoo and many others, NVIDIA and many others. Sequoia VII, many companies, Sequoia VIII, Google. It would have been so easy for us to call it and we just refused to.

Ben: Doug, it reminds me a lot of the 2008 story where Ford refused to take the federal government bailout and say, “Yeah. It would be easy for us to do this but reputationally,  it's important to us and all of our customers or your clients for the next decades to come that we don't do this.”

Doug: Absolutely. While I tell clients those times won't be chapter one in the sequoia book, they'll be a chapter. There should be a big chapter. It is maybe our proudest moment at Sequoia Capital. We've had funds close to 20X. It is not those 20X funds. The most proud time is when we decide it no one 's going to lose money at Sequoia Capital and we're going to go to work. We went to work for 10 years to make sure those funds [...].

David: Because the other aspects, unless listeners think this is just about reallocating fees or whatnot, it’s that you do you have a lot of work to do with those companies. Because you still have those investments, it would have been easy to say, “Yeah, these are zeroes, we're just going to do whatever,” but you roll up your sleeves and say, “No we're going to turn these into returning capital at a minimum.”

Doug: Mike Moritz is a Brit, strategic, man of few words, thinks 14 steps ahead, I'm a gregarious Italian and I'll tell you it hasn't always been easy. Mike would say the same thing. We made it work for 20 years, and I'll tell you during those times, we thought exactly alike.

You can burn a cigarette in our arm and we are not going to flinch. We're going to bring these funds home. It was amazing how two different cats, with two different backgrounds, with two different styles who get along a lot, and really argue some as you would imagine, which is terrific, because that means we pour two different views on issues. That is a strength. During those times, there was no question what we're going to do. I don't think we have to have the conversation. I don't think we even said, “Should we do this?” I just think we had to.

Ben: That's a special thing, to be able to get in that lockstep with another person. Do you feel like that sort of rare thing that happens once or twice in a person's life? And how do you attribute Sequoia’s success to you two being in lockstep like that?

Doug: On that issue?

Ben: Yeah.

Doug: It happens in sports teams. It happens when people go to war. Why do people keep on going to Afghanistan? The reason they do that, they miss that sense of camaraderie. I don’t know if you study situations like that. That was wartime. Make no mistake. It wasn't our lives, I don’t for a second, I love and respect the people that serve our country. The things they do are far more important, far more courageous than what Mike and I did. I want to make that crystal clear. We should be grateful to them, but it was a similar sense of camaraderie.

David: It was a business life.

Doug: No, nothing to do with business lives. It was the fact that each one of our cells in our body could not do that. Nothing to do with, we got to save our career, our money, none of that. It had to do with being a badass and doing what nobody else would do. That's what it has to do with. Do the right thing when it's inconvenient to you.

David: Yeah, because so many other firms did throw in the towel, get the mulligan, their business lives were fine.

Ben: We’re talking about this era right around Google's founding. We’re talking about your partner, Michael. There’s a quote that I've heard you mention in the past, it's something along the lines of Michael telling you a few months after making the Google investment, “We've never paid so much for so little.”

Doug: I think that quote is what John Doerr told Mike Moritz. We didn't know what Google did for a long time. We knew we had smart founders, we knew we were aimed at the internet, and we just knew we have to be patient. Sometimes, patience sits in your hands. I had a similar but a smaller story in Meraki. Smart founders couldn't figure out which way to go, and if you talk to them, what did Sequoia do most? They left us alone and let us figure it out.

David: We hear that from so many founders on this show that have partnered with you guys, that's one of the biggest differentiating factors is, we're in the driver's seat, let us figure it out.

Doug: If it’s creation time, the founders create. Now, that could be execution time where they don't execute as well in which case, you help them. The thing I tell founders, “You should do product/market fit, we can't help you there. If you get product/market fit, we can help you with everything else.” When founders are meandering their way early on and focusing on something that's going to work later on, you just let them create. They are the creators.

David: I think this is actually a perfect transition. I want to make sure we dive deep into what you and (presumably you) and Michael created here at Sequoia in your time and stewardship here. Sequoia was, I think the phrase that Don at least used to use was “you invested in companies that were a bicycle ride away from headquarters here.” The decision to expand, not just geographically but also product-wise in terms of investment products you offer, how did that initiative happen?

Doug: The first thing, I don't like the notion of “you and Michael.” We're all standing on each other's shoulders. Michael stood on Don’s shoulders, I'm standing on Mike’s shoulders, and Jim gets a shoulder. We all have shoulders, so it is really we. It is really a we effort. The other thing, when confused, there's only one curve I look at for the decisions I have to make, it’s the exponential curve of accelerated change. It's not linear. It increases through time, which means if you believe in that, doing nothing is the worst thing you can do. It’s the riskiest thing you can do.

We also know that in the early days of the curve, you over forecast because you're a linear thinker. In the later days of the curve when the curve is steep, you underforecast. I'm not that smart of a person, but I know these simple principles. Do stuff, take the shot and we'll talk more about what that means, but turn the clock back to 2003-2004, Mike and I are both immigrants, there's other immigrants here, founders we look at are immigrants, more and more founders.

I started wondering, what happens if the world becomes globalized? They’re going to go home and I thought of any ace offices, with posters from Indian companies in India, and the US-India founder coming here, and we don't have those posters. I thought, “Oh my God, defense.” But defense alone should make you do things. Then you think of the world that's more globalized, the world is flat, blah, blah, blah, and I thought maybe we should go there. I learned that other firms were doing flyovers. Going there and flying, and flying, and making [...].

David: Dropping the brand…

Doug: Yeah, or make an investment, do a brand. A few brain cells said, “If we're going to do something, where are the large and growing economies?” That brought us to China and India. As I say, it didn’t bring us to Vietnam because it grows, but it's small. It didn't bring us to Europe because it's big but not growing. Those were the two geo. We started making trips and trying to meet teams, trying to figure out how to get there.

David: Investing teams or founding teams?

Doug: Investing, founding investing teams. I'm very mindful of a line from an old sitcom, from a scene, the sitcom is Hogan's Heroes. Colonel Klink is the commander of a POW camp. He's a putz (obviously) in the show. Colonel Hogan is the American who is very smart. Hogan and Klink have a safe. If you turn the handle one way, you open the safe and there's money. If you turn to handle the other way, it blows up.

Hogan looks at Klink and says, “Klink, which way?” and Klink goes, “Left,” and Hogan pulls it  right and it opens. Klink goes, “How did you know?” Hogan says, “I wasn't sure whether I'd get it right, but I was sure that you would get it wrong.” Believe it or not, that scene is the scene that caused me to say, “I know for sure, Mike Mortiz and I if we make investments in China, we’ll get it right.”

We didn't know if the team we found would get it right, but we thought that was the least riskiest thing to do. So, we're shopping for teams. It's funny, I made 20 trips to China and then the team that was introduced to us by a founder of Billpoint, which is a predecessor to PayPal—sold to eBay—she introduced us to two Chinese nationals that grew up in China, had gone to school here which is exactly what I want to have, moved back to China, had served on the board of the same company, Focus Media.

One was an investor at DFJ, one was a co-founder of a company called Ctrip, we met them on a Tuesday, we met up again on a Thursday, and on the Friday morning in a conference room at Sequoia, we did a handshake deal. No contract, no anything. They were going to another venture firm in the afternoon. They cancelled that meeting. By Monday morning, Mike Moritz, God bless him, had a PPM (Private Placement) for Sequoia China One and gave it to them with the notion that you want to delight your partners.

When people do a deal, after the deal is done, you always find out it wasn't as good as you thought, we loved doing the opposite. We want people to be blown away. Holy cow, Sequoia culture.

David: Of course the second person there was Neil Shen.

Doug: There were two founders, one of them was Neil Shen. We went fundraising, we still didn’t have a signed contract, and we raised $160 million fund. We were ridiculed by limited partners. We held the annual meeting in Beijing in a brand new hotel where the heat broke. Everybody's freezing. We're little slightly abused, that has turned out to be a spectacular fun, and the rest is history.

Ben: What are some other companies that Sequoia China has invested in?

Doug: PinDuoDuo, Alibaba, Meituan, ByteDance… We have had somewhere near 50-60 IPOs. I had the idea on a one-page sheet, but if I tell you that, that would leave you with a wrong impression. At critical times where we needed—this is kind of funny—operational’s move, it was Mike that had the insight that we needed to make those moves. It was Mike that made the move.

I never told Mike this, I was incredibly grateful that Mr. Intuitive (as I had him slotted in my brain) became operational at key times. Even better than I was, if truth be told. It wasn’t me. It wasn’t Mike. It was all Sequoia because as we’re doing this, other people were carrying the load in America. It was truly a team effort.

Ben: So, while you and Mike were sort of championing, “Hey, we should be doing this because we think the rest of the world’s going to hit this inflection pointer, at least these areas.” This is sort of a Bezosism that’s more recent, but was there this disagree and commit mentality for anybody who is here, that knew that they had to hold down the fort, even if they weren’t pounding the table like you were? How did that go?

Doug: For many years there was sniping in the troops. “Why are we doing this? Why are we wasting time?” Keep in mind, this is not about money. No one’s making any more money because we all contribute the same amount. China contributes. We contribute.

David: But also we’re talking about the mid-2000’s when Tencent and Alibaba exist but it’s not clear that China’s going to be what it is.

Doug: It’s about building a dominant, world-class, global powerhouse that (at the same time) can act very local because the foundation of our business is seeds. If you lose seed in venture, you become (as I say) a private equity firm because later on, all you have to compete is on price. How do you, at the same time, go global while not losing an inch on the local side? Some of the best seeds are made during those days. We somehow manage to pull that off.

David: Dropbox, Airbnbs.

Doug: I initially became the global person. Nobody else had to do that. Somewhere along the line, Mike and I reversed roles where he was Mr. International, I spend more time in the US. In 2012, when Mike stepped down due to health reasons, we thought, “Should the three of us run it?” and we made the decision that I should run it, but we should have second-in-command. The logical one was someone from the US, Jim Goetz at that time and Neil Shen.

David: That makes incredible stories. Thank you for sharing all of this. At the same time that you’re expanding geographically, you’re also expanding the suite of funds in each geography, right? In terms of adding the growth funds, then ultimately the global growth fund, how did you think about that decision and doing that a separate fund versus one fund together, and obviously the company needs were evolving will stay private longer and everything?

Doug: The most important thing as I said is to be the first $100,000 to help that founder. Whatever we did, we understood that is the strategic part of the house. We’ve always done seeds but we’ve thought both for clarity of thought, marketing, we should do a C fund because we were starting to have a lot of C programs, such as a scout fund and a whole bunch of others we don’t really talk about.

By the way, I think the world changed with Netscape (or at least it had a major change), which meant we went from being deep technology investors—when really we only invested in technology pre-Netscape—to being application [...] investing across many market segments—travel, shopping, iPhone, Internet being part of the reasons. I think what started to happen is, it’s never been cheaper to start a company I seed investing. When you’re doing deep tech investing, there’s no need for seeds. It takes you to [...] with a bit of product.

David: Airbnb’s seed was $600,000 I think. Dropbox was $1.2 million.

Doug: Exactly, but that’s because an app can be built in a month. At the same time, though, it’s never been more expensive to launch a company. Why? You’ve got business that have the word “you” in their economics, the O2O (online to offline), Uber, DoorDash, Instacart, and so on. Then, if you don’t have those business, turn the clock back 20 years ago, we used to launch in the US, let’s say in B2B. We used to be profitable. Five years later we used to go to Europe. We can’t do that anymore.

David: You go public.

Doug: But you can’t do that. You launch in the US. Six months later, you launch Europe. If you wait, by the time it gets to Europe, there’ll be 20 competitors, half of which want to come to the US. You’ve got to run fast, which means you have to spend a lot of money, which means it’s bigger and bigger rounds.

We were seed and venture when we understood the companies needed more money. Keep in mind, we are the folks carrying the suitcases, we’re there from day one, we’re carrying the luggage, and we thought to ourselves, “Yes, we want partners, but why are we letting other people come in and dictate terms to our companies?” We were vulnerable and weak. So we got deeper into the growth business. We vertically integrated.

Then, when rounds became even larger and we have this incredible portfolio today of maybe 5–7 companies, we launched a global growth. The global growth is a global vehicle to double and triple down in the best company in the Sequoia portfolio. And yes, we partnered it with other firms and so on, but we’re able to enjoy the full ride.

I view those of being more tactical product versus seed being more strategic. That’s the most important one. Then, we also had a hedge fund because we realized that it’s way tougher to go from $0 to $100 million in revenues, from $0 to $5 billion in marketing cap than from $5 to $25 billion.

David: We talked about this a lot in part one of our Sequoia history. The vast majority of the magnitude of gains of returns happen post-IPO.

Doug: We learn to distribute shares to our clients carefully, not the week after the IPO or the week after the lock-up. We learned that a public investment vehicle would help us in many ways, including how to look at these companies retrospectively. If you’re in the hedge fund, you look back to youth and you explain how youth can grow up.

Most of us that invest in seed and venture lookup. We look from zero to something. The hedge fund guys look from a lot to something. We were able to have deeper conversations about companies and what companies could become, dare to dream of what companies could become. We found that to be quite useful.

Then we launched the heritage business which is to make it easier. It’s a family office endowment style. The reason for that -- we have founders and friends at Sequoia who had done quite well, and wouldn’t that be a terrific way to maintain a relationship for another 30 years?

That’s why we did it. These were just to try to build a global powerhouse, which is what we want, where we can serve founders, from idea to IPO and beyond to personal needs. I’ll go so far beyond, when to have the personal needs so we can have these relationships that would last a lifetime.

We all take an equal percentage of our profits. The venture group is walnuts. China is peanuts. The heritage funds are cashews. We blend them and then we redistribute them so that we all get a share of mixed nuts but no one gets more nuts. It’s just different kinds of nuts that financially intertwine us.

Ben: I see.

Doug: Nobody makes more money but we all have bought in, that we’re part of this team, this global team where we help one another while doing the very right things for the founders because it is all about the founders. Founders come first by far, limited partners, most of are non-profits, come second, and we come third. It’s not because we’re altruistic. If we achieve that, then it’s the way to run the business for the next 100 years.

Ben: An interesting take away here is as it became more and more expensive to get to your IPO or to get to be a scale global company because you have to do things exactly like you’re talking about, launch new GOs faster, grow more quickly to get ahead of your competition in these  winner-take-all markets, a major take away is a lot of firms took the specialization route, where they say we’re purely Series A and they stay smaller, or were a dedicated seed, “We’re this new asset class. We’re pre-seed. We’re growth,” or these large, public equity institutions come private and just stay growth capital.

But what Sequoia said was, “Look, we’re just going to grow with the company in the entire life cycle and take a very different approach rather than specialization.” Exactly like what you’re saying, to follow them and have the right products without belonging to their entire growth curve. It’s just a very different approach than a lot of people took. Certainly, there are other people doing something similar today but it feels 5–10 years later than when you did it at Sequoia.

Doug: I’ll make two points. The first thing is I will add, I agree with everything you said and to get there as early as possible, to be the first dollar. Second, if we said we are only an A firm, no company has a linear trajectory. Remember your Google question. They all have a little bump.

What happens when that company has a little bump and you have to invest in that questionable round? If you’re an only “A firm” or only “C firm” and you own 20%, where’s your capital to show to the new investor that you believe? Because it’s never linear, because it’s never slam dunk from day one, by being there, you can support the companies at times where there are darker clouds in the sky which helps attract other investors to then get to the sunny skies.

David: This is the perfect time (since I know we’re running out of time) to switch over to playbook. I’ve got two questions I really want to ask you in playbook. Let’s abstract out some of the themes of this conversation to what’s applicable to entrepreneurs running their businesses, to us as we think about partnering with companies.

The first one is, it just struck us and doing part one of the Sequoia history, would actually, the core makes Sequoia successfully is some pretty simple things. It’s focus on the market, founders come first, listen to what entrepreneurs tell you, don’t run your mouth, be a business partner, not an investor. How have you guys and you’ve thought about staying disciplined on those core things as you’ve grown so much? I’d imagine it takes a lot of active focus and effort.

Doug: Yes. There are many answers. I think our little secret is our culture. When I was young in business, I used to hear CEOs talk about culture, I used to think it was a talking point handed to the CEO by marketing. Nothing could be more incorrect.

The culture at Sequoia, if I could spend 10 seconds on it, is finding these quirky individuals who’ve had shock to their systems, who have something to prove, who as I say, “We’re not the quarterback of the football team in high school,” and you know what I mean about that. They were the shunned ones, if anything, maybe a couple IQ points high or something to prove, maybe something happened in the family. Put them in an environment of teamwork and trust.

We’re relatively flat at Sequoia. We’ve taken comp off the table, letting them know it’s okay to make mistakes and instilling a culture where we’re looking for the truth. Not your truth, not my truth, the truth in the middle of the table that helps the founder. A number of times I said in the partners meeting after proclaiming a point, I hear one of our young partners making a point. I say, “Hold that on a second, I didn’t think of that. His point is better than my point. I change my mind.”

So, applying that to everything that we do. Realizing that we’ve done nothing, realizing our worst enemy is the success that we had, realizing that by virtue of our market position, not because people hate us, because who else are you going to attack? Not the number 14 firm, not the number 3 firm. It’s just more fun to attack the number one first. It’s what I would do. It’s just more of a sport.

Ben: Trip Hawkins told us, “Sometimes you don’t want to be number one because then there’s people sniping at you from behind. I’m perfectly happy to be in two.”

Doug: I actually argue that Don used to say that. Don Valentine used to say, “Let’s let somebody else be one. It’s better to be two.” How we do that is making sure we have a mindset that we’ve done nothing. We have a mindset that we are here from going out of business. If you’re Amazon, you’ve got customers, you’ve got billions, you’ve got relationships. If you’re Sequoia, you’ve got 20 chickens walking in the back. That’s all you have, 20 chickens and a reputation.

So I tell people, “Take the darn shot.” Everybody at Sequoia would know we’d rather go out of business in a week than in five years. For sure. It’s just having the mindset of taking no prisoners, do the right thing when it’s painful to do so, help the founders, recognize when there’s no product/market. It’s not always helped. It sounds so wonderful. At some point, there’s no product/market fit. The market has spoken 19 times, then you’ve got to have a different conversation with the founders. All five VPs come see you and say, “It’s either him or her or all of us.” Those are tough times but that happens once out of 20 times.

Some firms do the calculus that says, “Oh, we don’t want to ruin our reputation. Let bygones be bygones.” We can’t do that. Remember the 1999 thing? It goes against every bone of our body. You have to help as much as you can.

Ben: It’s interesting that you talk about how it’s a negative, all the previous success. I’ve heard you talk before about how you’d pull down all of the posters on the walls here, of all these IPOs you had.

Doug: Look at this room.

Ben: Barren.

Doug: No posters in this room.

Ben: Very true.

David: It’s still very lovely.

Ben: It is lovely. Some would argue that the way that the venture model works from Sequoia has massive benefit from this momentum of you have made great investments which then (in hindsight) makes you look like a king-maker. So then, you get all the best deal flow now because everybody wants to be part of this aura that you have created. Do you think there’s truth to that? Do you think that’s true?

Doug: There’s a modicum of truth to that but let me give you another truth. Success is a drug and you can’t fall prey to that. We had investors here that have been successful, made some money, and then work as hard. We have 10 tenets at Sequoia. Number one is performance. The others are not important. If you’re missing one, the other nine don’t matter. You could have clarity of thought, you could have teamwork but you’re not performing, you’re not here.

I tell people we are not a family. Make no mistake. We’re a team. If you don’t like teams, we are a [...] production. Maybe the investors are the actors, but you know the actors don’t look so good without a script, without the lighting person, without a director. Everybody matters in the team, especially the people that make us lunch and breakfast. They are the ones we have to treat with the most kind of dignity. They are our team members. They are the ones that make this place run. That’s how Sequoia works internally.

David: Michael wrote one of my favorite books of the last 10 years called Leading with Sir Alex Ferguson about his career. Obviously, all of that applies to Sequoia as well, but yeah, it’s an organization that you’re building. It’s not a family. That’s fantastic.

Ben: All right, David. Now, before we get into grading here, I’d like to thank Wilson Sonsini, the official legal sponsor of season six of Acquired. Wilson Sonsini is the premier legal advisor to technology, life sciences, and growth enterprises worldwide, as well as the venture firms, private equity firms, and investment banks that finance them. Thank you to Wilson Sonsini. On to grading.

David: Yeah.

Ben: All right, Doug, on this show, when we grade an acquisition—a big company buys the little company, Facebook buys Instagram—we grade how good of a use of capital that was. That instance (as you’re well aware) is one of our far and away A+ of A+’s. We thought about how do we do grading on an episode like this.

The way that want to pose it to you are what are some of the things, as you reflect back in your stewardship and all your time at the firm where you would say, “That was an A+,” and some things that you swung and missed or you watched one go by and say, “Actually, that’s a C, D, or F.” We’ve made up for it in this way but this is a way to be critical of a previous decision.

Doug: First of all, I’ll tell you the overall grade I’d give us and then I’ll drill down. Somewhere between B and a B+, that is what I would give us. I’d give ourselves an A for the war room times of 1999. Those were our best days. I’d give ourselves an A for the times where we had those 51–49 conversations when we leaned the right way. Then I’d give ourselves a lot of F’s in things that came through this conference room and we just got them wrong. We tend to get them wrong for the most often reason is that we overthink things. Sometimes, we see revenue growth even early on and we overthink, “Well, what can this company be?” At some point, revenue growth speaks for itself.

I’d five ourselves a fairly high grade on how we treat people, how we wrap everybody in Sequoia.

I’d give us high grades that we bring everybody in in this teamwork approach. When we have an IPO, a big one, we’ll send an internal note about how many people touch a company. You would be shocked to see how many names are attached to success. I’d give us grades on how we embrace failure, our failure. It’s always us.

I’d give us a much lesser grade on the misses. I’d give us F’s because a lot of them came through here. So my blended grade, if I’m in a Mike Moritz mood, I’d give ourselves a B, if a Doug Leone mood, I’ll give ourselves a B+.

Ben: Thank you for that. It truly is hard to imagine a company at some point not coming through the halls here. I’d be remiss not to ask you, can you tell us the Facebook story? This has been in the freaking Hollywood film at this point. How’d that actually go down?

Doug: My daughter from Cornell told us about Facebook very, very early on. Kristin George is now product manager at Instagram. I told [...] for a number of reasons. Some good, some bad, some justified, some not. We would never be able to get in and we knew Facebook for a very long time, which culminated in that presentation at Sequoia where Zuck mistakenly—he since said that, obviously, we’ve all grown up. We don’t hold it against Zuck—came to Sequoia. I wasn’t in that meeting because I was in China looking for teams.

But then we had another shot at Facebook. We had a shot at Facebook early on at a very high price and then we were asleep at the switch when all those $8–$10 billion rounds were done, completely asleep at the switch. I’d give us lower than an F. I don’t know what’s lower than that. I’d give us a G.

David: Well, you did have WhatsApp, so.

Doug: Yeah. Let’s say that we got some Facebook shares.

David: You got some extra credit. Fantastic. Thank you so much, Doug, for joining us. This has been really special. Last question, how can people and especially entrepreneurs get in touch with you and get in touch with Sequoia?

Doug: Send us an email. I remember I was in a panel once (about 10 years ago) and they asked that same question to three venture persons. The venture person next to me said, “Well, we like to go through law firms, intermediaries, to screen.” It was my turn, I said, “854-3927” which was a phone number.

Ben: Does that still work?

Doug: It still works.

David: I hadn’t written down in the notes, I was going to ask you.

Doug: We didn’t get a lot of calls, but email us. And make it a thoughtful email. If you send an email to 14 of us, no one’s going to answer. Send us an email that’s—I don’t say spend a month on it—well thought out. “I was this. I want to start a company. Would you be interested in meeting?” Something like that. There are some emails I just don’t respond to. There’s no chance we’re going to do that and there’s just too many. But if you send an email anywhere near the viability that somebody may, one in 10,000 chances, ever make an investment, you’ll get a response.

Ben: Love it.

David: Love that.

Doug: Be aggressive.

David: Fantastic. I’m sure one of these days will.

Ben: Well, thank you so much, Doug. Listeners, if you aren’t subscribed and you like what you hear, you should. We’re available on any podcast player of your choice. If you want to become a limited partner, subscribing gets you access to our bonus show, where we go deeper into the nitty-gritty of building companies in real time.

To listen, you can click the link in the show notes or go to glow.fm/acquired and all new listeners get a 7-day free trial. With that, thanks again to Silicon Valley bank and Wilson Sonsini, and we will see you next time.