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31 January 2021

Special: Sequoia Capital's Investment Playbook (with Alfred Lin)

6Frameworks
12Insights

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Frameworks in this episode

Finance6 steps

Hold While The Prospects Brighten

Hold while tomorrow looks brighter than today, then distribute shares, not decisions.

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Finance5 steps

Margin Dollars Over Margin Percent

Judge unit economics on the right denominator and the dollars left, not the percent.

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Strategy7 steps

The Prepared Mind Landscape

Map a market before any founder walks in, so you recognise the right one instantly.

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Communication6 steps

The Three-Part Founder Pitch

Paint the future, ground it in today's broken reality, then connect the two with a path.

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Finance6 steps

The Why Now / Who Cares Test

Screen an early bet with four questions: why now, who cares, what if right, what kills it.

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Entrepreneurship6 steps

White Space Market Entry

Win air cover in a non-obvious market before incumbents decide you are worth crushing.

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 1

Myth Buster

There has always been too much capital in venture, and always will be

Early in his Sequoia career Alfred Lin complained to Mike Moritz that there was too much money in the venture ecosystem and was told to go back to work and figure it out. Moritz's point was that the complaint was equally true ten and twenty years earlier. The structural explanation Lin offers is that winners take a disproportionate share of the market cap, investors therefore chase winners, and winners consequently absorb more and more of the available capital. More capital in the system simply means the winners get more of it.

  • The 'too much capital' complaint recurs in every generation of venture
  • Mike Moritz's response was to treat it as the job, not the problem
  • Winners capture a disproportionate share of total market cap
  • That concentration draws capital toward the same small set of companies
  • Abundant capital changes what winners can do, not whether the complaint is new

“There'll always be too much money in the system.”

“the thing that we've learned over time is that the winners get a disproportionate amount of the market cap”

#venture capital#power law#capital markets

Hot Take· 1

Hot Take

It takes a decade to find out whether you are any good at venture capital

Alfred Lin tries to talk people out of joining venture capital, and only if they still want in does he tell them more. The reason is the feedback loop: you can find out relatively quickly that you are bad at it, because you cannot get in front of interesting opportunities or you do not dream enough, but knowing you are good takes a decade or longer. He calls it a humbling business, quoting Mike Moritz's line that you can make money with the wrong thesis and lose money with the right one — and says if that does not give you cognitive dissonance, you are not paying attention.

  • Lin actively tries to dissuade prospective venture entrants first
  • Being bad at it shows up fast; being good takes ten years or more to confirm
  • You can make money on a wrong thesis and lose money on a right one
  • Losses arrive early in a career and gains arrive much later
  • The right response is both excitement and permanent humility

“Because it will take a decade or longer for you to figure out whether you're good at this business or not.”

“you can make money even if you got the investment thesis wrong, and you can lose money even though if you got the investment thesis…”

#venture capital#careers#feedback loops#luck

Explainer· 4

Explainer

Why compounding fools us at both the beginning and the end

Alfred Lin argues humans misjudge compounding because we naturally make linear projections rather than exponential ones. The early years of a compounding curve genuinely do look linear, and at any single point along the curve the tangent still looks close to linear, so it is almost always only obvious after the fact that you were in a compounding situation. He extends the observation to the pandemic, noting that we get surprised, clamp down late, and keep seeing cases because compounding is hard to reverse once running.

  • Linear projection is the default human instinct, exponential is not
  • Early compounding is visually indistinguishable from linear growth
  • The tangent at any point on the curve also looks linear
  • Compounding situations are usually identified only in retrospect
  • The pandemic was offered as a live example of the same misjudgement

“The thing that people don't get right, and it's hard for us to understand compounding because we're human and we like linear projections as opposed…”

“The tangent of it looks very linear and it's not that far off from being linear, or you draw the line wrong.”

#compounding#mental models#forecasting
Explainer

Think globally, act locally: how Sequoia stays decentralised across geographies

Asked how a globally distributed partnership avoids spending all its time communicating with itself, Alfred Lin says the coordination is deliberately lightweight. Sequoia is structured in a decentralised way: each group and each geography makes its own investment decisions. The reasoning is that what is happening on the ground matters more than global themes, which can be considered quarterly, whereas you act locally every single day. Think globally, act locally is the internal mantra.

  • Coordination overhead is kept deliberately lightweight
  • Each group and each geography owns its own investment decisions
  • Ground-level knowledge is treated as more decision-relevant than global themes
  • Global themes are a quarterly cadence; local action is daily
  • Think globally, act locally is stated as the internal mantra

“Each group makes their own investment decisions. Each geo makes their own investment decisions.”

“So we try to think globally, but act locally.”

#organisation design#decentralisation#sequoia#global teams
Explainer

Sequoia's US early-stage team is about 15 people, on purpose

Despite the scale of the opportunity, Sequoia's US early-stage team is roughly fifteen people. Each partner only makes one or two seed investments and one or two venture investments a year. The team is kept small because the work they value is partnering with founders as early as possible and helping the companies reach their full potential, which is an enormous amount of work per company. Making the investment is explicitly not the end of the job.

  • About fifteen people cover US early stage
  • Each partner makes only one or two seed and one or two venture investments a year
  • Small team size is a consequence of post-investment workload, not caution
  • Partnering and company-building is valued as highly as sourcing
  • The firm frames its job as bringing the founder's future to fruition

“The early stage team is about 15 people. It's just not a big team.”

“each one of us are only going to make one or two seat investments or one or two venture investments a year”

#sequoia#team structure#venture capital#capacity
Explainer

Spotting the SaaS wave early: racks, colos and the rise of the developer

Alfred Lin describes how a durable trend gets identified before it is obvious. The move to SaaS was visible as soon as companies started moving racks into co-location spaces — it implied software would increasingly be written and run in the cloud. AWS was the unlock: developers could build straight into someone else's racks with just a credit card, which lowered the cost of starting a company. Jim Goetz built a landscape around the rise of the developer on exactly this basis. Airbnb's founders attended the Y Combinator startup school where Bezos pitched AWS to startups.

  • Racks moving into co-location space was the early signal for cloud software
  • AWS let developers build without raising money to buy servers
  • Lowering the cost of starting a company was the durable second-order effect
  • Jim Goetz built the rise-of-the-developer landscape on this trend
  • Airbnb's founders were at the YC startup school where Bezos pitched AWS

“The move to SaaS was actually identified way before this current wave, because as soon as you saw people moving racks into co-location spaces, you…”

“What they needed was just be able to have a credit card and start coding and put it on AWS.”

#aws#saas#trends#developer tools

Story· 4

Story

Why Sequoia passed on the DoorDash seed, and Alfred Lin says it was his fault

Between 2011 and 2013 Sequoia met Grubhub, Caviar and Postmates and passed on all of them, not because they doubted the market size but because they concluded the category would be won by an unusually operational founder. When they met Tony Xu they saw both a differentiated strategy and operational depth, but still passed on the seed round. Alfred Lin takes personal responsibility for the miss and says it took time to understand that Tony was a different character. Sequoia invested at the Series A and in every round afterwards.

  • Three passes in the on-demand food space were about founder type, not market size
  • The category thesis was that operations, not strategy alone, would decide the winner
  • Tony Xu combined a merchant-and-suburbs strategy with operational obsession
  • Lin calls the seed pass his own fault and frames it as slow recognition
  • Founder-market fit is the term he uses for the combination they eventually saw

“And so we unfortunately decided to pass on the seed. And that's my fault.”

“we noticed that this required a very, very operational founder”

#venture capital#doordash#founder market fit#missed deals
Story

Funding Airbnb's expensive ground war for Europe against Wimdu

Airbnb faced European clones copying every pixel of its website and had to choose between buying or merging with Wimdu and fighting an expensive ground war. Sequoia backed the fight. Alfred Lin explains the reasoning was not hindsight but a structural read: travel is a global network effects business, and whoever wins the supply side will most likely capture the demand. That conviction is why they kept investing in later rounds rather than treating it as a marginal use of capital.

  • European competitors were copying Airbnb's site pixel for pixel
  • The choice was buy or merge with Wimdu versus an expensive ground war
  • Travel was read as a global network effects business, not a local one
  • Winning supply was expected to pull demand along with it
  • That thesis justified conviction in later, larger rounds

“they were either going to potentially buy WimDo or merge with them or have to go down the path of a pretty expensive ground war”

“And if you win that, if you win the supply, you will most likely get all the demand.”

#airbnb#network effects#competition#capital allocation
Story

Sequoia Capital, not Valentine Capital: designing a firm to outlive its founder

Alfred Lin traces Sequoia's longevity to Don Valentine's decision to name the firm Sequoia Capital rather than after himself, wanting to build the tallest tree in venture capital. The naming set the culture and signalled that the firm was never his to keep. He handed it to Mike Moritz and Doug Leone, and they will hand it on again. Nobody owns the management company at Sequoia; the general partners manage it and treat it as inherited property to pass on in better shape.

  • Naming the firm Sequoia rather than Valentine set the succession culture from day one
  • The tallest-tree metaphor was a deliberate statement of ambition
  • Valentine handed the firm to Mike Moritz and Doug Leone rather than monetising it
  • Nobody owns the management company; GPs manage rather than own it
  • Each generation treats the firm as inherited and owed to the next

“And the simple fact of basically calling it Sequoia Capital because he wanted to build the tallest tree inside of venture capital makes a statement.”

“We all view it as we inherited it from the last generation, and it's our job to make sure that we pass it on to…”

#succession#firm building#culture#sequoia
Story

What DoorDash learned from China when the pandemic hit

Sequoia's global footprint produces two-way transfer between portfolio companies. Because the firm is also invested in Meituan in China, DoorDash and its Chinese counterpart traded learnings on what works, how much market share is needed, and how unit economics change at scale. When the pandemic arrived, China had faced the virus first, so Tony Xu called people around the world and concluded the single most important thing was keeping restaurants open. Onboarding restaurants came first, then driver safety with masks, PPE and contactless delivery.

  • Sequoia is invested in both DoorDash and Meituan, enabling direct transfer
  • Shared learnings covered market share requirements and unit economics at scale
  • China faced the virus first, giving the rest of the world a preview
  • Keeping restaurants open was identified as the top priority
  • Driver PPE and contactless delivery followed once supply was secured

“and Tony realized the most important thing was to keep the restaurants open”

“there are a lot of learnings back and forth about what works, what doesn't, how much market share you need to get”

#doordash#meituan#pandemic#global portfolio

Takeaway· 2

Takeaway

High IQ, high EQ, high hustle: what Sequoia hires for

Asked twice what makes someone good at venture, Alfred Lin gives the same three ingredients: high IQ, high EQ and high hustle, applied appropriately. Being smart alone fails because this is a business of influence — you must influence founders to take your money, and afterwards influence them to do things they may not want to do, like rounding out a company rather than perfecting a product. The hustle is the daily grind from theme to landscape to the right founder. He adds that there are no formal requirements for the job.

  • Three ingredients: high IQ, high EQ, high hustle, applied appropriately
  • Identifying a problem is worthless without the ability to influence
  • Influence is needed both to win the deal and to shape the company afterwards
  • Founders have strengths and gaps; the investor's job is helping round them out
  • No formal background is required — anyone's resume could belong to a great VC

“you need high IQ, high EQ, and high hustle. And then you need to apply it appropriately.”

“This is a this is a business of influence.”

#hiring#venture capital#influence#talent
Takeaway

Your business plan is the strategic weapon; capital is only fuel

Closing with advice for founders, Alfred Lin frames the relationship between capital and strategy. The business model and business plan are the strategic weapon; investors provide capital, which is fuel. The order matters — you need the strategic plan first, because fuel with no weapon does nothing. His accompanying encouragement is to keep thinking every single day about how to build a sustainable business.

  • The business model and plan are the weapon, not the money
  • Capital is fuel and is useless without a strategy to burn it in
  • Sequence matters: strategy first, then financing
  • The daily question for founders is how to build something sustainable
  • Reaching out to him is simply a matter of emailing

“your business model and your business plan is the strategic weapon. We provide capital, which is fuel, but you need the strategic business plan first…”

#founder advice#strategy#fundraising