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Sequoia’s Leone: In Venture, Big is the Enemy of Great

66 points by dkasper 14y ago

josh2600 14y ago
Yeah I understand the viewpoint here. I'd argue that the costs of building a startup have been driven down so dramatically that companies that are hard tech organizations need to raise ever-smaller rounds to get started but, quixotically, ever-larger rounds to scale. Something like LivingSocial costs next to nothing to start, but costs millions to scale. Those kinds of wars can't be fought with 1M Series A rounds, but burning that much cash on a mistake is also quite rough. Now LivingSocial isn't hard tech, but most DB startups don't have massive initial capital expenditures, and with things like KickStarter market validation is much simpler. Is the incubator approach better? With the exception of YCombinator and MAYBE techstars, I'd say no. It's hard to say. As always, we'll look back in 10 years and pick the winners and losers by fund growth, but the fact remains, companies can afford to put off raising until much later in their life cycle.
inmygarage 14y ago
Leone mentions the angel scouts briefly. Curious: --how do these angels structure the relationship? is it just that they invest out of an angel fund with a single LP? --what is the real downside of taking an investment from a scout that is backed by a larger VC? he mentions that people get upset about it, but it's unclear why it's such a negative thing.
- panabee 14y ago
  the downside comes when you need to raise money from VCs. if the larger VC -- which made a proxy investment via the angel scout -- does not invest in you again, it becomes a red flag for other investors. this grants the larger VC more leverage during negotiations because you effectively need the VC to participate, or else risk scaring away other VCs. this assumes the other VCs know the angel scout is a proxy for the larger VC.
jbyers 14y ago
I misinterpreted the title of the article and this post. I thought Leone was making this point about startups. He's not. tl;dr: VC is warfare; venture firms themselves need to be aggressive, nimble, and revolve around small teams to thrive. Don't give up too much equity, beware overcommitted angels, and sometimes high growth companies need tons of funding.
- jdcryans 14y ago
  I found one nugget: “You want very small, tight teams, same thing with running an engineering department.” I can think of reasons why you'd want that, but yeah the article wasn't about making that point.
gavanwoolery 14y ago
"...growing faster than Facebook." Please stop using growth as a metric -- just say, flat out, how many (legit) user accounts you have. If you grow from 1 user to 2 users in a day, you are growing at 200 percent, way faster than Facebook is...but you only have 2 users. If you grow from 10k to 20k, its only slightly less meaningless. Also, the 10,000 fake user accounts you are seeding your startup with do not count as legitimate growth. Also, Facebook is probably plateauing. It is unlikely your growth match's Facebook's peak growth rate.
- jessaustin 14y ago
  If you'll forgive my pedantry, I think doubling is traditionally described as "100%" growth, not "200%".
- chimeracoder 14y ago
  Relevant XCKD: http://xkcd.com/1102/ http://xkcd.com/1102/ Agreed - then it becomes easy to get worked up about a growth rate "slowing down" and misinterpret that as a plateau, even if the sheer numbers would indicate otherwise.
1123581321 14y ago
“We have co-opted seed funds. You know, Y Combinator, that was completely our money. We have secret handshakes with a whole bunch of people. Very dangerous, because word gets out that so-and-so’s money is Sequoia’s money, that would not be a good thing. Do I correctly understand that Paul, Jessica et al are investing Sequoia money, or that they are somehow a large partner? Would someone please explain this paragraph from the article? Update: Is this what he was referring to? http://m.techcrunch.com/2010/05/21/y-combinator-closes-new-8-25-million-fund-sequoia-is-lead-investor/ http://m.techcrunch.com/2010/05/21/y-combinator-closes-new-8... I wouldn't exactly call it a "co-opt"; I am still interested in whatever insight someone shares.
- apalmer 14y ago
  seems like the most relevant question for this forum
- jl 14y ago
  Yes, Sequoia was the biggest LP in the two funds we had in the past, as everyone already knew. Beyond that, I don't have any insights about this article.
- dougleone 14y ago
  Oops. Co-opt was an incredibly poor choice of words in a live presentation. What I meant to say is that we've been partnering with YC startups since 2005 and between 2009 and 2012 we were the biggest LP in two of their funds. We’ve had a terrific relationship with Paul and Jessica and are thrilled to be associated with them. My handshakes comment referred to our now well-documented Scouts program. It started out stealthy because it needed time to develop and the scouts didn't want the attention. Scouts regularly disclose our relationship to founders and the wire transfer always comes from Sequoia. These two efforts represent some of our attempts to work with very talented entrepreneurs (like Brian and Drew) as early as possible so that we may help them build enduring companies.
  - 1123581321 14y ago
    Much appreciated and thanks for joining to answer.
zupreme 14y ago
I think that growth, as a metric for gauging success will soon fall out of favor. Soon stodgy old concepts like "revenue" and "profit" will begin to take hold again. The assumption that eyeballs will eventually equal dollars has been proven false again and again. Eventually Angel Investors and VC's will have to return to the same types of fundamentals that banks have been following all along (the recent financial...hiccup...aside).
- rmah 14y ago
  It's dangerous because it limits your options. Say you take money from an angel that is strongly associated with a single VC fund. Assuming you do well, when you need to raise your series A, if that VC fund declines, then it's less likely another VC will fund you. And they know this. Essentially, you have given them a lot of power over your future financing.
- malachismith 14y ago
  You misunderstand the goal of a Venture Fund within an investor's portfolio. It is supposed to to be high risk, high reward, GROWTH investment.
dreamdu5t 14y ago
Who is the real entrepreneur? The investor who makes a decision to risk his capital to capture a market's demand, or the founder who asks for money but doesn't make the decision? Ultimately it's the investor that evaluates and takes a risk on the model, not the founder. I associate entrepreneurship with risking your own capital, and with risk in general. Investors seem far more entrepreneurial than founders when evaluated in that context. I think investors should be considered the real entrepreneurs - it's ultimately their decision. Founders seem more like managers, not entrepreneurs. I'm talking about founders who don't risk their own capital and take investment, of course.
- heyadayo 14y ago
  I see, so you really think that the LPs are the true entrepreneurs -- Harvard, Stanford, various state pensions/treasury departments and the like -- the ones who invest money in VC funds. Risking your life, status, health, happiness, and wealth in order to realize a huge, positive change in the world -- that's what it's about in my book.
- deleted 14y ago
  [deleted]
- jpdoctor 14y ago
  > Ultimately it's the investor that evaluates and takes a risk on the model, not the founder. Apparently your time is worth zero. It turns out that there are other valuations for people's time.

66 points by dkasper 14y ago

Yeah I understand the viewpoint here. I'd argue that the costs of building a startup have been driven down so dramatically that companies that are hard tech organizations need to raise ever-smaller rounds to get started but, quixotically, ever-larger rounds to scale. Something like LivingSocial costs next to nothing to start, but costs millions to scale. Those kinds of wars can't be fought with 1M Series A rounds, but burning that much cash on a mistake is also quite rough. Now LivingSocial isn't hard tech, but most DB startups don't have massive initial capital expenditures, and with things like KickStarter market validation is much simpler. Is the incubator approach better? With the exception of YCombinator and MAYBE techstars, I'd say no. It's hard to say. As always, we'll look back in 10 years and pick the winners and losers by fund growth, but the fact remains, companies can afford to put off raising until much later in their life cycle.

inmygarage 14y ago

Leone mentions the angel scouts briefly. Curious: --how do these angels structure the relationship? is it just that they invest out of an angel fund with a single LP? --what is the real downside of taking an investment from a scout that is backed by a larger VC? he mentions that people get upset about it, but it's unclear why it's such a negative thing.

panabee 14y ago
the downside comes when you need to raise money from VCs. if the larger VC -- which made a proxy investment via the angel scout -- does not invest in you again, it becomes a red flag for other investors. this grants the larger VC more leverage during negotiations because you effectively need the VC to participate, or else risk scaring away other VCs. this assumes the other VCs know the angel scout is a proxy for the larger VC.

jbyers 14y ago

I misinterpreted the title of the article and this post. I thought Leone was making this point about startups. He's not. tl;dr: VC is warfare; venture firms themselves need to be aggressive, nimble, and revolve around small teams to thrive. Don't give up too much equity, beware overcommitted angels, and sometimes high growth companies need tons of funding.

jdcryans 14y ago
I found one nugget: “You want very small, tight teams, same thing with running an engineering department.” I can think of reasons why you'd want that, but yeah the article wasn't about making that point.

gavanwoolery 14y ago

"...growing faster than Facebook." Please stop using growth as a metric -- just say, flat out, how many (legit) user accounts you have. If you grow from 1 user to 2 users in a day, you are growing at 200 percent, way faster than Facebook is...but you only have 2 users. If you grow from 10k to 20k, its only slightly less meaningless. Also, the 10,000 fake user accounts you are seeding your startup with do not count as legitimate growth. Also, Facebook is probably plateauing. It is unlikely your growth match's Facebook's peak growth rate.

jessaustin 14y ago
If you'll forgive my pedantry, I think doubling is traditionally described as "100%" growth, not "200%".
chimeracoder 14y ago
Relevant XCKD: http://xkcd.com/1102/ http://xkcd.com/1102/ Agreed - then it becomes easy to get worked up about a growth rate "slowing down" and misinterpret that as a plateau, even if the sheer numbers would indicate otherwise.

1123581321 14y ago

“We have co-opted seed funds. You know, Y Combinator, that was completely our money. We have secret handshakes with a whole bunch of people. Very dangerous, because word gets out that so-and-so’s money is Sequoia’s money, that would not be a good thing. Do I correctly understand that Paul, Jessica et al are investing Sequoia money, or that they are somehow a large partner? Would someone please explain this paragraph from the article? Update: Is this what he was referring to? http://m.techcrunch.com/2010/05/21/y-combinator-closes-new-8-25-million-fund-sequoia-is-lead-investor/ http://m.techcrunch.com/2010/05/21/y-combinator-closes-new-8... I wouldn't exactly call it a "co-opt"; I am still interested in whatever insight someone shares.

apalmer 14y ago
seems like the most relevant question for this forum
jl 14y ago
Yes, Sequoia was the biggest LP in the two funds we had in the past, as everyone already knew. Beyond that, I don't have any insights about this article.
dougleone 14y ago
Oops. Co-opt was an incredibly poor choice of words in a live presentation. What I meant to say is that we've been partnering with YC startups since 2005 and between 2009 and 2012 we were the biggest LP in two of their funds. We’ve had a terrific relationship with Paul and Jessica and are thrilled to be associated with them. My handshakes comment referred to our now well-documented Scouts program. It started out stealthy because it needed time to develop and the scouts didn't want the attention. Scouts regularly disclose our relationship to founders and the wire transfer always comes from Sequoia. These two efforts represent some of our attempts to work with very talented entrepreneurs (like Brian and Drew) as early as possible so that we may help them build enduring companies.
- 1123581321 14y ago
  Much appreciated and thanks for joining to answer.

zupreme 14y ago

I think that growth, as a metric for gauging success will soon fall out of favor. Soon stodgy old concepts like "revenue" and "profit" will begin to take hold again. The assumption that eyeballs will eventually equal dollars has been proven false again and again. Eventually Angel Investors and VC's will have to return to the same types of fundamentals that banks have been following all along (the recent financial...hiccup...aside).

rmah 14y ago
It's dangerous because it limits your options. Say you take money from an angel that is strongly associated with a single VC fund. Assuming you do well, when you need to raise your series A, if that VC fund declines, then it's less likely another VC will fund you. And they know this. Essentially, you have given them a lot of power over your future financing.
malachismith 14y ago
You misunderstand the goal of a Venture Fund within an investor's portfolio. It is supposed to to be high risk, high reward, GROWTH investment.

dreamdu5t 14y ago

Who is the real entrepreneur? The investor who makes a decision to risk his capital to capture a market's demand, or the founder who asks for money but doesn't make the decision? Ultimately it's the investor that evaluates and takes a risk on the model, not the founder. I associate entrepreneurship with risking your own capital, and with risk in general. Investors seem far more entrepreneurial than founders when evaluated in that context. I think investors should be considered the real entrepreneurs - it's ultimately their decision. Founders seem more like managers, not entrepreneurs. I'm talking about founders who don't risk their own capital and take investment, of course.

heyadayo 14y ago
I see, so you really think that the LPs are the true entrepreneurs -- Harvard, Stanford, various state pensions/treasury departments and the like -- the ones who invest money in VC funds. Risking your life, status, health, happiness, and wealth in order to realize a huge, positive change in the world -- that's what it's about in my book.
deleted 14y ago
[deleted]
jpdoctor 14y ago
> Ultimately it's the investor that evaluates and takes a risk on the model, not the founder. Apparently your time is worth zero. It turns out that there are other valuations for people's time.