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Hello boys and girls, ladies and germs. This is Tim Ferriss. Welcome to another episode of The Tim Ferriss Show, where it is my job every episode, certainly this episode, to deconstruct, in this case, a world-class performer to tease out the habits, routines, lessons learned, favorite books, etc. that you can apply to your own lives.
My guest today is Roelof Botha. That's spelled r-o-e-l-o-f b-o-t-h-a. Roelof has spent more than 20 years building companies in Silicon Valley. He began within the walls of nascent PayPal in the early days, which he joined in March of 2000 while completing his MBA at Stanford. He became CFO in 2001 and led the company through both its IPO in early 2002 and subsequent acquisition by eBay. We have quite a few stories about all of that. Roelof joined Sequoia Capital in 2003, one of the most famed, legendary, and effective venture capital firms ever in the history of venture capital, to help founders build enduring businesses, which he has done many many times now.
He leads the US Europe business as managing partner and serves as senior steward of the global Sequoia partnership. Roelof is a director of 23andMe, Bird, Ethos, Evernote, Inside.com, Landis, MongoDB, Netera, Pendulum Therapeutics, Square, and Unity Technologies. There are more. Previously, he was a director of companies that include YouTube, Tumblr, Zoom with an X, SureX, and Eventbrite. He also led Sequoia's investment in Instagram. Speaking of Instagram, you can find him on Instagram at Roelof Botha, on Twitter, same, and LinkedIn as well. We'll provide all of those in the show notes at tim.blog/podcast.
And without further ado, please enjoy this very wide-ranging conversation with Roelof Botha.
All right. So, for those who were wondering why I'm laughing, I forgot to press the record button and I'm glad that we were able to catch it. Roelof, so nice to see you again. It's been quite a few years and I'm so thrilled that you've been able to make time and that both of us have been able to make time to have this conversation. So, thanks for being here.
Thank you for hosting, Tim, and look forward to the conversation.
So, I thought we would start with a question that I asked before we pressed record on our backup and not the primary, and that is how do you pronounce your full name properly if you were in your homeland?
My parents would call me Roelof Botha.
Roelof Botha. Pretty close. I'm not going to pass for an Afrikaner, but...
Your pronunciation's excellent. I'll respond to that.
I have heard a number of fireside songs in Afrikaans, I suppose it would be, having spent some time in South Africa in the last year, but we're not going to spend a lot of time on that. I want to spend time on note-taking and also different visual cues that you've used at different points in your life.
And so, here goes the first question. The first question I have, and you can't believe everything that you read on the internet, but something in front of me that says you used to have 10 to the ninth power written in the corner of your notepad, I guess, every week when you started at Sequoia. Is that accurate? And if so, could you explain why that's the case?
That is accurate. When I joined Sequoia, it was clear that if I wanted to make it as a partner, you needed to produce meaningful gains. And I'd set myself the goal of producing a billion dollars in gains for the partnership because that would mean that I'd made it at some level. And so, 10 to the 9, which is a billion, was my shorthand of reminding myself what I was striving for.
Now, what was the notepad used for otherwise, and was this on the top of every page or something you saw on a weekly basis? I'm wondering on these if the frequency was which you saw this, and also what the notepad was used for otherwise.
This notepad was used generally for note-taking, but it was really on Mondays in particular when we had a partner meeting where we would review all the decisions for a particular day, and that would be the notepad where I'd make notes about the companies that we were listening to, my own views on companies, what did I worry about, what did I think was interesting. And so, that was the most important day at some level, you know, we referred to it as the Olympic finals at Sequoia, was that the Monday partner meeting and the importance of getting those decisions right. And so, that was the day where I needed to remember very acutely what was I striving for.
So, I'd done this when I was younger, too. I don't know if you'd heard this.
I had, and we're going to get to that. Let me ask you, before we flash back and do the sort of the wavy Austin Powers flashback to childhood, which I will do in a minute. With the 10 to the ninth, did you have in your mind a particular time frame for that, or was it just a reminder of the magnitude of the goal before you if you wanted to move the needle?
I didn't really have a time in mind at the time. Things have changed a lot in the venture business. Technology has infused so much more of the world. I keep reminding myself when I was at PayPal in 2000, there were about 200 million people on the planet that had internet. 200 million.
And the vast majority of them were on dial-up, right? So, by the time I joined Sequoia in 2003, we didn't even have broadband reaching 50% of the US population yet. So, the numbers were still much smaller and technology didn't have the scale that it does have today. And so, I just thought get to a billion. Now, honestly, I feel like it's 10 to the 10 that you need to strive for.
Because, you know, technology has infused so much of what we do.
So, let's do as promised the rewind to childhood, and I'll let you take this ball and run with it wherever you want to go. But, I did read a bit about your high school system of having your goals visible to you while you were studying. At least that's based on a bit of reading. I think this is actually from — it should be accurate because it's from sequoiacap.com or the articles thereof. So, could you please elaborate on what you did back during that era of your life?
I thought I needed — there's a concept in psychology called a Ulysses pact, which is this idea that, you know, in the myth of Ulysses, he wanted to hear the sirens, so he had all his soldiers, all his sailors wax up their ears, tie him to a mast, and that way they could sail past and he could hear the sirens, and they wouldn't succumb to them. And so, in psychology, the Ulysses pact is this idea that you make a pact with your future self knowing that your future self is going to be weak. And so, my technique for doing this, not having read about psychology yet, was to put notes in front of my desk, on the door leaving my room, and candidly all over my room reminding me what I was aiming for.
And in high school, it was to be the top 10 in my state at the end of high school. At college, it was to be number one, and I would just put all these reminders of what my goals were. So, if I was tempted to get up to go make a cup of tea or watch television or take a break, I would just see what I'd written to myself, and I'm reminded of what I need to do if I want to achieve what I want to achieve in life.
Do you still use reminders like that, of any type, or do you feel like you've hit a certain escape velocity where that's no longer necessary?
I still use some of those. I mean, when I was at Sequoia, you know, as you pointed out earlier, I had the 10 to the 9. I try to keep track of how I spend my time. When I was in college, I would literally write down the time that I started studying down to the minute, and then I'd write down the time that I got up, so that I would have an accurate tally at the end of the day of exactly how much time I actually spent studying instead of just thinking that I was studying and just loafing around the house doing nothing.
And so, I use Evernote to do that. I organize key things that I want to accomplish for Sequoia and for each of the companies that I work with. So, I always have this running list of what are the key things you need to focus on, the most important, the three most important things you need to accomplish for a given company over the next say six months as a reminder of the most important things.
I want to jump next to a headline. And this is I believe a headline in a local newspaper when you graduated from high school. You can correct me if I get any of these details wrong. And it was — and again I'm not going to pronounce this correctly because — I will play it safe and use my Long Island accent. So, Botha's grandson is number one, I believe was the headline. Could you use that as a segue into explaining who your grandfather was, but also I'd love to just know how that headline landed for you and what it felt like.
So, my grandfather was the equivalent of the foreign secretary for South Africa and I think he served for close to 20 years in that capacity. He was ambassador for South Africa to Germany, to Denmark, and to the United Nations. In his time he met Reagan and Thatcher and Kissinger — these are the sort of people he interacted with. And he was a part of the National Party of the government that ran South Africa until the first democratic elections in 1994.
My grandfather was an agent for change even though he worked in the party that was the ruling party that had enforced apartheid. He wanted to galvanize change from within. So, he was part of the group that announced the unbanning of the ANC in 1990 and he actually served in Nelson Mandela's first democratically elected government from 1994 till 1996 when he retired. So, he was a very well-known, very prominent politician and by some measure when I was a child growing up, he was probably the second most powerful politician in the country.
I was named after him. It was literally — you know, the convention in Afrikaner culture was that the firstborn son gets the father's father's name. And so that's why I was named after him. But because he was so well known, it meant that I also lived in his shadow and I was often referred to as so-and-so's grandson. And so the headline referred to him and I was proud of my achievement and I was proud of my grandfather, but at some level I also wanted to be myself and to prove myself and not be always referred to as, you know, in reference to somebody else.
So we may come back to that. But you seem like someone who has repeatedly not taken the path of least resistance, which I mean as a compliment for sure. Let's talk about actuarial science. Now, I must say one of the funniest things that has happened to me in the last few days is in the process of doing research for this. You may know this, but if you throw your name into Google, the first thing that pops up is Roelof Botha, South African actuary, which I love. I just — that's fantastic. So, could you please explain why you chose actuarial science as your degree? And also, by way of doing that, just explain what actuarial science is.
So, I finished high school in 1990, the year that the ANC was unbanned. And honestly, at the time it was unclear whether South Africa would have a peaceful transition to democracy. If you'd looked at the history of most other African nations that had gone through this kind of a change from sort of a quote-unquote colonial past, the picture wasn't pretty. And so when I chose what to study, part of the dimension was would it give me an ability to work and live abroad. And actuarial science was something where after you got your undergraduate degree, you'd study professional exams and become a British qualified actuary. So, technically I became a UK actuary.
Which meant that I could work in the UK and Canada and Australia and a couple of other Commonwealth countries. And so that portability of my qualification was a really important decision point. The other one was the most difficult degree to get into. You could get a bursary to study for it. My family couldn't afford college, so I got an insurance company to actually pay for my tuition. And it was challenging. So, what actuaries do, by the way, is they run insurance companies, pension funds, so whether that's life insurance or general insurance, and are involved within investment management for those companies as well. So, think of it as a financial engineering degree. So, technically, I majored in actuarial science, economics, and statistics with a heavy emphasis on mathematical statistics as part of the degree.
So, in addition to the math, and I don't have the full context here in front of me, but does UCT stand for the University of Cape Town? Am I getting that right? I may not be. I'm all right. But not the university that most people know of, right? Well, well, right, exactly. And so, I wanted to just confirm that and build off of what you said to add — this is a I guess an indirect quote, the way that I'm going to read it, but Professor Robert Dorrington at UCT has said, quote, 'Actuaries are trained to think 30 years into the future, and accountants are trained to think a year in arrears.' Do you feel like your training, or maybe the attributes that led to you choosing actuarial science, ported well to entrepreneurship and venture capital, or do you think that's too much of a reach?
I think it did, honestly. As I said earlier, the actuarial degree is about financial engineering, sort of the mathematics of finance, if you will. And so, in a very practical sense, when I was at PayPal, the techniques I'd learned were useful in understanding the fraud problem that was latent at PayPal. And we were able to catch our fraud challenges months before others did, and it's part of the reason that PayPal survived. But it was a twist of history that that training actually was very specifically helpful in that situation.
But this idea of thinking long-term, there's a great article or a concept about the time span of discretion. What's the horizon over which somebody thinks and plans? And I think part of what we try to focus on at Sequoia, and part of what I think has made me a decent investor is just trying to think much longer term, not just thinking quarter to quarter or a year out, but thinking about the possibility of what might happen with companies down the road.
And if you've had a chance to go read the original YouTube investment memo, for example, but there were three founders, friends of mine from PayPal days, when we invested, so I was the fourth person really to join the company when we invested, and there was a way of imagining what might happen if this actually works. What if it goes right? Because it's so easy to worry about all the things that can go wrong with every company. So, I do think the training helped, but in the classic nature-nurture debate, how much, you know, was I prewired to think that way or not? I don't know. These things feed on each other.
I'm not going to even make an attempt to separate those. I don't think I can do it in my own life. Won't even presume to be able to do it for anybody else. I would love to ask you, and we're going to bounce around a lot, because I don't want to do this chronologically. I wouldn't do that if we were just having wine over dinner, so I'm just going to follow my interest here. And then perhaps we'll jump back to PayPal. So, the first question, I suppose, is somewhat chronological. Under what circumstances would you recommend to a young would-be entrepreneur that they go into consulting, or would you generally advise against that path?
I would generally advise against that as a career choice. I chose to work at McKinsey. I don't regret the decision I made, but for me it was, again, an opportunity to work with an international firm. I worked at McKinsey from '96 to '98. So, South Africa just opened up from sanctions. We'd had sanctions from 1985 till 1994. The country was starved for international talent. And so, you know, this international firm shows up, I could learn from people from all over the world, and they would give me an opportunity to either study or to work abroad. So, that was a lot of the magnetism for me to join McKinsey at that time.
I think if you're already in the US, go do something a little bit more direct. The best business school is actually being in business. It was actually going to join a company and actually experiencing what it's like. So, if that's your ambition, I mean, there's — if you want to be a consultant, there's nothing wrong with that. But, I think as a way of delaying difficult decisions about what might happen in your career, it's a play-it-safe decision. It's not a risk-seeking decision.
So, I have a number of friends, including a fantastic, meticulous doctor named Peter Attia, who spent time at McKinsey. And Peter, as one example, loves matrices. And specifically, he loves two-by-two matrices. And I'd love for you to explain who Don Valentine is. And we're going to explore that a bit, but could you also explain what his two-by-two matrix was?
So, Don Valentine is one of the fathers of Silicon Valley, one of the fathers of venture capital. Don grew up in the semiconductor business. He was at National and Fairchild Semiconductor back in the 1960s. And he started Sequoia Capital in 1972.
And we should get back to this later, but he made a very important decision calling it Sequoia Capital and not Valentine Capital. Don had an amazing career as an investor. He backed Apple when a lot of people were unsure about backing a barefooted, not well-dressed Steve Jobs. He backed Atari. He backed EA. He backed Oracle, Cisco, and the list goes on. He had a remarkable track record as an investor.
And when I joined Sequoia, he was still around, still alive. He passed away two years ago. And very early on he pulled me aside and he said, 'There's a 2x2 matrix of people we get to invest in. Exceptional, not exceptional. Easy to get along with, not so easy to get along with. Your job today, Roelof, is to figure out in which of those four quadrants we normally make money.'
I have not heard this story. I don't know the answer. I could hazard a guess, but why don't you tell us number one, did you figure it out, and what is the answer?
I think you have an intuition for it. It's, you know, exceptional, not so easy to get along with. And the reason is, you know, when you think about the founder prototype or personality type, you know, most of us encounter challenges in the world and we just let it go. This is difficult, this doesn't work, this frustrates me, and you just go, 'Eh, whatever,' and you move on to the next thing. Founders are these people who don't accept the way the world is. They want to change it. They encounter a frustration and they do something about it.
But going back to the Cisco example, right? The founders of Cisco were the heads of the computer departments for computer science and the business school at Stanford. And they were on different networks, so they could send primitive electronic mail within departments, but not across campus. And the two of them were romantically involved and were getting tired of walking across campus to see each other. They wanted to — I'm not kidding you, this is the first internet love story.
Right. This is fantastic.
And so the founding inspiration for Cisco was connecting the networks of the computer science and business schools at Stanford. And that's the founding story, right? Instead of just accepting the status quo. And so there's so many other companies we backed where this is the example, right? Jack and Jim started Square because there was a lost sale. I mean, it just — these personal frustrations are just incredibly powerful. So, when you think about a person who wants to take on the world and doesn't just accept it, that tells you a lot about what the founder is like.
Right. And they're highly likely to push back on anything that I would imagine that they don't feel is fully aligned with the change that they want to leave in the world or impart to the world. So, let's — if you want to continue. Actually, I would love to hear you continue. So, what are some other characteristics that could be related to the exceptional, not so easy to get along with, or they could be separate, that you have identified within the data set of hits from Sequoia, where you've made money. And by you, I mean Sequoia.
Well, first it starts with an authentic identification with a problem. That founding inspiration. Because if you don't just start a business for the sake of starting a business, it's so hard. There are so many challenges on the way to building a successful company. If you're doing it for the wrong reasons, you're going to wilt. You simply won't persevere. But if you're deeply motivated by what you're doing, you'll keep going and you'll overcome obstacle after obstacle. And so, that to me is one of the key starting conditions is founder-market fit, founder-problem fit.
You know, I love asking a founder when I meet them, you know, how did you come up with this idea? What was the eureka moment where something snapped and you wanted to address this problem? And what is it about the current solutions that you must have evaluated that frustrated you, that you didn't think was good enough? And then the next one is what is your unique and compelling value proposition? So, having evaluated alternatives and deciding to build something, why do you think what you're building is so distinct that it has a chance of flourishing and becoming a real business?
So, I can tell you one specific story. There's a founder, Matthew Rabinowitz. He and I met in high school in South Africa in 1987 at a nerd camp. It was actually called an academic vacation school, but I mean that's just a very nice — that's my saying, nerd camp.
And he's absolutely brilliant. He was gold medalist in our national science olympiad. He came to Stanford. He studied physics, electrical engineering. And in 2002, his sister had a baby that died within a week of birth. And he was shocked at the state of prenatal testing. And he went back to Stanford and he learned everything he could about biology and genetics and started this company Natera, where I'm still on the board 15 years later. We made a million-dollar seed investment in him in 2006, just an idea. And today they deliver millions of tests to help people have healthy families. But it started with an incredibly authentic inspiration for him, which is seeing what his sister had to deal with.
You know, I've never heard the elegance of this phrase you used before, the founder-problem fit. But I am just a tourist in the startup world compared to your immersion as an entrepreneur, operator, and investor. But if I look back at all of the angel investments I've made, the founder-problem fit is the defining feature of any of the hits, not product-market fit, which may also exist, but in terms of the hierarchy of weighted importance, it's this founder-problem fit. That's a fantastic phrase.
What else have you learned or did you learn rather from Don Valentine? And it could just be anything that you observed in him, attribute, behavior, habit, or otherwise, but what are some of the takeaways from having spent time with him?
Incredibly good listener. You think about the stereotype maybe of an investor who's fast-talking and needs to be heard. Don was very comfortable sitting for an hour and just listening. And absorbing. And then he was very precise with his questions. Precise with his notes. I remember receiving a note in my inbox from Don. I was confused initially because there was no 'to' or 'from', so I didn't know who it was, you know, who'd written me this note. So, I walked around the office saying, 'Who, you know, who left this for me?' And people looked at it and said, 'It's written in green ink. It's Don.'
So, Don had exclusive use of green ink in the office. No one else was allowed to use a green pen. He loved the color of money. But he would take a full page and there maybe be 10 words on the page. They were just so incredibly concise in describing the feedback that he wanted to give about a company or when he interviewed people. I saw some of his interview notes about people. You know, instead of writing two pages of notes about the interview, it was just so crisp and on the point. And so, his ability to distill things very concisely is incredible.
You mentioned earlier the question of what happens if this goes right, and I'm paraphrasing. But like, what does this look like say five, ten years down the line, even more, if this goes right? Could you speak to the practice of pre-mortems and pre-parades, if I'm getting the term correct?
Correct. It was actually a technique that I picked up from Larry Summers. Former Treasury Secretary Summers is on the board with me at Square. And he actually joined pretty early. He's been on the board for almost a decade with me now. And he posed this as a challenge to the management team at Square about, 'Imagine things go incredibly well over the next three or five years. Actually write it down. Don't just think about it. Write down what does that look like? What does success really look like? What does the company look like? What have you achieved? Which markets do we operate in? Which products have we shipped?' Then go write a pre-mortem. Things didn't go the way you wanted to. What does that look like?
And so, we've taken that concept. We actually use it in our investment memos. So, for every investment we contemplate, we write a pre-mortem and a pre-parade. And when we've had strategy off-sites for ourselves, for the Sequoia Capital investment team, we did this, too. We had a pre-mortem. It literally said, '2030 autopsy of Sequoia Capital and what went wrong. What are all the things that are going to cause us to not be a great firm in the future?' And the value of this exercise is, again, back to the insights from Don, it really crystallizes first-order issues. Because you can spend all your time scurrying around doing all the busy work. If you're not focused on the things that will really compound and matter over the next five to ten years, you're missing the boat. And it's the urgent-important trade-off. You know, it's all those things woven into a very practical exercise.
How often would you do the pre-mortems at the Sequoia, I suppose, team off-sites?
I think every year is too frequent because things just don't change that often. I mean, we may revisit something if there's something that's really changed.
There's a 'why now' — 'why now' is one of the questions we love to ask. Obviously, it's like, 'Why now?' So, you know, we made an off-cycle decision to open up in Europe, for example. Something we hadn't done for a decade. We kept on thinking about, 'Should we open up an office in Europe? Should we be on the ground?' Instead, we kept on flying into Europe and we made some great investments. We were early investors in Unity and Klarna and, you know, several other companies on the continent. And at some point, we realized there's just so much company formation happening in Europe. And especially after the global financial crisis, there's a whole crop of young people in Europe that now aspire to building companies when that wasn't the case before. So, we revisited our assumptions and changed, and that was an off-cycle decision.
Let's dig a little bit deeper on the postmortems specifically as applied to Sequoia. So, let's just say you're at an offsite and let's — you can pull a real one to mind — and you're asking yourselves, you know, imagine the venture business in ten years' time. Sequoia is gone. What happened? Are there any answers that you can brainstorm that you can share that prove to be very valuable in decision making for the firm? Because I will say for people who don't know the venture capital ecosystem, one thing of many that has impressed me forever for as long as I've known about Sequoia is the longevity of Sequoia. Are there any examples that you could give of postmortem answers that have proven very important in decision making?
For sure. By the way, the long live — you know that the Sequoia tree is the longest-living tree in California.
Right. And that's the reason that Don chose to name Sequoia Sequoia.
It wasn't an accident. He wanted the partnership to outlive him with a lot of consequent behavior and actions. And he also wanted us to invest in companies that stand the test of time, which I think we've done disproportionately. So, you know, there are a couple of things from the offsites. I think one of the most important ones is hubris. The downfall of every Greek tragedy. And the extent to which we rest on yesterday's success. You know, one of my favorite quotes is: no wreath wilts as fast as one that's rested on.
We cannot rest on the past and that's part of what motivated me when I joined Sequoia, by the way. The motto we have inside our building is: you're only as good as your next investment. And I saw that hunger and determination from people like Michael Moritz and Doug Leone who clearly made it in life and yet they were relentless in their pursuit. So, very important for us as a team to think about hubris.
We need to make sure that we continue to meet companies at the earlier stages of formation. So, if you think about the history of Sequoia's investments, when we invested in Atari or Apple or Cisco, we were the first investors. They were often single-digit numbers of people around the company when we first invested. When we invested in YouTube, there were three people. LinkedIn, there...
Were seven people. Palo Alto Networks, one founder in our office, incubating them. If we start losing grip of that early stage of being in touch with the entrepreneurs right at inception, that's very dangerous for us. There's this temptation to then drift downstream and become a late-stage investor. And so, that's probably one of the most important things we talked about in our venture in the offsites is we've got to make sure that we stay at the fountainhead of company formation.
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So, let me ask a follow-up related to that last point. And this may be getting too into the weeds, but I'm curious. Early stage investing has become so, I would say competitive, or at least the field is flooded with players. Compared to say 2007 when I first started paying attention to the startup investing world, it's almost nothing like it was today in terms of competition and the sheer number of people willing to write checks in different forms, in different fashions. I would imagine with a famous firm with multiple funds, as you get to larger fund sizes, in order to invest at the earliest stages and have those offers be accepted without over diluting the founders, it seems like you would have to amass an army of people to maybe handle that, to have sufficient capital outflows to make the entire operation work. How did you guys think about solving for still investing at the very early stages as the firm and the funds grew?
We don't want to hire an army of people. Our investment team candidly is about unchanged over the last decade. We only have about two dozen or so investors in our US and Europe business. Because if you want to make good investment decisions, you need to have small decision-making groups. Committees don't make great decisions because then you average to the mean. And great investments depend on outlier instincts. And we are looking for the outlier founders, the founders who dare to build really exceptional companies, not just investable companies. So, we've tried to keep the team small. We've also kept our funds separate. So, we have a seed fund that's distinct from a venture fund that's distinct from our growth fund. And the teams are lined up against each of those because I think what you point out is a real risk that if you have — let's just suppose you have one pool of capital, you have one $10 billion fund making a $500,000 seed investment in something promising seems kind of irrelevant. It's surrounding it. And then the whole team starts chasing what they think are bigger investments. And so, that's one of the dangers that we've guarded against. So, we have separate teams focused on different areas. And the key is to look at the multiples. It's not about the input. Many of these small investments we've made have turned into very large gains. It's not about how much you invest, it's about the impact you're going to have.
In terms of the competition, by the way, I actually think it's fantastic that there's this much competition. Because what used to be a cottage industry in the 1980s and '90s — because it wasn't a big market. I'm not saying that dismissively, it was just a smallish industry. The industry has had to professionalize. The beneficiary of that ultimately are the founders. And we've had to up our game. Yes, we had a talent team when I was still at PayPal, Sequoia had a talent team, but you know, it was one or two people. Now, we have 15. And we're just delivering many more services to startups to help these companies succeed, to give them an unfair edge and a chance of outside success. So, I think it's really in service of founders. It's fantastic that the business is like this. It makes it more competitive, but it's all right.
Yeah, I think you guys are going to be fine. I mean, it's also incredibly advantageous to build a winning streak and to have the track record that say a firm such as Sequoia has because you also have a selection bias with inbound with respect to very good deals. So, I suppose that helps in part with maintaining a smaller team as opposed to a larger scouting team that's going out and canvassing sort of every corner of the landscape. Is that a fair comment or do you think there's more to the story that you'd like to flesh out?
I think it's true. We're blessed by having the history we do. So, the companies that we backed when they were private today account for over 25% of the total value of the NASDAQ.
Over a quarter of the NASDAQ were companies that we backed when they were private. No other venture firm comes close. So, that is an incredible achievement and it means that we're a magnet for other opportunities often because of sector expertise or experience. So, because I'm on the board of Unity, I might disproportionately get people who work in VR and AR because they're developing on the Unity ecosystem. And so, that gives us access to this. So, there is a way in which the industry success begets success for sure. But, it can also be a curse because if you have a lot of inbound, are you spending enough time thinking critically about where you want to spend time? Where the opportunities for tomorrow might lie? And so, there's a danger there that you may spend all your time just taking inbound opportunities instead of pursuing the best founders and the best companies. So, there's a balance there.
Roelof, what books if any come to mind as books that you have recommended or gifted the most to other people?
Two different ones. There's Man's Search for Meaning by Viktor Frankl.
Which invariably shows up on these lists of, you know, 100 books you should read before you die. Which really had a big impact on me. Spoken about it at Sequoia founder events. I've given it to many people. I just think the book is amazing in terms of helping clarify what it is that motivates you and what drives you. Like, what is your purpose? Because we're not really driven by monetary rewards or pleasure by itself. So, that to me is a fantastic book. The other one is an annual series called America's Best Science and Nature Writing. And it's this collection of about two dozen articles from American publications written for a lay audience across a range of topics. You know, could be what's the latest insights from physics and astronomy to what's happening in genetics, what's happening with anthropology or things like that — I mean it's absolutely fascinating.
Could you give us — and it doesn't have to be short certainly, but I wouldn't expect you to redeliver any of your presentations — why has Viktor Frankl's book had such an impact on you? And it is an exceptional book to be clear, but I'd just love to hear how it resonated with you or impacted you.
I think it introduced very clearly the need to think about what motivates you. I mean the fact that he was in a concentration camp — you've obviously read the book and it's not a story about the life in a concentration camp which is horrific, but the fact that he wanted to live. He wanted to survive because he wanted to recreate his work. His manuscript was taken from him when he was sent to Auschwitz in the first place. And part of what he learned when he was in the concentration camp was that some people gave up. And that even though the population in the prison was Jewish, the mortality rate actually increased around Christmas and New Year. Because it was the marking of time and a reminder for people that they maybe had no more hope or if they knew that their family members had died, they gave up. So, this idea that whatever it is that motivates you, your purpose might be your company, it might be your family, it might be your hobby, whatever it is, but identifying what it is that really motivates you and leaning into that and not pretending that you're actually motivated by fame or fortune or some other superficial motivator — it's just incredibly clarifying.
I'd like to ask you about a term you used earlier with reference to some of the other general partners at Sequoia, the relentless in pursuit piece. And I'd like to ask about this because one thing I've observed in some of my friends who are serial entrepreneurs who have had massive exits — I mean they have become wealthy beyond their wildest dreams — is that this relentless in pursuit or relentless pursuit can produce incredibly good outputs in terms of objective wealth creation, job creation, solving problems in the world, but it doesn't always translate and in fact, it seems sometimes to be inversely correlated to contentedness or a feeling of peace or happiness. How do you think about — if you do, and maybe the question is just the wrong question — but balancing the relentless pursuit or counterbalancing it so that you don't always feel discontent.
That's difficult because if you're not a little discontent, I don't think you're alive.
I mean, that is why people say, oh, Silicon Valley's dead, innovation's dead. Really? Like there's so many problems to be solved. As long as there's problems...
Yeah, I don't think Silicon Valley's dead or tech is dead.
No, absolutely. I think the people that I found who ended up getting unhappy wasn't because they were still in pursuit of something. It's actually that the pursuit was over.
It's the getting, not the having that makes you happy. And so, unfortunately, I've seen founders where they've had a big exit and maybe the company was acquired. And what do you do then? And maybe you can borrow from analogies of athletes often, right? The peak of their careers when they're 28 or 32, whatever the case is, but they peak relatively early in their life and then oh you're the person who once was that as opposed to what you are now. And I think that's very hard to deal with. But I've seen like the Instagram founders who I worked with, got involved with them very early and they were just incredibly well adjusted. Company was acquired, it's been a huge success, massive impact on the world and the two of them are just building and having fun and they found all sorts of other pursuits to keep them engaged and they clearly haven't suffered from what I described because they found another outlet for meaning for themselves.
Do you remember when you hit your 10 to the ninth? If you do, could you tell us about that experience?
I can't get you the precise year but it was probably about five, six years ago when I'd reached that. I think it was after the IPOs of MongoDB and Square — now called Block. I think after those two IPOs and the Tezos IPO I'd achieved that milestone. And sorry what was that other question?
Well what did you do? How did it feel? Did you pause to celebrate or were you just like all right now it's 10 to the 12th, let's get moving folks.
I definitely celebrated a little bit but it's not over because there are other interesting companies to be built. And even more importantly for those companies — I'm still on the boards of those companies — because they're still so early in their own innings. There's so much more to be done at these companies. I think one of the — and you know I don't know if we have time to talk about this — Sequoia Capital Fund, but this is part of the thing I...
Sure. We have all the time in the world. Go for it. Yeah.
Last year we conceived of and launched this thing called the Sequoia Capital Fund and for a long time I'd been frustrated that the venture capital model was built on this idea of a 10-year closed end fund cycle. It was first invented in the late '60s, early '70s and no one had questioned it. And there's this presumption that because you have such a short-lived fund life that when a company goes public you should distribute and move on to the next thing. But the truth is that many of the great companies endure and they keep compounding. And so with most of our companies that have gone public, the majority of their market cap accrued after the IPO, not before the IPO. Square today is worth 10 times what it was worth at the IPO. So almost definitionally, 90% of its market cap was created after the IPO. So why sell after the IPO? Why leave the board? What about all the other fun company building to be done? I mean, that's the thing that really floats my boat is working with entrepreneurs to help them build businesses. And for me to have the founder call me and say, 'Listen, I'm wrestling with this issue. Can you please help me?' That's one of the most gratifying things that I have in my job — being able to help on that journey.
So what is the structure of the Sequoia Capital Fund?
So the structure we created is essentially an open-ended fund that'll become the sole investor in all our future private funds. So we'll keep organizing private funds and part of the reason is what we described earlier. If we have a single pool of capital, it dilutes attention and focus. So we'll still organize a seed fund, a venture fund, and a growth fund and those will be time-bound, have dedicated teams, a certain amount of money, and it's accountable for the returns that it generates in a given vintage. But all the capital comes from a main Sequoia Capital Fund where we have cash, but we also have some of the long-standing positions of our enduring businesses. Where we believe the companies have an ability to compound for many years after the IPO. So that's the spirit of the investment structure.
Okay. I'd love to ask some probably naive questions and feel free to give me a wrist slap if they're stupid questions, but this is deeply interesting to me. So the first question — actually, I'll just give you two questions and you can tackle them in whichever order you'd like. The first is understanding — and I have seen it might have been published by Sequoia, it may have been Benchmark or someone else — but looking at the financial outcomes if you had held their private investments and sold as soon as lockup expired when these companies went public, or if you had invested the first day you could invest in those companies and held for X number of years, and you would have made more or just as much by investing as a public market investor, which blew my mind. I can't recall the source, but my question, I guess, is with the assumption that a lot of this value will accrue post-IPO, why not just distribute in kind, and then let other people, the LPs, decide if they want to hold or sell? And then the second question is the Sequoia Capital Fund, and presumably there are limited partners, entities, institutions, and maybe individuals who invest in the Sequoia Capital Fund. How do you pitch an open-ended fund to a pension fund or an endowment?
Yeah, maybe we should spend a second just on who our clients are. So, in Sequoia we work for what we call great causes. So, if you come to visit our office, our conference rooms are actually named after our long-standing limited partners. So, the Ford Foundation, the Wellcome Trust, Stanford University, MIT, Harvard, Dana-Farber Cancer Institute, Boston Children's Hospital, these are the people we work for.
We put their names on the door as a constant reminder that when we generate returns, they're the ones who benefit. And there was a period, actually, as a short digression, a couple years ago we thought about whether we had the right fee structure for our business. Because, you know, we capitalists, we teach our companies that they should figure out the right price for their product, and we have excess demand for people wanting to invest in our funds. So, why don't we raise the prices? Why don't we charge even more?
Could you just explain for people who are not familiar with venture capital, just the typical fee structure or your fee structure at the time so they understand how venture capital firms make money?
Sure. The typical structure is to charge a management fee as a function of the fund size. So, typically it's 2 to 2.5% of whatever the fund size is that you charge to pay for salaries and rent and research, all that sort of stuff. And then there's carried interest, which is a share of the profits, if any, that we generate. And the carried interest varies between 20 and 30% based on a firm's history and their performance history. So, let's just say that if you invested a hundred million and you turn it into two hundred, and let's just say your carry was 20%, there's 20 million. So, only a hundred million of gain, obviously, 20 million would go to the partners and the limited partners would get 180 million in that scenario, in that example. So, that's how our fee structure works. So, we actually talked about whether we should raise our fee structure because people were still going to invest in us. And we actually made an affirmative decision to not do that because we're very happy with what we earn, and we appreciate that the majority of what we generate goes to great causes. It goes to education. It goes to medical research, poverty alleviation. The Ford Foundation was helping to fight apartheid in South Africa in the 1960s before I was even born. So, we're proud that these are the people we work for.
Because we've had such a long history with them, we invited them to roll into the Sequoia Capital Fund, and 95% of the dollars that were eligible to roll into the Sequoia Capital Fund did. So, they are the same investors that have rolled into the structure, and we've had decades of experience with them. We have clients that have been clients of ours longer than I've been alive, and they'll be clients long after we're gone, and that's the way we want it. We want our LPs to outlive our GPs. The GP is the general partner, the people who work at the partnership, and we really care about that. That's part of this long-term orientation we have at Sequoia. So, to answer your — do you want me to go to the other question?
Sure. So, the reason we ended up with the structure — because it's a fair question. We talked about it. Let other people decide. Why should we hold the shares? Here, XYZ LP, you can take the shares and decide. If you're an endowment or a foundation somewhere, you're managing a couple of billion, maybe if you're a big university endowment, you have 20 billion or something like that. You don't know this latest company that we've just distributed. And so, what we found is that our LPs almost exclusively sell as soon as we distribute. And part of what we observed — we did other analysis, which is if we'd waited 12 months longer than we actually did to distribute, what additional return would we have generated for our LPs? And that was a lot of what informed the decision to form this fund. I'll give you a concrete example. At the point that Square went public, the gain for our limited partners was about 140, 150 million dollars at IPO. And we waited. We waited several years in that case to distribute. And we ended up generating well north of a billion dollars for our LPs in that case by being patient because I was on the board, I'm still on the board, I'm involved with the company, I understand their prospects, and I just had a different view that the company's share price eventually was going to catch up with its performance.
So, question on the research. If you look at the data and you have each of your portfolio companies value at time of IPO, and then there's lockup or whatever it might be, and let's just say even if it's hypothetical that you do the math on what the value would be at that point and then 12 months later, and you've made the decision to hold, what percentage of the time with your portfolio companies to date roughly would you say the value is higher versus lower after an additional say 12 month hold period?
I don't have the precise number at my fingertips, but it's the majority.
That's good enough.
Yeah, I was just wondering if...
The overwhelming majority, I should say.
Yeah. If that's the case, obviously, past is no guarantee of the future, you know, disclaimer, disclaimer. But the thing that's even more important, and I don't know if you've run across this book by Sebastian Mallaby called Power Law. It was recently published.
It has been recommended to me. I'm sure it's amazing. His book More Money Than God on the hedge fund industry I thought was exceptional. So, I haven't yet read The Power Law, but it's been recommended. But please continue.
I'll second the recommendation.
The reason he chose the title for the book is that our industry follows a power law curve. Sequoia funds, I can just cite some of the parameters roughly. In a typical venture fund that has, let's say, 35 to 45 companies in a given vintage, in a given fund, we'll probably have a third of the companies that fail to recover capital. Which may mean there's a complete write-off, or it may mean we only realize 50 cents on every dollar we invested, but you know, it's not a success. Then there is a whole group of companies that have modest success. Maybe you get your money back, maybe it's a 2x or a 3x. But what really drives the performance of the fund is the typically five to eight companies that end up being 10x companies, 10x returns. And the key is that the ones that get you 10x sometimes run, and they become 55x, they become 100x, they become 200x returns. And so, when you have a YouTube, an Airbnb, a Unity, a Snowflake, Palo Alto Networks, WhatsApp, Stripe, Square, yeah, these companies, they just completely blow it out on the right-hand side and so you get a power law curve if you look at it mathematically. It's just a very steep curve where a small number of investments really account for the majority of our returns. So in our history, between 5% and 15% of the investments we make account for over 80% of the returns.
And so to your question about holding off to the IPO window, it's not just that even if it's 50/50 whether it goes up or down, it's what's the asymmetry. The ones that keep compounding. Look at the scale that has been achieved by a company like Google over time. That's the kind of compounding potential that exists. Not with all businesses clearly. There aren't too many trillion-dollar companies out there, but when you get them right, they can make a big difference.
Yeah, the biggest takeaway for me and my, as I mentioned, sort of amateur tinkering in startup investing is — Tim Ferriss, you don't know what the hell you're doing with public investing. Do not sell after lockup because you have clearly no idea which companies are going to end up compounding incredibly. All of my worst mistakes have been panicking — well, actually, this is a perfect frame for a question I wanted to ask you. So, on one hand, I can look at for instance, selling Shopify right after lockup in retrospect from my financial position now and say that was a stupid mistake. It cost me a hundred million plus dollars. I should have made a different decision. However, I can also take the counter position and make a very compelling argument for why even though now it seems like I made the wrong decision that the absolute dollars at the time were a life-changing amount for me then. And so it was a logical decision.
And I use that as a segue because — please correct me if this is wrong — but I found a supposed quote from you which was, you know, PayPal was a 1.5 billion acquisition and today it's a company worth over 300 billion. I'm not sure if the timing of this article. And Mike Moritz was on our board and Mike, I think, saw the potential and pushed us and challenged us to think longer term. And what did we know? What did I know? And I made the wrong decision and didn't quite fathom how much potential PayPal had as a business. But I imagine that it had a significant impact on your life. So, I'd love to know if you still feel that was the wrong decision and also how you talk to founders about this because not every slamming of the briefcase, Zuckerberg-style walking out on Yahoo after a multi-billion dollar offer works out. Sometimes it backfires. Do you still think that was a wrong decision for you and if this quote is even accurate, and how do you talk to founders about this kind of thing?
So, the question I ask founders is — my partners tease me because they know that this is my question. And it's what's the scale of your ambition? What are you aiming to achieve? Are you interested in a company that gets to 100 million in revenue and that's the end of your ambition or do you want to blow past 100 million in revenue on your way to a billion in revenue?
Quick question, sorry to interrupt. At what point do you ask them this question? Because I imagine if it's in a pitch meeting, they know the right answer. But when are you asking them?
No, in a pitch meeting often. And they may not have thought about it and it's not to be critical. I mean, often when you're a founder, you just found a problem that you're passionate to solve. But I'm still interested to understand like where do you want to take it? Are you trying to build a small — which is, and again, that's fine if you want to do that, but you know, we're looking for outliers who want to build really, really big businesses. That's the business we're in. And I want to make sure that there's an alignment and that we're on the same page. That your ambition matches what we're looking for.
So, that is the scale of ambition question.
Critically important question to try to ensure to the extent possible that you're on the same page. Let me throw out — this is a thought exercise, hypothetical, right? Because I've seen it happen with founders I know. They start off, they have incredible founder problem fit, and in the beginning, their scope of ambition actually is quite modest, right? They just want to be able to buy snowboards online or whatever the hell it is, right? It's not to build an enormous company. And then, partially through competency, partially through timing, partially through luck, they end up having tremendous traction. And then, let's say they end up in a pitch meeting with you, you end up investing, and then years later, fortunately, the company's doing really well, and they get an acquisition offer. And let's further say that these two founders come from middle-class families, maybe their parents made 50 grand a year, and one founder wants to swing for the fences and say, 'YOLO, it's all or nothing.' Although, in this day and age, I mean, they've probably taken some money off with secondary and so on. But, let's say the other really wants to cash out because they're looking at how their life would change, and they're just saying, 'You know what? This is a bird in the hand. I don't know what the future holds. I want out.' How do you navigate a situation like that? And maybe the fast answer is, if we can, we just buy out founder B. But like, how do you handle a situation like that?
This is — and you alluded to it — secondaries are so important. At PayPal, we did a small secondary in 2001. People talk about it as though it's a recent invention. It was around 20 years ago. And I remember going from having been a student, still paying off student debt. My net worth was negative in 2001. And we did a secondary, and I think I got $50,000. I felt rich. I mean, it was transformative. I could actually travel, and I could stay in a hotel, and it was really amazing to have this experience. But, the reason I mention this is in the summer of 2001, eBay made a run at us in August. And I think part of what stiffened our backbone was that we'd all taken a little bit of money off the table. We were such a young team, and none of us worried about making rent next month. And it was a really important, I think, ingredient to us pursuing the IPO and getting a far, far better price. We got triple the price that they offered that summer 12 months later. So, it was a wise decision to have done that. So, I love being able to provide secondaries for people. And then there's a conversation with people about the meaning. Going back to Viktor Frankl, just what is it that you want to do? Do you really think having the money and having the beach house is going to make you happy? Or buying this fancy car? Because what we often do is we'll put them in touch with founders who've been in that predicament and have them speak to them and talk about the regrets about maybe having sold too early.
Do they ever run into someone who says, 'You know what? Given your specifics, I think now is the right time.'?
That has happened. I mean, and it's part of what — sorry to interrupt you. That's part of what we try to do. Just given our experience, is try to shepherd the conversation and to let people know, 'Look, we have this front row seat to hundreds of portfolio companies. I've got the unfair advantage that I've seen many, many more companies unfold than you have, the founder. You've probably personally seen many companies. And so I can't give you a perfect prediction, but I got to tell you you're in this outlier category. You're in this one in ten companies that we see that really just has outsized potential. And I think you're going to regret letting go.' And sometimes it's not the case. We were valiant, we made an effort, we thought the company had a shot and it's ended up where it's ended up and I think this is a good acquisition offer. It'd be a good home for your team and your technology. You'll end up flourishing with somebody else at the helm. And that's happened sometimes where the companies have really flourished being acquired because that company has the right distribution maybe for their technology, and that also is gratifying for the entrepreneur because their creation sees life and flourishes, not just as an independent business.
For people who don't know what secondary transactions are, would you mind just defining that quickly? I brought it up, so I should have defined it, but if you would — you're far more qualified to do this, so if you wouldn't mind.
A primary issuance of shares is when a company sells equity in the business as part of raising capital. So the company sells a million shares at $10 a share and they actually raise $10 million that goes into the coffers of the company to help the company pay for payroll and for helping to grow the business. A secondary transaction is where the money doesn't end up in the company's balance sheet, but instead it's just a secondary transaction between two individuals that are unrelated. So an employee of the company, a founder of the company sells shares to somebody outside who's interested in owning shares in that company. And so the company doesn't raise money, it's just the founder sells $100,000 worth of shares to an investor. That might be an example.
Perfect. Thank you for that.
So we've talked about the counsel you might provide founders. I'd like to turn that around and ask if any founders come to mind who have had a large impact on you in any capacity and that doesn't need to mean, of course, through financial magnitude of their outcomes.
Several. I think it's interesting, one of my partners actually pointed this out that when he first got into the business he had this impression that you should always maintain the delineation between your professional and your personal life and that you shouldn't mix the two. And that he found it interesting that I seem to be doing something different because I was very close to the founders I work with and I'd help them with a pediatrician recommendation or have dinners with them on weekends or sometimes travel with them for family vacations and things like that. And so maybe it's just my style. I've ended up really enjoying the long-term relationships I formed with founders. So we spoke about Matt Obenauf earlier, the person I...
I had met in high school, he's become a very dear friend given his background in genetics and what he's exposed to in the health care system. He's actually volunteered hours and hours over the last 12 months helping me with a close family member who has a medical situation. And it just warms my heart to see somebody who's so busy running a company make that kind of a sacrifice. I didn't even ask. He just volunteered. So through loyalty and being involved with people for a long time that you can build those sort of relationships to me is deeply meaningful. The Harts who run Eventbrite and Kevin was the founder of a company called Zoom with an X not with a Z that we'd invested in as well. They've become close personal friends and I don't know, just it makes life so rich when you can have these sort of relationships with your founders and that to me has been a big part of the job honestly. I've enjoyed.
