Sequoia Capital's Shailesh Lakhani at TechSparks 2016

I wanted to talk some about something that we think a fair bit about and know at Sequoia. We certainly invest in a lot of companies, but what we really get credit for is when we're involved with a company that lasts a really long time. And we were fortunate to be early investors in the U.S. in companies like Cisco, Apple, Electronic Arts, Google, Yahoo, and a bunch of others. And it's fascinating to us how some of these companies survive and some of them don't. So I wanted to talk a little bit about building a defensible consumer company. So we're focusing a little bit more on consumer than the description and the program might have said, because I wanted to get a bit... So this is the metaphorical equivalent of what we want our companies to turn into. You want to build a big, beautiful castle that has a big moat. In a company term, it's just a great, beautiful business that lasts generations and is something that people can marvel at and is very hard to defeat. But that's really hard to do, and we'll talk about some of the reasons why in more detail. So firstly, the cost of starting a company — these are charts here for compute on the top left, storage on the... Tech company today. Looking at the nature of these charts, it's probably safe to say that it will continue for the foreseeable future. So what that means is that a company that starts tomorrow will need to spend 35% less than you do today to build out the same stuff. These charts don't account for the fact that you don't need to buy any of the stuff anymore; you can just turn it on in the cloud. And things like software frameworks — to build a web app with Ruby is way easier than it ever was before. Second, there's this new concept of replicators. This circle here represents all the Chinese equivalents of major US tech companies. In India, we find that when a tech company starts that raises some money, we all see tens of business plans of someone starting that for India. Our Chinese colleagues tell us they see hundreds or thousands for ideas. And when you don't need to think about what the company you're creating is, and you're just picking up a model, it also becomes much easier to just start a company. Another factor that makes it more difficult today is what we call the J-curve in venture capital. The J-curve is basically the cash burn... The amount of venture funding has tripled in India, which makes no sense because the economy has not tripled in that time. The line here represents the number of companies that were funded. The number of companies actually has not tripled; it's up by maybe 50% over two or three years. So the average dollars that any given company receives is up almost 2x in the past three years. So that just means that your competitor who starts tomorrow or next year, in the last few years at least, has been able to raise a lot more money than you have, and that makes it again harder to be defensible. Here is iOS or maybe in the future virtual reality or augmented reality. You are typically using some sort of underlying framework to base your application on. In the past, these applications or these frameworks or underlying platforms lasted for a long time, but the pace of evolution of a framework has been so quick that you don't know how long the underlying platform that you're riding on will last. So if you are writing a spreadsheet for MS-DOS or Microsoft Windows, being the leader on that, when the platform shifted to mobile or tablets or whatever else it might be, there's no guarantee that you will survive. That all got lost during platform shifts in India, and certainly in many other parts of the world. Some of you might have seen this on Twitter, but you won't be able to read it here. This is a short memo that came out in 1963 that the CEO of IBM wrote to his team about how a small team of 34 people beat IBM to create the fastest computer in the world at that time, and how he was complaining and commenting how could this happen. So tech disruption, or disruption by smaller, faster, younger teams, has been happening for a long time. One way of defending themselves — I think the only thing we've learned over the last several months is that you cannot raise enough money to defend yourself against these trends. The cost of computing will continue to drop; there's lots of money available in the world to fund people. It will not be possible to just use even the profits you generate to defend yourself. Also, there's one other big factor that we see has played out over the last several years, and I don't think this existed as much many years ago. So there's the rise of what we think of as consumer tech super-power companies — companies that are actually just so powerful that they... Facebook in blue, green, and red which are the stocks that are breaking away from the pack. The other two lines that you see, the purple and the light blue, are overall tech stocks. In the last five years, the three biggest companies, along with Apple, have drastically outperformed the average of every other tech company. I think that's something that you would not normally expect in tech. You expect disruption; you expect some changes. But in consumer tech, these three or four companies — and if you do the same chart for Baidu, Alibaba, and Tencent in China, you'd see exactly the same trend. So if you are a big consumer tech company, you have a lot of advantages once you've... There are very good reasons why these companies have been as successful as they have. I'll walk through just three of them. One: these companies have generated a lot of profit. If you look at this chart, this is the share of overall smartphone profit that Apple enjoys. They enjoy over 90% of all smartphone profits. So this makes so much more money that they can plow into new products, and it's very hard to compete in the smartphone world today. This is Amazon versus all other e-commerce companies in the U.S. in terms of growth rate. This chart is a few years old, but if you look at the trend, it's exactly the same today. Amazon is accelerating growth in e-commerce. The same thing is happening in online advertising. In India, we estimate that Google and Facebook account for 60 to 80 percent of all ad dollars, and that percentage has actually gone up over the last several years. So this chart here shows in the U.S., Google and Facebook again, the two largest companies, are accelerating growth faster than the market, so they're taking more share from smaller companies. The network effects that these companies have just allows them to do this. One other thing: I listed out some examples that I could think of in just a few minutes of areas where you typically would have expected — why would Apple launch a music service and not buy Spotify or SoundCloud or something like that? But they did, and they've been quite successful. Why would Facebook build a local service or not acquire a Yelp or Zomato or that type of service? But they did. Or Amazon launch restaurant delivery and not acquire an existing Foodpanda or GrubHub or another restaurant delivery service somewhere else in the world? And we think it's because these companies also benefit from some of the earlier trends we talked about: that it's way easier to start a new service or... We are in a very interesting situation where it is way harder to build a scalable consumer tech company than it has been ever before. Because the costs have come down and everybody can do it; there's less need for incumbents to buy you as you build out these companies. Like, let's say Amazon has been successful in expanding into India. If they consider that a success, they are more likely to try that again and not buy in the next market. These companies generate a lot of profits. So the way we see it is, unless you're very, very special, life is pretty tough as a consumer tech startup. There are lots more things going against you now than ever before. So we wonder what to do. Pure companies building their own stuff — like I will just bought three ML companies in the last few months. Sure, rather than building, even though they had the resources. Were any of those big acquisitions? Yeah, about 200 million. I mean, you might get to 200, maybe even 500 million dollars if you're a very decent acqui-hire, but none of those companies have been able to build a standalone business. And look, I think there are some contradictions to this. Like, Facebook bought WhatsApp and Instagram, and we'll talk about some of those things later. But on the whole, we're seeing the big tech companies expand in new areas where they could have bought somebody, but they chose to build it themselves. For machine learning and AI, there's just a very short edge of talent in the short term. But I'm pretty sure five years from now, they won't be buying companies for just talent. And I'm again quite sure that none of these guys will be buying something very big for any of these things. I think when we think of companies, we try to think of companies that can get to a billion dollars plus in value. And I don't think that yet they'll be buying an ML or AI company for that. It's just talent at least. You have to build a business. Right? Yeah. Thanks. So yeah, we think a lot about this. How does a consumer tech company compete in this new world? I think some of the things that you can do are go back to core enough. Second, we think it's very important to focus on the quality of growth. In a young company, I think we see too many companies just focusing on growth for growth's sake. So one thing that we've seen that some successful folks who invest in the e-commerce business have done is: you don't count the number of customers an e-commerce company has; you count the number of loyal customers — the people who have bought more than five times or ten times. So count the people who really matter and stick around. I think NPS also can be a very valuable tool to help measure how happy your customers are. Brand is about measuring how much your customers love you and how much they would refer you. There's a very simple calculation you'll be able to find in lots of places on the internet. But it's a tool: the best companies have higher NPS scores, and it just indicates customer loyalty. We also find that companies are not thinking enough often about how to build something really proprietary, something that's really defensible. One example could be companies like TripAdvisor in the early days focused very much on collecting lots of review content, so the next hotel booking site couldn't — they would always have less content than TripAdvisor. So the question is: what are the things that you know, literally, as I'm driving off in front of the road, beep, throwing nails behind me, and make it harder for the next competitor to come and catch up?

Start with the biggest, most valuable markets. If your patent is for the US and maybe Europe, you're probably 80% there in terms of value, particularly if you're a software company or something like that. There are quite a few countries you can go into in Southeast Asia. I mean, do you know 30 to 40 lakhs? Yeah, we can talk offline; I need to understand a bit more details. But thank you. Look, understanding the right metrics at the early stages of what type of growth you're trying to build is super important. I wanted to change the... If Google had not bought or built Android, Amazon had not built AWS, Facebook had not bought Instagram and WhatsApp, and Apple had not built the iPhone, I think all these companies would be a fraction of the size they are today. I think we would all probably agree to that. I want to jump back to one of the earlier graphs we had. Because these companies were able to successfully navigate a platform shift. Had Mark Zuckerberg not cared so much about mobile, Facebook may not have done those deals. Had Amazon not thought so deeply about its own infrastructure, it may not have built AWS. So companies being able to navigate that — a platform shift in the life of your company and being able to navigate it is super important. The other important part of this would be that if you look at all these four companies, with the exception of Apple up until a few years ago, they were still very much founder-driven. So having a founder in the building who can really change the complete direction of the company, I think gives you a lot more chance of succeeding. Also, if you look at all these companies, they also had a very core profit stream that kept going. I think you cannot ignore the fact that you always need to keep making money while doing all this. Now, I look at many of... I think that analogy is quite different because those companies have gotten to a point where their businesses are generating a lot of cash and they can afford to invest. But when your company is still losing money, it's hard to take the big real bet that you need to do to protect yourself for the future. So profits are a real source of power in being able to navigate a longer-term business in the consumer world. So in summary, we think actually the best way to be a defensible tech company is not to be defensible at all. Or don't play defense at all — play offense. Play for the future, make big bets to reinvent your business. In India, big bets that these companies continue to take to continue challenging themselves, because they know tomorrow will not be the same as today. And the value of building a really strong company culture to be able to navigate the changes that will occur — none of this is possible without you actually working to have a team that can respond to the changes that happen in the marketplace. So these are just some of our thoughts on the topic. I would love to hear what people think. We spend a lot of time thinking about this, but it's a...

Yeah, Flipkart — you would probably need to... There are companies that have taken a risk that have not really succeeded. Like Sony, that gave up on its Walkman idea and went through Experian and the Walkman phone, and they didn't really expand in that. They tried to push it that way but didn't really go through. So where do you think the pitfalls lie when you say you need to take a risk? Because that's such a broad, generalized statement. You got to say that's the first part. And the second part is related to the question the lady asked earlier as well: if you have Indian companies — I would say they can't come up with ideas like Facebook. I think they can, and they do all the time. But how do they reach out to... push it forward towards a more global marketplace so that they start to... what's right? They start to invite the product that we're trying to sell in a faster way. How do we make the product sell faster in a global sphere and not focus so India-centric? And that's why Flipkart. Why can't Flipkart move out of India? Why is it stuck in India? How can it become an Amazon in the future? So the first question: we see the big companies taking lots of bets, and many of them don't work. So if you try to look at the number of failures and products Google's had, there's a very long list. Maybe Google Plus is the one that is... PlayStation business — not too much new stuff came out of Sony, whereas there was a lot more that was possible. If you read about the early days of Apple, the company that Apple was most scared of, most compared itself to, was very much Sony. So I think you have to continually be okay to take lots of bets and know that you'll lose many of them. On why India doesn't have these companies or why the market here... I think it's a function of there being fewer early adopters here. There are fewer people to try things out. We're a bit behind in some of the infrastructure required to do this stuff. We're just getting 4G for real in the last few months. So you'll know if you... The switch tracks a little bit to enterprise companies. I think you see a whole raft of software or service companies being created in India that are winning globally, and we think we'll see many more there. Because I think the infrastructure between here and the U.S. is a playing field, but you know because...

Look, if you might need it, then it might make sense to raise money. Yeah, it depends on the market. One of the things I didn't talk about that I actually wanted to mention was that I think companies use press and PR too much and aren't quiet enough about their achievements. I think there are numerous aspects of Google that we don't know how it actually works underneath. If you actually try to figure out how Amazon makes money, where they actually make money in their business, there's so little that they actually release publicly about the insides of their business. If you have a great idea and you're bootstrapping it, just be quiet. Don't tell anybody, and enjoy it to the point where you're at a scale where you can fight off...

That people take their model to other places. You can see what approaches different people have taken. Uber has chosen to compete in every market. Airbnb has mostly decided to compete in every market. Groupon ended up buying a few companies here and there. I think there are lots of different approaches you can think of. It's more dependent on how fast you can grow relative to your competitor. Yeah, yeah, we do. We worry a lot about that. Can you — if it's a city or country-based business, that determines how big your market is. That has a big impact.

I think in B2B, like per day, let's say you're selling software for example, it's harder to build a network effect because companies don't want to share with the next person, with the next competitor potentially. And they value or control their data much more than an individual does. So in B2B, we just see fewer companies with network effects. But there are certain models that lend themselves to it, like if...

Absolutely yeah. In a service model, what do you exactly mean as an offense? Is it scale? Because for each scale also you need funding, and in that case you come into public consideration. Mostly was talking about consumer companies, so less about Software-as-a-Service companies. SaaS companies, I think, just tend to have customers that are more sticky, and there's less chance of you losing them as long as you don't screw up. But I think it's hard to beat or remove a...

I don't think we should talk about any specific company's approach. Yeah, I'm not super close to Ola, and I think they're growing quite well, so their burn probably is quite justified, but we probably shouldn't go into any specific company.

Compared to PR for startups in India, I think the greater point was you use PR effectively and in a way that benefits you. Just being very excited that you got, let's say, a hundred thousand users in your company and doing PR may make you feel good and get you some tweets and Facebook likes, but it may not do anything for your business and may just invite a competitor. And that might have much more harm long-term. Not saying that you don't use PR at all. If you look at WhatsApp, for example, they only released — before they got acquired — the only release number of users they had maybe twice in their history. And... put your ego a little bit aside and just be happy with the numbers. And who cares if anyone knows about it? Probably better if they don't. We'll take a couple more. Yes, I have you said that consumer tech companies are hard to compete against right now. We have emerging markets, and there are so many people even in India who are getting onto the internet and getting mobile for the first time. And they are probably not on the radar of Amazons and big companies. So would it be a good difference if we build a product which is really made for such people who are coming for the first time? Yeah, I think I catch Amazons off guard at least by creating a big... respect. I don't think anybody would have believed it would have gone to this scale in India. What trends do you see in the future in the software industry in India, in terms of technology as well as innovation? We see a lot more software product companies, for example, serving global markets — SaaS companies, as a few people have talked about. We see a lot more, as the previous question was, a lot more people doing things that are unique or innovative for India or other emerging markets. But in reality, I think India's internet is still very small. It doesn't cover probably more than 10% of...

Yeah, I think some of the core things that we look for are: are you building any sort of network effect? Do you have very happy customers? Do you have sort of switching... the real health of the business? Those are some of the things that we would look for.

Thank you guys. I'll be around for a few more minutes.