A fascinating story of the most successful venture fund of the Silicon Valley based on passion, vulnerability, ambitions, modesty and self-confidence. How did Sequoia manage to invest practically in all best startups of the world?
Doug Leon arrived to Maunt-Vernon (State of New York) in 1968 the eleven-year-old Italian immigrant. At first he understood nothing and couldn't accustom on a new place in any way. Leon failed school tests on mathematics, without understanding value of terms "truly" and "false". Because of ugly slacks schoolmates laughed at him. After school the boy watched alone on the black-and-white TV a sitcom "Mikhail’s Fleet" to learn some colloquial phrases which would help him to comunicate in the company of contemporaries.
So some years proceeded, and soon these efforts started bearing the first fruits. "Being a teenager I worked at yachts and was dog-tired on summer side jobs — Leone remembers. — I saw children at the pool of country sports club in the distance. Guys communicated with girls. And I spoke about myself: "I look forward to meetings with you in the world of business. You made a big mistake when let me in the country".
Ambitions. Vulnerability. Self-justification. Many succeeded immigrants constrain these emotions, having achieved success. They want to forget the past and seek to mix up with the best representatives of the American society. But Leon is not such. Even having become the managing partner of the venture company Sequoia Capital, he still behaves so as if he only going to take the first step to success. "I am supported in many respects by fear" — he says.
In a strict, ascetic office of Sequoia in financial center of the Silicon Valley on Send Hill Road it is possible to contemplate with your own eyes material result of what occurs when some hungry perfectionists gather. Along walls in photoframework copies of financial documents of 98 companies are hanged out. At the head of charts — paper with IPO Apple in 1980. It is possible to find the documents of Oracle, Cisco, Yahoo, Google and LinkedIn next. These are children of the venture company. Sequoia is put in startups from the moment of the foundation in 1972. The general capitalization of the companies with which it dealt, makes $1,4 trillion today — these are 22% of capitalization of all companies at the Nasdaq exchange.
And Sequoia is surprisingly modest, especially against other venture grandees, without speaking about such investment monsters as JPMorgan and KKR. Historical demands for carrying out IPO hang at office of Sequoia in a modest framework, which looks so as if they were bought in the next supermarket.
Partners of Sequoia have no magnificent private offices — they work behind desks in the big open hall.
The negotiation are filled with cheap plastic wastepaper baskets. There’s uch impression that managing directors of fund still didn't understand that they are rich.
Last year the company got the biggest profit for all the and
Last year the company got the biggest profit for all its history. Thanks to successful investments such companies as Airbnb, Dropbox, FireEye, Palo Alto Networks, Stripe, Square and WhatsApp, "Midas's list" of Forbes for 2014 (a rating of the most successful venture investors of the world) included record number of partners of Sequoia — nine people. First place was won by the partner of Sequoia Jim Getz who was enclosed in WhatsApp in 2011 — long before Facebook decided to buy a mobile messenger for $19 billion. Leon takes the sixth place in the rating, it is followed by his colleagues Michael Moritts, Alfred Lin, Relof Botha, Neil Shen, Michael Gauguin, Brian Shrayer and Kui Zhou.
Salaries in Sequoia aren't magnificent at all.
Though the annual salary of nine main partners of firm can reach $1 million, Sequoia doesn't pay the employees the guaranteed bonuses as it is accepted on the Wall Street. Besides, some younger partners of Sequoia even lost in a salary when came here. It was easy to decide on this victim — the profit on investments considerably surpasses a salary.
Let’s take Sequoia Venture XI Fund, which attracted $387 million at 40 investors in 2003, mainly universities and endaument for an example. Eleven years later the income of Venture XI made $3,6 billion, or 41% a year minus the commission. Partners of Sequoia will gain 30% of income, or $1,1 billion, and investors — 70%, that is other $2,6 billion. Even more amazing profitability expects investors of Venture XIII (2010) fund which grows for 88% a year so far, and Venture XIV (2012) fund. These funds will divide $3 billion for two, which were gained by Sequoia on sale of WhatsApp. If to put this money with other income, partners of Sequoia will appear billionaires, and external investors will receive record profitability.
"Since I came here in 1989, we involved more than 200 external investment managing directors — the head of department of investments of the American Notre Dame University Scott Malmass tells. — Meanwhile Sequoia could provide the highest profitability to us".
Counter to circumstances
Sequoia Capital arose in 1972 when Don Valentine, at that time the sales and marketing director in the companies of the Silicon valley making chips decided to try venture investments. The driver's son from Yonkers (the town in the State of New York in several kilometers from a place where Leon passed his childhood), Valentine was able to make out geniuses who founded the great companies later. His name got to textbooks of history thanks to that in 1978 he decided to invest in Steve Jobs's enterprise, though it smelled very strange from the 22-year-old founder of Apple as Valentine remembered later, besides he "was similar to Ho Chi Minh".
In the mid-nineties, when Valentine departed from direct management of Sequoia, Moritts and Leon took control of it. Externally they resemble each other a little. The graduate of the Oxford university, Moritts started working as the regular author of the Time magazine, his speech dazzles graceful with graceful turns. Leone graduated from Cornell University majoring in mechanical engineering and sold computers in Hewlett-Packard, Prime Computer and Sun Microsystems. To inform the interlocutor with his thought, he sword quite often. Moritts achieved full partnership in Sequoia, without having worked there even two years. Leon needed five years for the same.
And still both partners correspond to spirit of Sequoia: they are assertive, resolute and ready to finance the unusual companies worldwide.
"Every time when we are put in a startup, we do it counter to all circumstances — Moritts explains. — We are always resisted by the companies much more large than ours, which threaten us and founders of the company with full defeat. — the most interesting is to prove that all were mistaken. This is the most pleasant feeling".
Today Leon became the senior partner. Moritts remains the active partner, but began to participate less in company management — in 2012 a certain illness about which the investor tells only that it can worsen quality of his life in the next five-ten years was diagnosed at him. In recent interview of Forbes Moritts said that "now the main thing for him —to remain longer in shape", and added that in that morning he swam 90 minutes. On questions, whether there is no news about his health, Moritts answered: "Who knows, what the destiny prepares?"
Check by roughness
Every month partners of Sequoia study about 200 options for investment, but, as a rule, put money on average only in two new companies. All startups describe the interviews to representatives of Sequoia as unique life experience — regardless of how their meeting comes to an end. Moritts behaves as the detective: he listens attentively to all details on presentations and asks frighteningly acute questions. Botha, Lin and Shrayer — specialists in growth, they discuss ways to accelerate growth of consumer startups. Gauguin and Getz act as mechanics, each of them has twenty-five years' behind shoulders experience with the hi-tech companies, they measure chances of a startup of success.
There is Leon. The native of Genoa likes to nonplus founders to understand for whom durability for success in business will be enough. Nowadays experienced director from the Silicon valley Tony Zingale remembers how at a meeting in the early nineties Leon grabbed with Zingale's curriculum vitae, threw it on other end of a table and grumbled: "What do you know about management of a startup?"
They altercated ten minutes, and as a result Leon declared: "Well, we understood that you are a clever asshole. Now let's start negotiations".
Today Zingale — the CEO of Jive Software, the company on development of the software for corporations in which Sequoia invested. Zingale says that it isn't terrible that Leon form refuses to applicants often in quite sharp for whom it is a blow in the face. The neglect is quickly forgotten. Now Leon constantly calls Zingale the member of the Sequoia family. "He is the same quick-tempered Italian, as well as I,so we do well", Zingale says.
Borg Hald, the CEO and one of founders of Medallia faced roughness Leon in 2012 when his company looked for the first external investor on development of software for support services of buyers. The majority of other venture companies "flattered us and said that everything is so good that it isn't necessary to change anything in our conpany— Hald remembers. — Doug exposed us the requirements. He told that we should cardinally change approach to sales. He explained that in the world where energy and chaos fight, we only add entropy". In this case the sharp criticism from Leone bore fruit: Medallia agreed about investments with Sequoia, despite more generous offers from more passive competitors.
The main thing — not to complicate
Similar approach of Sequoia to work with startups is logical: the company seeks to provide rapid growth at the expense of the most perspective companies. If to make the proposal to partners of Sequoia in the morning on Monday, at a successful deal it is possible to agree about financing already in the second half of the day. If to request from them the list of conditions, it is possible to receive basic provisions on one page instead of the long memorandum written in difficult legal language. Speed with which Sequoia works, imposes Elon Musk, the CEO of Tesla Motors. Mask remembers how in 1999 when he created future payment system PayPal, Sequoia transferred $5 million to start work still before lawyers finished all formalities.
"It isn't necessary to complicate our life" — Adie Tatarko, the CEO of a platform for reconstruction of houses Houzz explains. She and her husband Elon Cohen became founders of this site in 2009 and since then work on its development. When the Houzz company attracted investments in 2011, other venture fund suggested to take their shares at the price above the market. But they prefer Sequoia because those "worked very directly and really quickly".
The fascinating history of the most successful venture fund of the Silicon valley is based on passion, vulnerability, ambitions, modesty and self-confidence. How did Sequoia manage to be invested practically in all best startups of the world?
Investments into migrants
The Tatar and Cohen grew up in Israel, Mask — in South Africa, Hald — in Norway. The analysis which is carried out by Forbes shows that at 59% of startups which were considered at calculation of Sequoia positions in "Midas's list", at least one of founders — a foreigner. If to place tags on the world map, it is possible to see that Sequoia works with businessmen from Ukraine, Ireland, Finland, Greece, India, Pakistan, Venezuela and ten other countries. (For comparison, data of Kauffman Foundation show that less than a quarter of startups in the USA among founders has immigrants).
Communications of Sequoia with the most gifted immigrants of the Silicon valley are hardly casual. Italian Leone works with partners from Wales (Moritts), South Africa (Bot), Taiwan (Leang) and natives from the northeast coast of the USA, which also consider themselves as immigrants. Natives of California — it is rather an exception for fund.
As result — partners of Sequoia don't avoid to look for new successful startups in democratic coffee houses and cheap offices where future stars of branch are just often born.
Other venture capitalists quite often wait that the success itself will find them on golf courses of Pebble-Beach or in refined institutions of Davos and Aspen. "We don't go there — Leone speaks. — There are no founders of young companies".
Exception to the rules
It is no secret that we tear apart venture business internal conflicts. Young ambitious partners are at enmity with old residents. In funds argue on the one who is a really good investor and who was simply lucky, who deserves a bigger share of profit and who should be expelled. If to add personal offenses and imprudent acts to it, quarrels of venture capitalists can give a good piece of bread to lawyers.
Sequoia became an exception of this rule for a long time. Thanks to special approach to engage of employees, and the salary scheme Sequoia keeps healthy climate in the company, organizations of work, and rejuvenation of the management takes place without excesses. Old partners leave with cash. New take their place. The fund works according to Leon’s idea about a big Italian family: there’re a lot of different people, different views, but all want to keep despite everything together. Women? In Sequoia there is no on the leading positions, but in the company hope that they will appear over time.
"We need the people of a modest origin aimed at a victory — Leone says. — And we create environment in which people trust each other ". Sequoia sometimes employs recent graduates of business schools as younger partners without vote. Positions are taken more seriously by skilled heads from high-tech branch, such as Alfred Lin (Zappos), Brian Schreyer (Google) or Omar Jamui (AdMob). These are famous grandees, they worked many years in the companies from Sequoia portfolio.
For example, Schreyer offered Sequoia three business ideas in 2008. Any of them wasn't pleasant to Morittsu, especially underfulfilled project on release of phones with large buttons for elderly people. But, as Moritts remembers, "the best Brian had Brian". Phones with large buttons can wait. In Sequoia decided that gravity and Schreyer’s modesty as well as possible will suit the most investment company.
Partners of Sequoia meet every Monday at 8 in the morning to discuss perspective investments and progress of the companies from the portfolio. Unwritten rules demand modesty. "The main thing — to make the correct decision, but not to prove the case" — Getz says. "If performance lasts more than 90 seconds — a new partner Aaref Hilali says (from Clearwell) — you probably speak too long".
Unlike the vigorous investors with the Wall Street preferring cardinal measures which can influence growth of actions on the same day, partners of Sequoia constantly help the companies on different trifles and don't blow about it in press releases. When WhatsApp looked for a new developer, Getz invited at least six candidates for this position to family dinners to convince them that this modest startup has really big future. When one of founders of the Stripe service, 23-year-old John Collision looked for a way to sell the startup on acceptance of payments of large finance corporation from East coast, Moritts from Sequoia carried out with his two rehearsals and advised how to make the proposal more convincing.
At discussion of details of business with founders of startups partners of Sequoia make use of the wealth of experience which is saved up in the company for 42 years of work. For example, Dropbox regularly invites the partner of Sequoia Bill Kugren, the former senior vice-president of Google for technologies to discuss with him how to maintain growth rates and at the same time not to complicate service.
During recent visit of Dropbox office Kugren leaned back in a plastic chair and indulged in memoirs. He told about four technical tasks facing department of search of Google during that time when the idea of "ranging" looked fascinating, and "indexing" seemed something boring. Does anybody want to be engaged in indexing? Yes. As soon as Kugren set the task for some years to make indexing in Google 30 times more productive, all at once became interested in indexing. The vice-president of Dropbox for technologies Adyta Agarval smiled: now he knew, by means of what story it is possible to interest people in tasks which face Dropbox.
Price of mistakes
If Sequoia proposes the solutions too persistently, startups start beating off from councils. The founder of the company on production of means of Palo Alto Networks safety Nir Zuk tells that once answered to Getz: "If you want to work for me as a products manager, I will immediately take you for work. But you can't come to meetings of the Board of Directors once in six weeks and say that you know more, than my managers who work every day. So simply doesn't happen". But in general, according to Zuk, he likes in Sequoia that partners of investment company — in the past also were businessmen who "passed through the same, as we. They understand us".
Even Sequoia has misses.
When stocks of the Internet companies in 2000 collapsed, the fund suffered severe losses from investments into such companies, as eToys or online shop of products of Webvan. Recently Sequoia invested $25 million in a mobile application for processing of photos Color — it ended with that Color was resold to Apple with losses. Even in fabulously successful fund Venture XI of 2003 more than $100 million investments were lost on unsuccessful startups.
Periodic losses from investments — in the nature of things. The company worries that it can't sometimes make out future leaders of the branches more and refuse them. So, the fund refused investments into Pintere and Twitter. In 2007 Sequoia had a chance to buy 10% in Twitter when the cost of the young site was estimated at $20 million (for today the market value of Twitter grew more than by 1000 times).
Live and learn. In 2011 investors of Sequoia tried to analyse a situation to understand the miss reasons with Twitter. Their conclusion: they adhered to the rule too stubborn to enter into the capital of startups from shares from 20% to 30%. The CEO of Twitter Jack Dorsey wanted to sell a package less. Back mind, Botha says, all understand that Sequoia had to agree. Moreover, after that case the company is ready to buy small packages, even at inflated prices if the outstanding startup occurs in its path.
The biggest mistake was made in 2006 when the founder of Facebook Mark Zuckerberg touched Sequoia with that was late for a meeting and came in pj trousers to discuss the collateral Wirehog business project.
The funny presentation was designed "to annoy Sequoia", the writer David Kirkpatrick told later. The founder of Napster and the shareholder of Facebook Sean Parker who had a grudge against Sequoia long ago was Zuckerberg's adviser then. Zuckerberg's arrogance achieved the object — he received financing from other venture investment company Accel Partners. Profitability of that transaction for the investor made 300%.
Today the relations of fund with Facebook improved. Since 2012 the social network got two companies from Sequoia portfolio at the record price: Instagram and WhatsApp. Even Moritts who was offended by presentation in pj trousers, says now that this fact helped him to estimate Zuckerberg's courage. "At the end of presentation — Moritts remembers — there was a slide with the signature "the Producer: Mark Zuckerberg". I remember that admired bravery and self-confidence which were required to insert this signature. At his age I didn’t have enough courage for it".
Other venture capitalists pay tribute to results of Sequoia, but can't keep from a temptation to criticize style of its work. "Huge respect — David Sy from Greylock Partners says. — They, as well as we, are betrayed to achieve results which will change the world. But they behave quite biliously, we are more adjusted on cooperation".
In due time, when founders of a startup are on search of air tickets, hotels and permits of Kayak Steve Hafner and Paul Inglish looked for investors, Hafner asked partners to help him to test service and to call some codes of the airports (such as JFK — the New York airport of Kennedy or SFO — the San Francisco airport). When Leon was at a loss, someone joked: "Doug doesn't know them. He flies by private plane". It was the well-aimed hairpin to economical Leon who always flew by the regular flights of United Airlines and just agreed to rent after long fluctuations for some hours a private plane through service NetJets. But Hafner didn't know about it. He came to confusion and the presentation failed. The demand was rejected, until English returned without invitation and convinced investors more fixedly to get accustomed to Kayak.
Rupture of a template
In the Silicon valley there is a stereotype that venture capitalists become the extremely rigid when the companies experience difficulties, and hurry to sell too quickly shares if affairs at the companies go well. Sequoia doesn't fit into traditional ideas of venture investors and does exactly everything on the contrary. CEOs (in particular, Brad Peters from the Birst company that makes software for business analytics) says that Sequoia gave them time and helped councils to solve problems in critical situations. When the companies show good results, even bigger appetite wakes up at Sequoia, it starts convincing the partners that those are capable for bigger.
For example, during a recent dinner in San Francisco where about ten CEOs of the companies from Sequoia portfolio arrived there, Lin asked, how many attendees use an index of consumer loyalty for an assessment of enthusiasm of the clients. Almost all raised hands.
"And now tell who from you analyzes, what influences this rating?" — he asked.
"Only, if indicators are bad" — one of CEOs answered.
"Why you don't analyze a situation when everything is good?" — Lin parried. His formula of success when he was the CEO of Zappos was such. "It is necessary to work more for what will attract the happiest clients, and thus the director can turn steady growth into the avalanche gain of consumers".
Not to repeat mistakes
Today Sequoia aspires to improving return from the already most successful companies. In 1979 the fund sold the equity stake of Apple in 18 months after the first investment in future giant, and partners aren't going to repeat similar mistakes any more. Unlike other venture companies which operate investment funds of investors within ten years, Sequoia quite often prolongs the term of their life till 16 or 17 years. Sequoia kept in the portfolio of the stock Google within nearly two years after IPO. It kept the stocks of Yahoo in the 1990es even longer.
The story with the ServiceNow company, the producer of software for services technical support, became good check of readiness of Sequoia to keep actions in the portfolio long. In July, 2011 after the offer on purchase of the company for $2,5 billion Sequoia unexpectedly became the large investor of the company at the end of 2009, having headed a round of investments for $41 million that allowed to enter Leon into board of directors. Having sold the shares, Sequoia would gain tenfold income to starting investments.
Most of directors of ServiceNow "pecked" on this offer. Only for Leon it became offensive. Together with several colleagues he developed the 12-page analytical report in which showed that directors simply "will present the company" even if the buyer will offer $4 billion. In his opinion, ServiceNow was in the beginning of a curve of growth, and the fact that it worked in fast-growing sector of service software, promised to it more interesting future, than could seem to third-party investors.
After discussion the director of ServiceNow rejected the offer. A year later public ServiceNow came to exchange, where its assessment made $2 billion. Self-confidence of Leon seemed shamed until actions went to growth after IPO. The current market capitalization — $8,3 billion.
The simple mathematics shows that the obstinacy Leon brought in addition about $6 billion to shareholders of ServiceNow, including the founder of the company Fred Laddi. And something behind it is bigger, than monetary calculation: Leon still remembers those rich children at the pool who enjoyed easy life. He has no occasions to reduce the speed until former competitors remain far behind in a dust cloud.