Company culture explained by the grandfather of Silicon Valley venture capital:
We have gone into business with some people who had absolutely no business credentials. And we organised the companies in ways so that the people who are going to run them, who are often younger than you are, could run them based on the limited experience they had. So we taught them outsourcing, we tried to explain to them that making everything in-house might have worked for Sloan and the Ford family, but certainly not recently. We try to teach them that you only have to do a couple of things well in our companies.
Fortunately Amazon bought Zappos from us about four months ago. And I say they bought it because we were not selling it. And if you can believe it, we had a big argument at Sequoia whether we want to sell it for $ 1.3 billion.
It’s always nice when you can make the slide that shows the success and apply your selective memory to those other companies that didn’t make the slide.
I do a lot of the interviewing and recruiting of people joining Sequoia. And one of the subjects I ask them about is “why do you wanna join Sequoia? assuming you think we are successful, why do you think we are successful? what have you learnt?”. And it turns out that many or most of the people in the venture business historically would answer that question by telling you they financed the best, the brightest, the greatest managers, and that stuff. We do not. We have always focused on the market: the size of the market, the dynamics of the market, the nature of the competition. Because our objective always was to build big companies. If you don’t attack a big market, it’s highly unlikely you are ever gonna build a big company. So, we don’t spend a lot of time wondering about where people went to school, how smart they are, and all the rest of that. We’re interested in their idea about the market they are after, the magnitude of the problem they are solving, and what can happen if in fact the combination of Sequoia and the individuals are correct.
One of the sub questions that I was encouraged to talk about is: “how do you go about picking/choosing?”. We don’t choose people. We choose markets. And once we choose a market, there’s a primary product, and we rarely ever invest in an area where there’s only one product. So, you take Apple: we knew (if you think of the Apple computer as a system) that we had to finance one or more memory companies. We looked at the system (the Apple computer) and in the final analysis made over 15 investments in that category. And one of the investments we made was an application investment: the guy with the sweater on the top started Electronic Arts. We started the company in our office, and at a point of time when they had more people in our office than Sequoia people, we asked them to leave. But that’s how Electronic Arts was created.
We have gone into business with some people who had absolutely no business credentials. And we organised the companies in ways so that the people who are going to run them, who are often younger than you are, could run them based on the limited experience they had. So we taught them outsourcing, we tried to explain to them that making everything in-house might have worked for Sloan and the Ford family, but certainly not recently. We try to teach them that you only have to do a couple of things well in our companies. You have to be very good at technology and engineering, and that normally took us about 6 people to start a company. The second functional skill we were always interested in establishing was marketing. So that we could tell what the dynamics of the market were. With our cheque book at Sequoia we were not interested in creating markets: it’s too expensive. We are always interested in exploiting markets early. These are the right people: technologists, people who had a dream someway to solve a problem. Most of them were not interested in becoming wealthy: that was an accident. They were interested in solving technology problems and creating new products, and many of them have done it brilliantly.
We have always had a search function looking for the people that we want to populate our companies with. Unlike other people in the venture business, we don’t wait for you to knock on our door: we knock on your door. We know (generally speaking and with a lot of respect), which kinds of companies, which kinds of products: therefore which kinds of people. So the people to us become very important for their fundamental technical skills when applied to a particular problem that we are interested in solving. A different approach that many people in the venture business have followed. I don’t suggest that it’s the only approach, and I definitely don’t want to leave you with the impression that it always works.
Learning to tell a story is critically important because that’s how the money works. The money flows as a function of the stories. And one of the critical things that I would encourage you to learn, that’s way more important in my world than anything else, is how to ask a question. Because you want to have the person comfortably telling you what he thinks is important so that you get it. Now, for a long time we don’t understand the product with the market while we are listening, so we have learnt to string questions in a way that provides the entrepreneur with a way to explain what he wants to do, how long it’s gonna take, who the competition is, how much money he needs, without feeling threatening. For many of the investments that we made we didn’t understand the answers, but we constantly work on developing the questions. And when we have had a company that has failed, we always have post-mortem at Sequoia, because we are trying to understand what we missed, “what questions didn’t we ask?”, “what answer did we not understand?”.
We try to make the management job extremely easy: don’t manage any function that you can hire some else. So we have people who act as CFOs for our little companies, and they may do two or three of these companies at a time. And there’s only one metric that matters in finance, in our world: and that’s cash flow. So we hire people that are wizards at cash flow. We don’t have balance sheets. We love recessions (best time to invest in our experience) for lot of reasons. But recessions don’t hearse: nobody is buying (we are product development, usually), banks don’t lend (they don’t lend to us ever): so it’s not unusual. So we look forward to recessions and the to environment that are in recessions.
Now, I didn’t tell you early on, I had a special advantage, going into the venture business. And I think no one else of my relative contemporaries had that advantage. And I know this is one that might take thin aspirin and a slack of water to deal with, but I knew the future. And if you don’t think knowing the future is a great advantage….: it is a phenomenal advantage.
We have invested in a lot of companies, and this is not a statistical business: so, we’ve had a lot of failures. We learnt that we have never made a bad investment where the technology didn’t work. It didn’t work when they said it was going to work, they spent more money doing it, but what didn’t work was the dynamics of the market. We have developed some pretty spectacular things for which there were no buyers. Now: there were buyers eventually? Yeah. But the critical thing is getting a product developed where the timing of the products developed and the market demand are simultaneous.
Written by Marco Tantardini