Roelof Botha, Managing Partner, Sequoia Capital Interviewer: Alyson Shontell, FORTUNE
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00:00Good afternoon, everyone.
00:01Thank you so much for being here with us today.
00:03And thank you for the news bits that you gave us yesterday
00:06to start the conversation with.
00:09So first things first, before the news dump of yesterday,
00:13a lot has happened in the nation in the last few days.
00:15A lot of the PayPal mafia, of which you were formerly a part,
00:19have come out and been influencing a lot
00:21in terms of the world of politics.
00:22We see Elon Musk is now throwing $45 million
00:25per month at the Trump campaign.
00:28Peter Thiel is now backing the Trump campaign.
00:32Your former predecessors who were running Sequoia
00:34have been political before.
00:36Doug Leoni was a Republican.
00:38Mike Moritz donated a lot to Democrats.
00:40Has any of the last few days made you say,
00:42I'm going to take a stance here?
00:44I'm going to go email my LPs right now,
00:45or my company right now, with what I'm planning to do?
00:48Well, that was a hello.
00:51You had no time to waste here.
00:52You dragged me into the debate.
00:53It's great to be here.
00:54Yes.
00:57As an immigrant to this incredible country,
00:59I think it's important for us to be more united than divided.
01:03And at Sequoia, as a partnership,
01:04we don't take a political point of view.
01:06We're proud of the fact that we've enabled many of our
01:08partners to express their respective individual views
01:11along the way and given them that freedom.
01:14And I'd say many of my former PayPal colleagues
01:16are actually very different parts of the spectrum
01:19and everything in between when it
01:20comes to the political situation in the country.
01:22And so I just think it's really important for us
01:25to treasure that this is an incredible country.
01:27There's a reason people like myself want to come here.
01:30There's a reason about 40% of the founders
01:32we back are first-generation immigrants.
01:34And I think we should treasure that and treasure
01:36what's great about this place.
01:37So that was a non-answer.
01:39Correct.
01:40So I'm going to just take it that you're just not going
01:41to answer moving forward about voting
01:43or anything like that or donations.
01:44I'm not a registered member of either party.
01:47I'm much more focused on the policies
01:49that will help drive entrepreneurship, job creation,
01:52and making sure that the United States stays ahead.
01:54I mean, there's so much data about how much partisan divide
01:57has grown in the US over the last 20 years.
02:03And I think it's really unhealthy for the future
02:05of this country.
02:06Agreed.
02:07Well, on another note, Stripe.
02:09You're a big investor in Stripe.
02:11Sequoia is very long-term focused.
02:13We were talking earlier on the stage
02:15with some other venture capitalists
02:16who were saying the 10-year cycle is out.
02:17It's actually more like 15 years or even longer these days.
02:21And just exits in general have changed dramatically
02:23in the startup landscape of late.
02:25So you had an interesting way of giving,
02:27a pretty unusual way of giving some of your LPs liquidity
02:30yesterday in Stripe.
02:31Could you just talk a little bit about that
02:33and how the changes to the structure of the fund in 2021
02:36allowed for that to happen?
02:37Sure.
02:38Stripe's an exceptional business,
02:40truly exceptional business.
02:42We first partnered with them in August of 2010.
02:45The company was called DevPayments at the time.
02:47And in addition to Patrick and John,
02:49there was one other employee.
02:51Who happened to be South African too, just coincidentally.
02:53So we've been a business partner to the company now for 14 years.
02:56We've seen them transcend various different economic
02:59challenges, economic cycles.
03:01They processed over a trillion dollars in payments in 2023.
03:04It's truly amazing what they've accomplished.
03:06And I love the company's mission statement
03:07to increase the GDP of the internet.
03:10So because of our enthusiasm for the company,
03:13we thought this was an interesting transaction.
03:16There are LPs in these funds that
03:17were started more than a decade ago, some of whom
03:19have liquidity needs.
03:21Our clients are foundations, endowments, nonprofits.
03:24And sometimes they need cash to fund their activities.
03:27And so we created the Sequoia Capital Fund,
03:29as you mentioned, two years ago, to really upend
03:32the traditional fund structure.
03:34Because this 10-year fund life was invented 50 years ago
03:36and is outdated, as you pointed out.
03:38And so this is an open-ended fund structure
03:40that enables us to do creative things such as offering
03:44early limited partners a liquidity alternative.
03:47OK, yeah, because usually we're accustomed
03:49to employee tenders, not usually the LP tender.
03:52So maybe this will be, do you think
03:53this will be something that is increasingly
03:55likely for firms to do, given especially that the IPO market
03:59is not super strong right now and people need returns?
04:03So SpaceX is an interesting example
04:05of a company that has been, I mean,
04:07Elon founded that after PayPal over 20 years ago.
04:10And SpaceX has actually enabled secondaries
04:12not only for employees, but also for early investors
04:15in the company.
04:16So I do think you'll see other models evolve.
04:18I think the Sequoia Capital Fund is a somewhat unique structure
04:21that Sequoia was able to create.
04:23But other firms are exploring continuation funds
04:25or other mechanisms to enable this sort
04:27of secondary liquidity for private companies and LP
04:31positions.
04:33So I want to take a little bit of a step back into 2021.
04:38You've mentioned it was the go-go days for the VC community.
04:42A lot of money was raised.
04:43I think like double the amount was raised from LPs to VCs
04:47than the year prior.
04:49Now it's a very different market.
04:51It's much harder for the traditional VC to fundraise.
04:55I'm wondering how you've seen the market change
04:57from your perspective, what the relationship between VCs
05:01and LPs is like that you're seeing.
05:03I know you're a bit of an outlier because you're Sequoia,
05:05but just in general, what you're seeing.
05:06And also, what does that mean for startups
05:08that are in search of capital or maybe raised capital in 2021
05:11and now have nowhere to go?
05:12There's several questions in there.
05:14So we may need to go back and forth
05:15to make sure we catch all of them.
05:17So the sheer amount of venture capital
05:19is actually, there's still a huge overhang of funds
05:22that were committed to venture firms that
05:24have not yet been deployed.
05:26And despite the venture environment cooling
05:28tremendously since 2021, in 2023,
05:31the total amount of venture capital in the United States
05:33alone was in the order of about $130 billion.
05:37$130 billion just in the United States, just in one year.
05:41Now if you think about reasonable returns
05:43that an LP might need, and you take into account
05:46the carry and fee structure of a venture firm,
05:48if you want to generate a net 12% IRR for a limited partner
05:52over, say, a seven, eight-year period,
05:54depending on how long you need to hold the company,
05:57that implies that that $130 billion a year
06:00needs to result in about a half a trillion dollars
06:02in returns by venture firms.
06:04And if the venture firms own about 2 thirds of the companies,
06:07that means that's $750 billion in company value
06:12every single year.
06:13That's 75 dekacorns.
06:15But if you think about some of the companies we've backed,
06:17DoorDash or Snowflake or Block, they're
06:19all worth about $50 billion.
06:21You don't get 15 of those companies
06:23being created every year.
06:25So when you think through that math,
06:27the only thing that can break is the IRR assumption.
06:30So the return expectations in the venture industry
06:33are just not realistic.
06:34And I keep on saying that venture is not an asset class.
06:38There are a small number of firms
06:39that help disproportionately build spectacular businesses.
06:43I don't think there's a single tech
06:44IPO in the last 20 years that wasn't a venture-backed company.
06:48Venture firms do bring skills to bear to really
06:50help these companies succeed.
06:51But it's not an industry.
06:52It's not an asset class.
06:54So I do think fundraising has become much more
06:58challenging for firms, but I think
07:00that's healthy in a supply and demand point of view.
07:03And honestly, the best ideas will always
07:04find a home for capital, just like the IPO market is always
07:07open.
07:09PayPal went public in 2002.
07:10We were the first technology company
07:12to go public after the crash because we
07:15had a good business.
07:16And so I think the market is always
07:18available for great ideas.
07:19Do you think we'll see VC firm consolidation?
07:22We previously saw a collapse of one or two,
07:24but do you think, like, will PE firms be coming in for VC firms?
07:27And what does that look like?
07:29I never thought about that.
07:30I think it's unlikely because the value of a firm
07:35really resides in the team.
07:36So I don't think it's an industry that
07:38lends itself to consolidation quite in that way.
07:40I think what you're more likely to see
07:42is that the firms shrink, slim down the fund sizes and team
07:46sizes, and that some firms just close shop altogether.
07:51So you've been at Sequoia since 2003,
07:55formerly CFO of PayPal.
07:56You've had a number of opportunities
07:58to be a CEO yourself, to join executive teams of some
08:01of the world's biggest companies.
08:02And you've stayed on at Sequoia, and you've seen quite a bit.
08:06You took the helm in 2022.
08:07And since then, there have been some quite public things
08:10that you've had to navigate.
08:12A few months in, you had the collapse of FTX,
08:14of which Sequoia was a big investor.
08:17About $213 million just went poof.
08:20And then there was a bit of a public spat
08:24about Klarna with Mike Moritz previously,
08:27who was on the board.
08:29It's not the easiest road that you've had to navigate.
08:32And it's also a little bit uncharacteristic of Sequoia
08:35to have a little bit of publicly facing drama.
08:37So what's up with that?
08:40We've had a challenging few years.
08:42And the thing we keep on talking about as a team
08:45is it's very easy to have a healthy, positive culture
08:47in your organization when things are going well.
08:50The real test is when we face challenges.
08:52And it's been incredible for me how, over the last two years
08:55as a team, we've locked arms.
08:56And our culture has really helped
08:58us navigate these challenges.
09:00And part of that is because of the long-term orientation
09:02we have at Sequoia.
09:03So yes, FTX was an unfortunate experience,
09:06but it's in the context of an $8 billion
09:07fund, where the other returns we've had in that fund
09:09are spectacular.
09:11It's very painful for us to suffer an embarrassing loss
09:13like that, no question.
09:15But we have to pick ourselves up.
09:17We take accountability for our decisions.
09:19Within a few days of that incident,
09:22we organized a call with our limited partners.
09:25And we spoke to them live.
09:26We took their questions, because we want to own up to it.
09:29One of the phrases we think about
09:30is, the cover-up is always worse than the crime.
09:33So the best thing we can do is make sure
09:35that we're not just covering up for ourselves.
09:36So the best thing to do is to think
09:38very long-term about your relationships
09:40and to be very transparent about those.
09:42And so as a team, we've navigated these.
09:44And one of the other tougher moments
09:47was the decoupling from China and really separating out
09:53China and India and in Europe and the US.
09:56So you've called that a crucible moment.
09:58I'm wondering how you made that decision
10:01and what it means really for startups and for the world,
10:05now that there is just decoupling happening
10:07everywhere.
10:09So just as a point of clarification,
10:11so the US and Europe business is one team, one fund.
10:15We used to have Sequoia India and Sequoia China.
10:18Now, we made, by dint of luck or genius, about 20 years ago,
10:23and we started those business lines,
10:25the world looked very different.
10:26China had just been admitted to the World Trade Organization.
10:29And we felt as though there were tremendous opportunities
10:31for us to build a more connected world.
10:34That was the spirit within which we all were operating.
10:37And we were very successful.
10:38Our teams in India and China had built spectacular businesses.
10:41From the get-go, they were independent teams,
10:44raised independent funds, and made independent decisions.
10:46So I was never on an investment committee decision
10:49for an investment in India or China.
10:51What we did is we shared back office, compliance, technology,
10:54finance, fundraising, things like that.
10:58And whenever you have a decision like this,
11:01you look at the cost-benefit trade-off
11:02of being a global firm with a single brand.
11:05And all three businesses, along with Sequoia Heritage
11:09and Sequoia Capital Global Equities, we got together,
11:12and we just reassessed whether the cost-benefit trade-off
11:14was worthwhile.
11:16And it was a unanimous decision between all of us,
11:18that if we think about the future,
11:19it was better for us to be fully independent
11:21with independent brands than to continue the way we had.
11:27By the way, we came up with this term, crucible moment.
11:29It was actually my partner, Jim Goetz,
11:31who came up with this term.
11:32And it's very similar to Jeff Bezos' concept
11:34of a one-way door versus a two-way door.
11:36There's certain decisions in business that are two-way doors.
11:39You can easily reverse them, and you should make
11:41those decisions very quickly.
11:42And then there are one-way door decisions,
11:44what we call crucible moments.
11:46One or two decisions a year that have an enormous bearing
11:48on the ultimate outcome of your company.
11:50And the challenge sometimes is identifying them,
11:53and even if you identify them, making the right decision.
11:56And so that's why we call that a crucible moment.
11:58It was not a decision we could undo two years later and go,
12:02oops, sorry, we should go back to being one firm.
12:04So we changed that.
12:06And what's the culture of the firm
12:07in making decisions like that?
12:09How do you kind of talk through it with a team,
12:11whether it's defining what a crucible moment is,
12:15or it could be arguing about a startup investment
12:18you should or shouldn't make?
12:19What's the culture of the firm in that kind of decision-making
12:22process?
12:24Our COO, who joined a few years ago,
12:26she remarked to me that one of the interesting things
12:28about Sequoia is that we have a culture of and, not or.
12:33And so we celebrate individualism and teamwork,
12:35innovation and performance, challenging each other
12:39while also being supportive.
12:41So it's very important for us to hold opposing ideas
12:45in tension.
12:46And most people make trade-offs between those two.
12:47You veer towards one of those because it's easier to do that.
12:50And so when it comes to decisions like this,
12:52it often takes an individual sponsor to make a proposal,
12:55to make an investment recommendation,
12:57or to spark an idea.
12:59But at the end of the day, if we make a decision,
13:01we should make it as a team because we care about making
13:03the right decision.
13:04So I'll give you an example.
13:06In 2019, we had a team off-site, and we
13:09were thinking about what it was going to take to be one
13:10of the best firms in the world in 2030, literally in 2030.
13:15And we asked each team member to write a pre-mortem
13:17and a pre-parade of what Sequoia Capital looked like in 2030.
13:21What would make us successful, what would make us fail?
13:24And then we anonymized them.
13:26And we circulated them to the team
13:27to read because we want the triumph of ideas.
13:30I don't care if the best idea comes
13:31from the person who joined us two weeks ago,
13:33then we should listen to that idea.
13:36The pre-parade, I like that.
13:37That's the positive spin on the pre-mortem,
13:40which sounds much souder.
13:42And the reason that's important, by the way,
13:43is one of the most important characteristics
13:45in our business is imagination.
13:47What's possible.
13:48What's possible.
13:49My biggest mistakes as an investor
13:51has been a failure of my imagination.
13:55So we need to talk about AI because everybody's
13:57talking about AI.
13:58It's a thing.
14:0060% of Sequoia investments in the last year were AI related.
14:05But at the same time, the firm recently
14:07put out a blog post that said, there's
14:09a $600 billion question, which is essentially,
14:12where's the revenue?
14:13There's all this investment going in.
14:15This is a capital-intensive industry.
14:19And the revenue isn't really being captured.
14:21The dollars aren't really being created.
14:22Open AI is a bit of an exception.
14:24It's generating billions of dollars in revenue
14:25so far from reports.
14:27But other than that, it's kind of crickets out there.
14:30So how are you justifying continue
14:31to invest in this very frothy seeming market?
14:34And how are you separating out what's real
14:37and what's just going to flame out?
14:40We think AI is a foundational technology.
14:44When I speak to people who are really steeped in computer
14:46science, the best comparison they have is to electricity.
14:51It really is going to be a technology that infuses
14:53almost every single other industry.
14:55And I also think it's a technology that
14:57will benefit disproportionately incumbents, by the way.
14:59And then clearly, we're investing in startups that
15:01will benefit from that.
15:03Because it's so expensive just because
15:05of the capital required?
15:07No, because the benefits of AI can accrue to everybody.
15:09And I'll get to your expense question in just a second.
15:12But breweries benefited from the advent of electricity
15:16because they're able to tap into the power grid.
15:18And I'm sure there was a time where people thought
15:20funding companies that were electricity companies.
15:22And at some point, it wasn't the thing you talked about.
15:25And I thought about the fact that in 2002,
15:26when we went public at PayPal, we actually
15:28dropped the .com from our name.
15:31Because at that point, it wasn't a differentiator.
15:33We're a financial services company
15:35using whatever technology was available
15:37to help our business grow.
15:39I think the same thing is going to happen to AI.
15:41I think in two years, if we sit here,
15:43I won't be able to tell you what percentage of the last 12
15:45months investments were AI, because I think it'll just
15:48be a cybersecurity company or a consumer services company that
15:51happens to have AI as a key enabling technology.
15:54So I think the rhetoric around that's going
15:56to change a little bit.
15:57It'll just be a pervasive technology.
15:59Now, to your question about the capital intensity of this,
16:03most of the big CapEx is actually
16:04going into the foundational model training.
16:06And it's being spent by the cloud service providers that
16:08are in a bit of an arms race with each other.
16:10And from a game theory point of view,
16:12it's actually quite rational for them
16:13to spend this amount of money.
16:15Because if one of them doesn't and the other one
16:17wins the prize of AI, they may be mortgaging their future
16:19for the next decade.
16:21And 2 thirds of all the capital that
16:23went into foundational models in 2023
16:25was invested by my favorite four-letter word, MANG,
16:29Microsoft, Amazon, NVIDIA, and Google,
16:32not by venture capitalists.
16:34It's actually the corporate VCs that are investing this money.
16:36And they're using it in a clever way
16:38to turn their balance sheets into income statements.
16:41Because they're using the cash they have.
16:42They're investing in companies that
16:43need to spend it on cloud resources, which
16:45means they get revenue back.
16:47So it's clever.
16:48It's apparently legal.
16:50But we can't compete with that.
16:51The thing that's very interesting for us,
16:53though, is this is going to yield an enormous dividend
16:56to all the application companies.
16:58And that's where we spend a lot of our time investing.
17:00So the foundation model companies,
17:02OpenAI and Anthropic and Mistral and Robotics Foundation
17:07companies, many of those, they're
17:08very capital consumptive.
17:09Our funds just don't have the resources to fund those.
17:13There's a layer of infrastructure software
17:14above that where we think we can build
17:16really interesting businesses.
17:17And we're investors in a company called LangChain that
17:20helps you chain together different applications.
17:22A company like Fireworks that helps you with inference.
17:24That's an interesting layer.
17:26The most interesting, in my mind,
17:27are the application layer companies.
17:28And whether it's health care or financial services
17:31or cybersecurity or education, there's
17:34just so many different applications that we've seen.
17:38So we could talk about that for much, much longer.
17:41But as we're winding down here, you guys
17:44are so good at picking founders and being close to founders
17:47and picking companies.
17:48I'm curious how you're thinking about picking founders
17:50for the AI future and what they're building.
17:54Another portfolio approach you seem to have
17:56is investing in Elon.
17:57I mean, you're in like five or maybe all of his companies.
18:00I think it's at least five of his seven companies.
18:02He's certainly one player in it with x.ai.
18:04They just raised, I think, a $6 billion Series B or something.
18:08Something really early.
18:09And then there's Sam Altman, who you're also invested in.
18:11How are you looking at these people
18:13and investing in them?
18:14And how important is that to the AI future?
18:18Well, I think the characteristics we look for
18:20in founders have been the same for 50 years consistently.
18:23And a lot of that is looking for the quality of the idea
18:26and the unique insight that the founder has.
18:29And the founders we back really come
18:30in a variety of shapes and sizes.
18:33Steve Jobs originally was not funded by other people
18:35on San Diego Road because he wasn't wearing shoes
18:38and was unconventional.
18:39And yet, Don Valentine saw through that
18:41because he saw the quality of the idea.
18:43And I think to this day, we invest
18:45in people who dropped out of high school
18:47and people who have PhDs.
18:49We have some of the companies we're backing in AI specifically
18:52are some of the world's leading researchers
18:54in a particular domain.
18:56The Robotics Foundation company we invested in,
18:58two professors at Carnegie Mellon,
19:00truly world experts at what they do.
19:02Many research papers that they've published.
19:04But then we listen to a founder who
19:06has a bright idea for an application.
19:08They're fresh immigrants.
19:09They're a team of three.
19:10And they have no academic credentials
19:12that we can easily verify.
19:13But the idea is interesting and they
19:14have customers that can reference
19:15the quality of what they're producing.
19:17And so our job is to not to look at the surface
19:20level of what people have accomplished,
19:21but rather to look at the quality of their idea.
19:24And we often want to focus on the Eureka moment.
19:27When did you come up with this idea?
19:29How did you come up with this unique insight?
19:31Tells us a lot about the founder,
19:34why this idea has legs.
19:36So you're in an interesting position, Rulof.
19:38You are at the top of arguably the world's greatest VC firm.
19:44That's kind of a scary position to be in.
19:45I think I would rather be an underdog than having
19:47to defend the number one spot.
19:49So I'm curious how you think about that.
19:50You've said that winning isn't everything.
19:52It's the only thing.
19:54How do you defend the top title?
19:56How do you not be the guy that screwed it up
19:58after five decades of success?
19:59Because we're only as good as our next investment.
20:02And honestly, I think we're not as good as our next investment.
20:06And honestly, given what we've experienced
20:07over the last two years, we did feel like underdogs.
20:10I feel like an underdog.
20:11I was an unknown immigrant.
20:13Most of the team members we have at Sequoia,
20:15we think about the fact that we're all lucky to be at Sequoia
20:19and that it's a privilege for each of us
20:20to wear the Sequoia jersey and that we need to fight
20:23incredibly hard to win.
20:24And one of the phrases I repeat at our all-hands meetings
20:27at Sequoia over and over is that nothing
20:30wilts as fast as laurels that have been rested on.
20:34And so we don't take anything for granted.
20:36The exercise I described where we did the pre-mortem
20:38and pre-parade for Sequoia, literally one
20:40of the pictures we used as inspiration said,
20:42autopsy, 2030, Sequoia's gone.
20:45What did we screw up?
20:47What did we get wrong?
20:48And we keep thinking about that to make
20:49sure we stay at the forefront.
20:51And what were the screw-ups?
20:52What's the worst case scenario?
20:54I think complacency is probably one of the biggest risks.
20:56The common thread in all Greek tragedies is hubris.
21:01And so that's the thing we need to guard against the most.
21:04Well, we will be watching and excited to see
21:07what your next investments are.
21:08So thank you so much for spending time with us here.
21:10Thank you so much for inviting me.
21:11Thank you, everybody.