93: Behind Silicon Valley's Top VC Firm With Sequoia's Pat Grady

Foreign.

So I'm psyched to have Pat join us for this podcast here. I got to know Pat at. I was gonna say drift at HubSpot, where we worked together. So got to work with Pat, and Pat was one of the most thoughtful people that I know. I might not know many people. What is it?

What is it about Pat? Like, what, What. What makes him thoughtful?

A bunch of stuff which you'll figure out. The proof is in the pudding you'll figure out on the podcast. But one of the things that I thought would be interesting to talk about is like, Pat is relatively young or appears young to me from what I can see. And so, like, this podcast is all about accelerated learning. And so, like, the. I was thinking, like, how has Pat approach learning? And we were talking about this when you got here, about these new markets, especially as you come into an environment like Sequoia where people might be 20, 30, whatever years ahead, not only in learning, but in terms of, like, pattern matching. Right. They have history. So how do you accelerate your learning there? Like, that's a thing.

I love that. The theme that we talk about a lot is like, D.C. calls it like, reps and sets.

Right.

You have to have reps and sets. Like, I haven't interviewed nearly as many people as he has, so he'll come out of an interview and know something already. And I'm trying to figure out, like, what is it? Yeah, it's like, well, he's had the reps and sets. Like, you've seen this pattern matching over and over.

Yeah, yeah. The pattern matching is something that we're very careful about talking about. Just because what's interesting in the evolution of a venture investor is when you're a couple years in, maybe two, three, four, five years in, you start to think that you know something because you've. You've seen enough companies and you've met enough founders and you've seen stories play out. And thinking that you know something very quickly becomes dangerous. Yep. Because as soon as you think you know something, the next company you see breaks that pattern and you come to learn that, like, it's a little bit of motherhood and apple pie. But it really is true that every company is unique because a company is nothing more than the collection of people inside the building, all of whom have unique DNA. And in combination, all of whom, like, combine to create very unique outcomes. And so we're really careful about using quote, unquote, pattern matching as anything more than context that we can provide to a founder so they can make their own decision.

That's interesting. So how do you not let that bias, like, how do you systematically not let that bias sink in? Which is pattern matching is a bias, right?

Yeah.

You just have to tamp it down every time it shows up.

Yeah, pretty much. We talk a lot about trying to think from first principles, because I think starting a company or being an investor has a lot of scaffolding that's been built up around it over the years, which is useful because in a lot of cases, that can help you shortcut to an answer, as opposed to have to doing everything from first principles. But I think for us, when we invest in a new company, we're trying to only invest in what we would call sort of fundamental companies, meaning they have a chance to be independent for the next few decades. They have a chance to completely define a category and dominate that category and show the world something that the world didn't know before they existed. And for those companies, a lot of that scaffolding doesn't really matter because by definition, that scaffolding is conventional wisdom, and conventional wisdom builds conventional companies. And so we just try to go back to first principles, like, what problem do you solve? Why is that important problem? Are there really a lot of people who have that problem? And what positions you to solve it in a unique and compelling way that won't be easily replicated by everybody else who witnesses your success?

First principles is like one of these things that is, like, it's so logical, like, when you hear it, but it's like, so hard to apply it in the heat of a deal or the heat of battle, the heat of some competition or something like that. Especially in your world, right? Everything is competitive, highly competitive deal.

Can you explain what first principles are in your context? Because for us, it's like customer, company than us. Like, what does that mean for you from an investment perspective?

Yeah, first principles, for us, in the context of a company, it means, like, if you reduce it to its essence, like, why do companies exist? Right? Like, companies don't exist to make people rich, whether those are the founders or the investors or anybody else. Like, companies exist to solve a problem. So for us, the first principle is just, what is the problem you're solving? How do you do so in a unique and compelling way that has some inherent durability to it? And for us, those sort of are the first principles, how that translates into sort of going after an investment. One of the biggest things we look for is just authenticity in a founder, because if somebody makes a list, like, here are the hundred businesses that maybe I could build and I'm going to try a couple of them, but maybe I'm going to settle on business number 37. That's fine. And there are probably a lot of situations where that ends up working out. But you might not have the same level of passion in attacking business number 37 as you do when you attack a problem that you've actually experienced and it really ticks you off that that problem exists and you just want to stamp it out of existence. The authenticity with which somebody approaches their whole business, I think they can't help but translate that into their employees and into their customers. And, and then you have this groundswell of enthusiasm that kind of propels your business forward.

I know a guy like, I know a guy like that.

Oh really? Somewhere. I don't know who he is. Yeah, I don't know either.

All right, so there's not really pattern matching. So there's not pattern match. Well, there is, but it's not an important thing for company perspective. What about from a people perspective and a founder perspective? Because like we love talking about people and like who's behind the companies and the, you know, personal side of things. Like are there companies? Can you pattern match on a founder level?

Yes and no. I think yes and no because I think what people talk a lot about product market fit and we think about product market fit, but we also think about founder market fit, meaning a great founder to go after a top down enterprise market probably looks different than a great founder who's going to build a consumer facing application. And sometimes there are enterprise markets where that consumer facing application, founder is actually better because you want to have frictionless bottoms up distribution, not 42 longs parachuting into the CIO office. And so we try to spot people who are a fit for the market that they're going after. And then I think we'd layer on top of that outlier characteristics, which generally has some component of drive and ambition associated with it. And then we try to layer on top of that, I guess I would call it moral compass or ethics or cultural sensitivity. Because if you have somebody who is not intentional about the culture that they're building and the values that they represent as an organization, there's going to be some point at which the entropy starts to take over and the organization starts to break. And so we always try to look for that too.

That's interesting. And so how do you. So you must have a weird problem at Sequoia and that your, your funnel is like kind of maybe the biggest funnel or infinite Right, right. And so, like, at the top. And so. But, you know, there's only a handful of companies that you're gonna bet on in a given year. I don't know what that handful is. Like, so, like, you must have the highest order, like, filtering problem. Like, and so how do you. Yeah, yeah.

The biggest and smallest funnel.

Yeah, it's the biggest.

You wouldn't be a very good marketing website. Like, all the traffic and then very small.

Yeah, yeah, yeah.

Rough.

I don't know what it is from lead to investment, but from first meeting to investment, it's about 500 to 1.

Unreal.

To give you a sense. And what's really interesting about this, so I joined Sequoia at the beginning of 2007, and I think at the time we had, call it a dozen investors, and today I think we have 19 investors. And so we've grown by roughly 50% in terms of investors.

Yes.

Our funnel has probably grown by more than 10x.

Crazy.

Because over those 10 years, there's so many companies and technology and everybody's starting a company, and I think that's a persistent trend. So one of the things that we've been grappling with over the last handful of years is this constant need to reinvent our own business, not just in terms of who's inside the building, but also in terms of how do we operate. Like, how do we use technology to our advantage so that the methods that Don Valentine used in the 1970s and 1980s, not the same methods that we're using today. Like, we want to benefit from all of that tribal wisdom, but we want to also reinvent constantly so that we can deal with that funnel problem. So we actually have. We have a team of really talented engineers and data scientists and who work on your funnel, who work on. Who work on automating as much of that as possible.

That's amazing.

Identifying, filtering, coordinating, providing leverage to investors. Like, we've got. We've got so much room to, to run, and we feel like we're just in the first inning of sort of reinventing our own business with technology. But it's something we think about all the time.

How often are they surfacing things to you before you've heard of them?

That's a good question. A lot of times it's resurfacing, meaning it might be a company that we intersected a couple years ago and didn't get into business with for whatever reason, and they've started to take off and like, we were asleep at the switch and somebody in our technology Organization finds it.

Yep.

But we've actually made an investment in the last 12 months as a direct result of our data science efforts, where they surfaced something that, like, we'd heard of, but we weren't really keyed in how important it was.

Yeah.

And they're producing good leads for us every week.

That's crazy.

That's awesome.

And so in the show notes, I'm gonna have a link to a YouTube video of a talk that Don Valentine did at Stanford at gsb. It's amazing. I think I've watched it like, seven times.

Was this the target big market?

Yes. Yes. Yeah. I have to. It's one of those talks that I need to keep revisiting all the time of. Just like, let me watch this one more time.

Don is amazing. You want to talk about first principles thinking. Don Valentine is just so simple, canonical example.

Fill people in who are going to listen and be like, who's that? And what was this?

Don Valentine was the founder of Sequoia in 1972. What was interesting about Don was he was not a financier. He was a chief marketing officer at a time when marketing went meant everything associated with going to market. And so the founding premise of Sequoia was Don just saying, boy, I'm surrounded by all these brilliant engineers who know how to build great stuff. They don't necessarily know how to connect it to human problems. And it's like, that was the genesis of our business, and that's kind of been what we've tried to stay true to over the last 45 years.

That's amazing. So that goes back to the authentic founders. Right? Big markets. And then he talks about this thing of just like, target big markets. Right. Just like, it's so fundamental. I mean, I'm doing it injustice. You have to watch it. And he's funny and the way that he delivers it. But like, that. It's a thing that we always forget. All entrepreneurs forget is just like, the importance of targeting big markets.

It's tricky, though, and it's. And it's a little bit dangerous because I think anymore you don't target a big market from time zero. You target a very, very narrow slice of a big market, and you earn the right to evolve your way into more of it over time. And so I think, like, for us as investors, one of the mistakes that we make, one of the most common mistakes we make is we underestimate or underappreciate what a market can become when things start to work. And as a result, we just don't Realize how exciting a business is the first time we see it.

Yeah. It's something we talk about internally all the time. It's just like it's our own go to market. It's just like wedge. We got to start something with something that is like, easy, simple. Everyone can integrate it. It's non threatening. Non threatening is the word that we use. And then that wedge, over time gives us the ability to maybe rethink all this other stuff. Yeah, but we're capturing a tiny little wedge in the beginning and then expanding over time doesn't mean that we don't have a big vision for where we're trying to go. But we need to find that little crack to get inside. That's non rip and replace, non threatening, not just fits right in there.

Well, in the wedge that you talk about a lot, it doesn't start. It actually starts big. And then you get to the wedge. Right. Like you love the whole invert. Right. You invert all the problems, invert the problems, invert the challenges that we have and then say, okay, that's the big problem. But what's the easiest path for us to maybe get into. Into that market or into that company? And that's how we started small.

Yeah. Yeah.

How did you find your way into investing from Wyoming?

Good question. Good question. So. So I went to Boston College and bc. Bc, what's up? Go Eagles.

Lot of love out there.

Go Eagles. And so while I was at bc, I actually started as a physics major. And I was. I started as physics and finance. And the rationale was.

That's weird.

I liked math and it seemed like business and science were two places that you could apply math.

Yeah, yeah.

And. And as I went on through, through school, I ran into physics lab and it just drove me crazy that, like the math you could do didn't necessarily work in the lab.

Yep. Yeah.

And so I. So I dropped physics and ended up with finance, econ and math.

So all events, all the places that math can. The Venn diagram of math. Yeah.

And so I went into business, I went into investing right out of college. And I guess at the time kind of naively thought that math was going to play a big part in it, which it turns out it plays almost no part whatsoever.

That's great to hear.

But what really intrigued me about it was finance and econ kind of sets you down this path of the investment world writ large, whether that's banking or working for a mutual fund or a hedge fund or whatever the case might be. And within that world, it seemed like, working with founders was at the very far end of the spectrum in terms of things that you could feel good about and kind of tell your grandma what you do and have her say, like, oh, you help small companies make their customers happy and hire great employees. That sounds good.

Right.

And so that's what drew me to it originally. And so I was an investor straight out of school in Boston.

We just went for a few years. We extracted.

I was at a private equity venture capital firm in Boston and then moved to sequoia beginning of 2007. Because I think Sequoia, more so than almost any other organization out there, has prided itself over the years on starting with founders who are really at ground zero and trying to wrap as many resources around them as possible to maximize the likelihood that their idea is going to have the biggest possible impact.

And that's another part I loved about Don's talk about when he was talking about Jerry from Yahoo and, like, basically how they basically targeted those early founders and kind of, like, built around them. Yeah, that's a great part. Is he still Don around?

Oh, yeah, yeah, yeah. Don. So Don spends most of his time in Arizona these days.

Okay.

But he's in the office every couple of months, and that's crazy. Like, he'll still drop in on a partner meeting from time to time, checking in on you. Don is amazing. I mean, he.

That's crazy.

Stoked. He will sit. He will sit without saying a word for two or three hours, and he won't talk unless somebody asks him for his opinion. But if you ask him for his opinion, like, inevitably, you will get 10 words or less that are more insightful than anything else that was said in the preceding three hours.

Those are people that I love.

He's incredible.

Yeah. Just quiet, and then just like, wow. How did he say that in 10 words? Yeah.

I had a question that I wanted to ask you that. I just. How did you. So you get this job at Sequoia? Did you reach out to, like, what is the actual process for you to get from Boston to Sequoia?

People are listening.

They want.

Yeah, they want to know.

Well, so, secret process. Yeah. The truth of the matter is I got really, really lucky in a couple of different ways. One was in 2006, we decided that we were gonna start amping up our focus on growth stage investments. And so we actually got into that business in 1987, but it was kind of a side business for a really long time. In 2006, we looked around and said, well, geez, a lot of These companies that we get into business with at the early stages start to grow up and then would prefer to work with us as opposed to working with other folks. And also there are plenty of companies that are started outside of the Bay Area where we're not as good at supporting companies at the very earliest stage that we'd love to intersect at a growth stage. Right. So 2006, we started kind of amplifying this focus on the growth stage business, which meant hiring a dedicated team. And it turned out that the place I worked in Boston was one of the kind of early category defining firms around growth stage investing. And so I was. I was sort of in the right place at the right time in terms of what Sequoia was targeting.

Yep.

And then. And then how I got the job was, I think I. My very first interview was with Doug Leone, who at the time was responsible for the growth business in addition to a bunch of other stuff, and today is responsible for all of Sequoia globally. And I think I had a good breakfast with Doug and he kind of just.

So the secret is there. Good breakfast. Yeah.

Doug just kind of ran around and I think he. I'm not convinced that anybody else likes me as much as he kind of paved the way.

That's amazing.

He put a good word in after.

So I got a shot.

Yeah. That's crazy. I love that. I love those stories. We all have those stories.

Yeah.

Just like random, right?

Yeah.

I have a similar story of like, how I got my. It was CRV at the time, but, like how we got our first investment. My first company was just like. I think I hired someone. I'm pretty sure I hired someone that this investor was trying to hire and they chose me over them. And so that's why. That's why that was it. I think that's it. That's the only pattern.

Which company was this?

This is at Compete. I had hired someone. I hired someone away that this investor was trying to learn to one of their companies. He's retired now and this investor, but I think that was it. Yeah.

Yeah.

I can't explain it any other way.

Yeah.

That's awesome.

It's crazy. So does growth operate separate at Sequoia now?

Very tightly integrated.

Very tightly integrated. So I mentioned the model for everyone has been all over the map. Some people are totally separate on growth. Some people try to integrate. Some people.

Yeah. Well, so it's. It's very tightly integrated. And I mentioned we have 18 or 19 investors. That's everybody who does early Stage and Growth Stage investing. And the reason it's tightly integrated, A couple of reasons. One is the spec for both businesses is kind of the same. Like, we're looking for companies that have a chance to just define and dominate a category over a really long period of time. And it doesn't matter whether we intersect them. When it's a person with an idea or a team of several hundred people that is going to go public in the next 12 months. Right. Like anywhere within that range, like the business is the business, we just happen to be intersecting them at different points along that spectrum. The reason we have dedicated teams is the decision criteria for a Cedar Series A is very different than the decision for a growth stage investment when there are a bunch of unit economics and a bunch of financials and valuation and all that stuff. And so the decisions are a little bit different, but what we look for in the company is the same. And then also a lot of the company building itself is the same. Like a growth stage investment. There's a lot of DNA that's already taken shape. But we tend to get involved with growth stage companies around that, like 150ish Dunbar's number, employee Dunbar's number, which is where everything kind of starts to break and where a lot of the VPs who got you there start to top out. And so there is still a lot of, kind of a lot of things that people look toward us to help with as the company scales. And the fact that we do a lot of that in our early stage business really helps with the growth stage business in terms of just sharing some of those tricks of the trade.

It's funny because we've talked about that in past episodes of like, there are these magic breaking point numbers in companies that it's hard to. Unless you experience them for some reason. It's hard to explain. You cannot explain why these happen. But they are the magic, like breaking points of every company that I've been at that they seem to start to break at the same point in terms of headcount.

We had an awesome interview with Patty McCord who ran Netflix yesterday, and she had an amazing thing that has. I can't stop thinking about it is we asked her, like, okay, we're right around 50 employees now. By the time you talk to us next, we'll be 100, 200 plus. What advice would you give? And her advice was like, don't get caught up in nostalgia. Nostalgia can be the number one thing that'll kill you. And that is like, employees that were there early being like, oh, I wish it was like how it used to be. And so that's like. That's a really interesting topic. That's, like, very top of mind for us right now, I think.

Yeah. Yeah.

Why do you think those magic numbers exist?

That's a good question.

I think I'm hoping for an answer because I don't know why they. I just say they do.

I think, like, 150 in particular for anybody who's not familiar with Dunbar's number.

Right.

Like, it's basically the number of reasonably close human connections any given individual is capable of having and keeping track of. And I think that applies to a company in the sense that 150 employees is right around where that, like, inherent ambient knowledge of what's happening disappears.

Yeah.

Begins to dissipate and it's overwhelmed by the coordination costs of keeping 150 people on the same page. And so I think when there are 10 people in a room and, you know, you can hear everything that's happening, it's very easy to know that there's a clear. And not very easy. I shouldn't trivialize it. It's still hard. It's just comparatively easier to have a shared vision about where the company's headed and a shared understanding of how you're going to get there at least over the next, you know, weeks or months or quarters. And 150 employees, like, you start to not know everybody's name. Like, the employees who've joined recently might have a totally different idea of why the company exists and where you're hoping to get. And the only way you can solve that is through systems and culture. And so it's the point at which, like, having actual management systems in place, I mean, systems in the sense of technology, but also in the sense of a regular cadence, you know, around meetings and whatnot. And then culture in the sense that at that point, if you're not intentional about your culture, it starts to get away from you.

Yep. That's funny. Patty yesterday said, like, she asked, like, are you at the. Are you still at the stand on the table phase, where you can stand up on the top of the table and address everyone in the company or you pass the stand on the table phase, which is very much no way to put it. And it's definitely why we're spending. I'm spending a lot of time in Alias co founder on starting to document a bunch of this stuff and getting. Figuring out how we do onboarding and all that kind of stuff, because come 12 months, we'll be hitting that Dunbar number or Past that number. Right. And so we need to be ready now of how we're going to train people. And even now when we're having like seven people starting at a time and that kind of thing.

Well, I think the thing that, I think that you guys, the two of you are obsessed with is like, just because maybe something marketing related is in my head or something sales related is in Armin's head or wherever, like, that doesn't do anybody any good for the next wave of the company. Right. Unless it's on paper and it's documented and it's part of an onboarding process. Like, it becomes a checklist and the whole, like, you know, we're obsessed with the Bill Walsh book standard. You know, how he talks about the standard of performance and how he ran the 49ers. Like, just having those checklists and having that process up front is such an important thing that, you know, you guys are obsessed with that. And now it's like, how do we actually, you know, put that into play?

Yeah. And so since you look at so many companies, what would be your advice to budding young, budding entrepreneurs about how to think about their companies, about how.

To think about their company, just in general?

Yeah, yeah, I know. That's like, I don't know if that's there in today's context, like, how they should. So let's take a SaaS company, for example. Not a. Not a, you know, scientific risk kind of company, but like, just like a market risk company, like someone in SaaS or some kind of software. Like, like, how would you be thinking about that category now or that type of company now versus five years ago? Like, what are the risks?

Good question. So I guess broadly speaking. And then maybe I'll zoom in on SaaS a little bit. Broadly speaking, like, we've been in the same basic technology cycle since 2001 now. And so we're called 16 to 17 years in. And historically, these cycles have followed kind of 14, 15 year patterns. And so in some ways, we're kind of overdue for. For the end of this cycle and the beginning of the next. And what that means for a founder generally is that what we would call the verruckt period. Verruckt is a German word which means sort of insanity or craziness. What Don Valentine would have called the good theater that comes at the end of a cycle. The verruckt period is probably coming close to an end, and that could be tomorrow, that could be five years from now. Right. But it's probably coming Close to an end. And the way that translates into the advice that we give a founder is don't get caught up in the hype. Don't try to chase the unicorn logo. Don't raise infinite amounts of money just because it's available. Just try to stick to first principles. Because if your employees actually care about your mission and if your customers are going to buy your products regardless of whether or not their budget is big or small, you're in a good spot. And so we would actually encourage people in most cases to raise less money as opposed to more, to be very deliberate about the hiring and try to stay away from the people who respond to the line. We're a fast growing pre IPO company and go after the people who respond to the line like we care about solving this problem. It's hard, but we think it's worthwhile. If you agree, you should join us. Right.

I'm going to change our job descriptions. Yeah, yeah.

And then I think for SAS specifically, that's also true because five years ago, there was still a reasonably decent amount of white space in SaaS just in terms of, like, buying centers within the enterprise that were underserved, or SMBs for that matter, that were underserved. And I think today there's less white space. And so the companies that are cracking through are the companies that have come up with something that's truly a superior value proposition. Either it's more usable or it's more pervasive, or it's more intelligent or whatever the case might be. And I don't think you can sort of brute force your way into scale today the way that maybe you could five, six, seven, eight years ago. Today there's just more competition. Everybody's got plenty of money, and we're kind of back to the basics of find the magic of product, market fit and kind of iterate from there.

Those are wise words for you entrepreneurs out there.

Easier said than done.

I know. Everything is easier said than done. That is true. That is awesome.

We got to ask Pat about learning before we go.

Okay.

Do you read a lot?

I do.

When do you, like, tell us, when do you read? What are you reading now and books you recommend the most to people.

Great question. When do I read and what am I reading now? Well, anytime I travel, I end up getting a lot of good reading in I. I do mostly read books as opposed to reading, you know, newsletters and that sort of thing, just because I find I'll scan a bunch of different newsletters to try to get an awareness of what's happening in the world. But I get a lot more out of spending an hour reading one thing and really understanding it than I do out of snacking on 15 different things, you know, over the same period of time.

Love that.

So books that are worth reading. Well, we were just talking about Extreme Ownership before we got on. I know that the listeners of your podcast have heard plenty about that.

So we love it.

I won't beat it.

We love it.

So actually, the guy, my partner, Kevin Slump at Sequoia, is the one who recommended Extreme Ownership to me. And he was also the one who recommended a book called Boys in the Boat.

Oh, yes.

The thing that I love about Boys in the Boat is actually towards the end of the story, and for people who aren't familiar, Boys in the Boat is about the 1936 U.S. men's rowing team which went to the Olympics in Germany. This was a team consisting of a bunch of people from the middle of nowhere who really, like, had no right to be in the Olympics, but they just fought like heck.

Yeah.

And came together in the toughest of moments to, you know, to earn their way there. But the best part of the book is towards the end where they're reflecting on what happened in the 1936 Olympics. And at this point, the guys are 50, 60 years old and they're just, they do reunions every now and then. And at one of these reunions, they realized that for the eight men in the boat, every single one of them thought that he was the weakest link.

That's awesome.

And every single one of them fought like heck because he didn't want to let the other guys down.

That's awesome.

And I think that is just the ultimate statement of high performance culture and what we love to see in our own partnership or in the companies that we're getting into business with.

Chills. So you get goosebumps. That's amazing. Thanks, Pat, for joining us.

Thank you.

Before you leave, hit up Pat on social media. We'll have links to him on social media. Follow him.

Do you tweet?

Yeah.

You do? Yes, occasionally.

He's a tweeter.

I tweet every day and check out Sequoia. I bet you know them already and leave us a six star review. Apple will only allow us five stars so far, but we're going six stars.

So tonight we're going out to dinner with a bunch of people that we want to be customers and customers. One of them just replied to me on the way down here and she said, can't wait for dinner. Tonight. Six stars only.

That's it.

Six stars only. And in the in your review, leave a little story about Pat or a tip for Pat or a book recommendation for Pat, and we'll make sure he gets it. Thanks.

Love it.

Thank you, Pat.

Awesome.