Business Plans: Jim Goetz, Sequoia Capital

The topic today says business plans. It's more about raising venture money. And arguably from a perspective that everybody you heard from in the prior session may not agree with. It's a very Sequoia specific look at what we look for when we're thinking about making an investment in a series a company. My own background. I was actually in this room. I'm going to date myself here close to 18 years ago. Ken Oshman and Robert Maxfield from Rome fame were teaching the very early years of this entrepreneurship program. I didn't start a company that year, but about six or seven years later it was part of the inspiration for me to take a risk and start a company, which I had the good fortune of having Sequoia back about seven years ago. I've gone to the dark side and that's how I view it. But I'm happy to share with you a perspective of both an entrepreneur and an investor. And I will be as transparent as possible today. So I encourage you to ask questions. This is a workshop. It won't be about detailed business planning. It will give you some insight into what I perceive to be the mystery in dealing with venture capitalists. All these odd behavior patterns. And I would just encourage you to ask today throughout the conversation. So the title I have here is Think Big, Start Small. So take a look at those pictures. Jerry and David Valerian, Sergey Steve, Chad. And for those of you that are actually into YouTube lore, Jawad. So look at that set of faces. This was the formative time in each one of these companies and today think about what they actually represent. So Yahoo at this point in time was really a web directory for Stanford, not much more. Many people would argue today that's a feature. Google wasn't a search engine. It was all about page rank and improving search for the search engines. Kind of a middleware offer in many ways. YouTube was about sharing video from parties with one another. The point I'm trying to make is you think about these three companies. You could have made all sorts of arguments about market size not being large enough feature rather than a product. But in all cases there's a great deal of passion and energy around a specific pain point. They started very small, not a lot of fancy titles, no 42 longs, no fabulous resume of experience. And that's all in the last decade. If you go back another 10, 15 years, there are the Steves from Apple, a company today that is associated with so many wonderful consumer businesses. They are going after the hobby computer market. At the point of time that Don Valentine had Invested very small. Market Trip was a middle manager at Apple who was the pioneer behind Electronic Arts, a publishing company that I think most of you are familiar with at the time was really a single game, single product, hoping to run on Commodore 64 and a couple other open computers. Boy, talk about a market size problem. And then Sandy and Len, they were here at Stanford in the IT department, worried about connecting DEC, VAX, DECnet environments and SNA to not IP networks, but NSFnet. The point I'm trying to make with this is that we regularly see entrepreneurs come in and talk about billion dollar markets, large TAMs, and that's just not as interesting to us as the passion that comes from trying to solve a very specific pain point for a very specific customer. Focus, focus, focus. So this is a framework that you'll see in Mark Leslie's sales learning curve work. In fact, I'm just curious how many of you have actually read the case Sales Learning curve from Mark Leslie. Okay, if you haven't, you should please put it on your list. It's a fabulous case about startups in the early days of what we call revenue ramp. And I'll talk further about it. But it's something that very few entrepreneurs that walk in actually get. This framework lays out the three Ps in marketing, key qualities that we look for in products and the whole go to market strategy. In many cases this might be 100 pages or longer to really knock out a decent business plan. We're not interested in that. I have to tell you on a regular basis I'll get a 100, 120 page, well thought out, well written business plan from entrepreneurs across the globe. It's such an iterative process, it changes almost every month. It's just not interesting to us. So when you think about how to spend that first hour with the venture community, and I always wondered about this myself as an entrepreneur, what do I want to spend my time on? At least at Sequoia, there are a handful of questions we ask ourselves and we're hoping to get answers to in that first hour. What's compelling and unique? And the words compelling and unique you really need to dwell and focus on. And I'll talk further about that. What is your unfair advantage? This is really about market strategy and market tactics. If you convince us that 1 and 2 are interesting, we want to hear all about the great technology, but not necessarily from a end user perspective. We're interested in it. As a shareholder, I'll talk about what that means, defining team. And here we're probably Contrarian. We're less interested in your executive bios and a lot of the titles that might be important to some of you and more interested in the DNA of the actual founding team. And then finally, finance and financials. A lot of people make mistakes that we don't pay attention to the financials. Oh no, we do. I have a couple of partners that will literally, in a presentation, if you hand them the deck, flip to the financials and we'll shred them within 90 seconds and I'll talk about the things that they're looking for. Compelling and unique. This is probably the most difficult challenge for entrepreneurs to tackle. I remember spending almost 90 days on this myself with my co founder Monte Kirsten at Vital Signs, trying to determine what our unique compelling value proposition was and how we would position ourselves in the marketplace. Incredibly challenging. I've got here a very compelling value proposition from Cisco. They network networks. Pretty simple, not even a couple sentences, down to a couple of words. But the point is that we're looking for clarity of purpose and that's not only important to us as investors, it'll be important to the marketplace at large, to your potential partners, to potential recruits. And. And it's something that candidly, very few entrepreneurs get when they walk in the door. In two, three declarative sentences, can you explain to us what's unique, compelling, why you're different and how you're ultimately going to win and what your unfair advantage is? So there is a template which I'm hoping many of you are familiar with from Geoffrey Moore. How many people have read Inside the Tornado or Crossing the Chasm, still the bible in high tech marketing. Jeff has a positioning template which it looks like it's easy to fill out, but if it's really going to be tight, compelling and unique, it's very challenging. I point out that the initial challenge is just picking your target customer. We hear often about target customers being the Fortune 2000 or 18 to 35 year olds almost at that point in time. Not interesting to us. Who knows who the Facebook was for or the target customer was for Facebook? Harvard students, Harvard students, College students. I said Harvard students. Harvard students. Thank you. What is it today? Everyone in the world. Anybody familiar with. A couple of interesting examples? Insider Pages, which was a local search site, one we backed, and their focus, their initial target market was all of North America, arguably a white Pages. There was another little startup that some of you who might hang out in San Francisco could be familiar with as well, started by one of the alums from PayPal. I won't mention the company's name, but they decided that their target market was clubbers in San Francisco. One of the two companies is still independent today. The point is this template and really focusing on the key elements that Moore lays out in both of his books, Inside the Tornado and Crossing the Chasm. Incredibly important. And if you can get through this phase, boy are we interested. Probably one in 15 entrepreneurs that come through our doors in literally five minutes can convey their initial market positioning. So here's an example from Silicon Graphics, a company that has faded but certainly had fabulous glory. In fact, Google is located in their campus today. If you're familiar with the Google campus. Four movie producers who have post production special effects. Silicon Graphics product provides computer workstations that integrate digital fantasies with film footage. Unlike IBM or Sun Microsystems, their prime competitors, SGI has made a no compromise commitment to meeting filmmakers post production needs. Might be worried about market size. We wouldn't a lot of focus, fairly compelling value proposition. Certainly unique. They had a fabulous run. They moved away from this focus throughout their life. But the point is we are looking for something very similar to this in terms of an explanation around clarity of purpose. God, if you can get past that first challenge. We are very interested in your company and at that point in time we're looking to understand the market strategy. What are your unfair advantages, the nuance behind the pay point. You really have first hand experience. We love listening to entrepreneurs, Chad or Steve talking about their frustration in sharing video after a party. They had first hand experience and many of the entrepreneurs that we back are attacking a personal pain. We love to back people that have 10, 15 years of experience in a specific industry. I recently backed two gentlemen out of the storage industry. One was a key architect in the early days of network appliance at storage. The other one somebody out of data domain. Both fabulous storage companies and the nuance and depth of their expertise was wonderful. What we're really looking to garner in the next set of questions, and in many ways it's a test, is to understand the depth and substance of both your passion for the pain and your ability to orchestrate a strategy around creating unfair advantage from a market entry and market tactics perspective. And so you'll normally get rattled with a number of different questions. Stay on point, it is your meeting. But just know that we're very interested in understanding your detailed expertise in the domain. And by the way, I should mention we're rarely experts. I mean venture in general has very few people that can kind of go across all the different markets that we might be investing in and take the time to educate us. It's a wonderful opportunity after you get through that first challenge around positioning to gain credibility with the venture organizations. I touched on this already. We invest in both of these areas, existing markets where you might be looking to create a value proposition with a 3 or 5x improvement in price performance, an adjacent market. But what really is most interesting to us is this opportunity to find new categories where often there is no market, there's no tam, there's no sam, and it's all about those early beachhead customers. We love knowing that you've gone out and thought about that. And for us I listened to the prior conversation. For those of you that were in here, there was some discussion around selling out versus waiting for an ipo. And it's certainly our experience that on the right hand side, if it begins to work, it will exceed wildly everyone's expectations. And our own philosophy around MA versus an IPO is pretty simple. When it starts to work, we desperately try to convince the entrepreneurs to remain independent and that served us very well as a partnership over 35 years. That said, if we're unable to convince them on the merits of our argument, we're not going to vote against the entrepreneur. I think that's venture specific, but it's just worth noting that we do invest in both categories, but they have very different market attributes. I'm not going to go into too much detail other than to say that Moore in his books does a fabulous job talking about market tactics for high technology companies, and I'd encourage you to be familiar with how you might create a market entry strategy that is suitable for a startup. Talking about channels as an example, is something that gives us a great deal of heartburn if you're going after the enterprise with a high technology product, it's relatively new. Getting channels to pay attention to startups, at least in our experience, has been very difficult. There are a number of issues with consumer based companies in a similar light, where it's our belief that you ought to be able to get meaningful consumer traction as a web company without spending millions of dollars. In fact, I'd argue as a function of time. Over the last three to five years, the cost of getting a consumer Internet service up and running has begun to approach zero. So as an entrepreneur, if I take off my Sequoia hat, you're far better off getting meaningful consumer feedback and iterating on that feedback and then waiting to go and get venture. Now my partners would love to have me represent a different position because we'd like to be the first dollar in and your first phone call. But that said, there are a number of markets where the amount of capital required to get meaningful consumer feedback is relatively small. This is a personal frustration. But if you look at the competitive differentiation and the mapping that happens in the entrepreneurial community, there are so few entrepreneurs that are truly credible about the existing incumbents and their advantages versus their own. It is so refreshing to see a company that's not actually up in the top right. I mean, 98 out of 100, when it comes in, they're top right. Here's why. Yet it's really nothing more in many cases than a wonderful idea. In PowerPoint, one fabulous way to build credibility with the venture community is to really know your competition intimately, to have a wonderful degree of respect, and to initially position yourself in one quadrant. And over time, you might have a hope or ambition to move up into the top right. But this is a credibility building exercise. You will truly separate yourself if you have a balanced view of where you hope to enter the market as a upstart and over time earn a stronger market position. So some of you might have been wondering what this ball is here for. I kind of told myself that this was a workshop and if I didn't get any questions, this is like a question. If you got the ball, you needed to at least ask a question or possibly answer one. Can I pause now and just ask what are you guys thinking? Are there any questions about. Please. So whenever I see one of these charts, the whole question is, if you're in the software business, what about the Googles and the Microsofts and the Yahoos of the world? Why won't they come and eat your lunch as a new entrepreneur? Sure, they can have 20,000 people developing what you're developing. What answer is a good answer? There is no good answer. Well, it's going to vary by venture firm, but we're very comfortable investing in and around what we call an aircraft carrier. The companies that you mentioned, it's very hard for them to shift momentum. And we'll regularly make an investment decision based on a set of assumptions that the existing incumbent will not be able to successfully attack the adjacent market. In fact, I'd actually argue much of our current portfolio makes that implicit assumption. Some firms are going to have a oversized fear of what these large incumbents might do. But it's certainly been my experience both being inside one of these large incumbents and being part of an upstart. It's very rare for a large company to Move on. Even Google, look at the markets that they're currently dominating and the ones that they've attempted to pursue aggressively. Very different list. With this chart, Jim, that you have up. If you are in a new category, as I believe my company is, then aren't you more concerned with the axes that I choose as opposed to the companies that I put onto that chart? And wouldn't I be choosing those axes with the intent of putting my company in the upper right or at least heading there? The answer is yes. But even day one, as you think about entering the market, lay out where you're going to compete on those two axes. But even day one, be credible about at least what the customer perception is going to be. And rarely as a startup will you wind up distancing yourself into the far right corner. Certainly over time that will happen, but. But normally there's a stage that we typically call wart removal and iteration that occurs over 12, 18 months before you can really position yourself as dominant in an existing market. Defensible barriers if you're interested in the consumer Internet or mobile space, this is our biggest concern. It's what we describe as the Malthusian environment. For those of you that are philosophy fans, Thomas Malthus in the UK and his theory around population and eventually it starving the globe. We see this all the time in certain Hot Web 2.0 categories. It's also true in a number of mobile micro landscapes. How are we going to build long term competitive barriers? We're not comforted by patents. I can tell you that we often hear the patent story as a startup. Patents are interesting and I think we should pursue them aggressively, but it's more of a defensive tactic. It doesn't necessarily need to be technology, but there's great comfort when we hear that there's a meaningful technical barrier that's being accomplished through technology. And by the way, we're very comfortable with technical risk. We take that over market risk. If you can assure us that there is a market and you'll be able to begin to pull together a world class team to go up the technology that's very exciting to us. But being able to explain why there's a meaningful barrier. Ebay had the network effect. We often meet with entrepreneurs that have a fabulous set of instincts around viral behavior. Intimate understanding of the market itself or domain expertise is often a fabulous buried entry. There might be a set of partnerships that the first mover is going to be able to take advantage of or user generated content and how that actually creates stickiness in the business. But the point is, at least for us, we are very interested in barriers to entry. If you can get through the first set of items in the conversation and unfortunately probably not as interested in all the raw details around the technology. And if you're an engineer in the room, and I was certainly guilty of this throughout my career, I love talking about technology, but as an investor it's less interesting then understanding how that technology or business process or unfair advantage is going to create a meaningful barrier to entry. Please can you give some comments about simplicity, design theme and scale errors. It's an enormous barrier in our opinion. Very few startups get it candidly, but we're seeing more and more of that on the web. Certainly Apple has differentiated themselves over a couple decades with simplicity of design, but we're big believers in that. We think YouTube, it wasn't like YouTube was the first site to share video. No, they were the first site to do it in a browser only fashion through Flash. So simplicity is incredibly important and we think often creates new levels of adoption and first mover advantages. And it's a big lever. It's not up there. But this was not meant to represent a comprehensive list. But certainly it's a wonderful way to go after a market that you know well. Other questions on barriers. So here are six slides, or business cards rather that are pretty common for us when we meet with an early teen. Talked about humble beginnings, but look at the titles. Chairman, President, Secretary, CEO, General Counsel. General counsel is always a red flag when you're looking at a Series A company. But in all seriousness, this is a very common problem for us. We see these very stacked groups and I kind of wonder where are the times 10 programmers? Where's that wonderful architect? Where's the guy with the fabulous sense of simplicity and market expertise? What we're really looking for is three, maybe four individuals with very different expertise, lots of dynamic tension, who are times 10 programmers, you know, wonderful marketeers. The pedigree is not important. Certainly it's a qua. You will find other firms that take a strategy that they'd like to have people with an executive history as part of the founding team. It's not part of our criteria. We're happy to back executives all day long and do quite often. But the point is it's not part of the way we think about a business. And as you come in, we're as interested in who the doers are and having them join the meeting as we might be on the future leader of the company. We get tingly when we meet with a bunch of engineers who just knocked out some fabulous code for a mobile effort or a consumer effort or a storage effort who are absolutely world class. Now, let me not talk a lot in the meeting, but it lends a great deal of credibility to your efforts. Just out of curiosity, how many people here have an engineering background? So about half. So I've touched on this already, but intelligence, ambition, clear understanding of a pain point, and in our case, often immigrants. But certainly unknown and underdogs are the people that we find the most interesting to back the second time, third time entrepreneurs, I mean, candidly, rarely works. And in our own experience, we've done it a handful of times, but it hasn't been nearly as interesting as the first time they were actually involved with us. Now, that said, we love backing people that have tried it once or twice before and weren't wildly successful, but they're still unknown in an underdog. So you guys don't know either one of these individuals here. You knew the first six pictures I show you. But the point is, I think there's a good chance two or three years from now you'll know those faces. Fairly unknown today. Toiling away. I have an Italian partner who immigrated to the US who was born on the 4th of July in Italy, Douglioni, who is the one that typically flips to the financials in a presentation. And what he's really doing is mapping what he perceives to be your sales mechanism to your business model. And you know, probably two times out of three, there are major flaws. 50% of the time you've lost Doug's confidence in your ability to build a business because instinctively he can look at your numbers and grasp whether you're plugged in, if you will, to how to build a sales, marketing and distribution arm for your business. The numbers are incredibly important. And if you don't know, just say you don't know. That's okay. In fact, arming us with a set of financials that's not believable is more damning than just leaving them out. And this is very common. I think people want to be comforted by the numbers. There's lots of standard mistakes, but the numbers themselves tell us a lot about the way you're thinking about the business. We have a slight unfair advantage in that we've been around for 35 years and have seen lots of P and LS, both the Dreamcase and then the reality after we invest and we have the pleasure of going through what we call portfolio review, as my partner, Mark Dempster fully appreciates Every six months where we look at all of our companies, their plan and what happens, and it's a full day. It's a wonderful experience to razz your partners on this, but rarely do people hit their numbers. That said, it's the disparity and the magnitude of it that we're fixated on. So take the time on the financials and I would encourage you to go look at other companies and their filings when they go public on their very first couple of years. We regularly will see plans that go from 0 to product shipping to 25 million to 80 million to $200 million. That almost never happens in the history of high tech. I mean, if you looked at Google in its early days and read Mike Moritz's description of the company in our LP letters, you'd think it'd be ready to be shut down. So the point is, you can gain a great deal of credibility by being balanced on on the numbers up front. And certainly a number of folks in the financial community, specifically venture, are going to be very fixated on your P and L if you're doing something in the SaaS area or consumer Internet or mobile or advertising or even semis. There is a nomenclature around unit economics that we like to think about when we contemplate a business model. There's a lot of specialization here. I'm not going to go through all the terms, but I assure you that if you're not on top of how you might contemplate unit economics for your business, whether it's yields for semis and how that impacts gross margin versus MRR for a SaaS business, and what your ratable revenue looks like or cost to customer, acquisition or churn or lifetime value. These are all elements that suggest that you've really gotten your head around the economics of your business. This is often more telling than the P and L and the balance sheet and the cash flow statements for us. And almost every major category has a unique set of economics that have been laid out. And it's wonderful to have that in black and white along with ranges. So I'm going to pause here and see if I can get any questions on unit economics. To get the football out, please. With YouTube, one of the issues was early on they were giving away a lot of bandwidth and storage for free. And honestly, they can march through the advertising. They break down unit economics per user and I guess with that up against the amount of bandwidth in stores they expected each user to represent. We talk about shipping out dollars for every customer and in the case of YouTube, there was a bandwidth and a storage cost. It was measured in fractions of a penny, but per user. And we were very concerned early on around monetization, but more concerned about friction. And there are lots of conversations that Roelof and Pierre had with the team around the balance. And we wound up raising more cash not because we needed it for headcount, because the bandwidth cost had actually crossed a million dollars a month. Turns out the storage is not a large issue for YouTube, at least in the early days because the amount of bits that were being stored and there's a certain amount of caching. But the bandwidth and the peering costs were becoming fairly painful. But that was captured even in their initial Series A presentation. They had a very good handle for what a 90 second flash video with a certain quality. And our hope was could we eventually build an ad monetization scheme that could produce north of that? And that gave us some comfort. We knew what the CPMs might look like and had some knowledge that we could eventually turn this over if it would start to take off. We're not big fans of low margin businesses at Sequoia. That's not to say you can't build wonderful businesses. Flextronics is a great example. Don Valentine's not here, but you know, you hear a groan in the room anytime an entrepreneur mentions a gross margin number below 50%. You can build wonderful businesses in both the low and high margin area. Here in the Valley I think you see more healthy gross margins than you might see in other areas that globe. But you know, through our team in China, we're certainly starting to see wonderful aspects of low margin businesses and I think that will continue. Okay, sales learning curve. This is something that I encourage all of you to read. This is a fabulous case that was developed by Mark Leslie, who was the CEO of Veritas. He actually teaches here at the GSB I think a couple times a year. And it's now an HBS case. This is all about the recipe involved in building revenue and a real business. And there are all these assumptions that I would characterize as textbook that go in to what your revenue ramp look like, how many salespeople you're going to hire and all sorts of elements of the business, whether it's positioning, sales compensation, traffic training, and there's this view that you can just lay out the formula and every quarter you're going to grow 30 or 40%. Just not how it works. There's this enormous challenge in iteration on the recipe to get to a meaningful level of repeatability in your business. And that's true for an enterprise business, it's true for a consumer business. And the art is to go slow. First, focus on the recipe with world class people people and get to the point where you have repeatability. And it turns out that if you decide to spend a great deal of money on talent in your customer facing organization early on, before you figure out that formula, you're going to burn through your cash far faster than you should. Because salespeople are very expensive, they're not going to take the same risk that you're going to take as an entrepreneur. And until they can actually produce margin equivalent to two times their compensation, and that's not just a stock salesforce, but it's the ses, you should not have your foot on growth in your customer facing organization. And so knowing that it might take three, four, eight quarters to really figure out what the formula is, is incredibly important. Cisco, as it stands today, went for seven quarters. Up, down, up, down. Very small sales force, unclear whether it would be a meaningful business. But they focused on the recipe and there was an incredibly important early sales executive there. And with the patience of the team, they eventually built an enormous business. But it took 6, 7/4 for them to figure out the recipe. Take your time. Make sure your business plan reflects that. When we see a set of financials, whether it's in consumer, mobile or enterprise space, that suggests that you're going to go from nothing at product introduction to some enormous number on a monotonically increasing basis over four or five quarters, you lose credibility. This is a wonderful case and I really want to continue to iterate that you should pick it up and read it. There's not a book yet, but there ought to be. Touched on this already. The financials in your plan say a whole lot and it's certainly not a time to be glib, overly aggressive. And I would encourage you guys to hold off on financials even in the first meeting if you're not confident about the numbers. One of the wonderful things about the Internet and mobile space is you really can experiment and have a pretty good handle on what the cost of customer acquisition might look like, on what churn looks like, like with just a little bit of money or bootstrap it yourself. We've got a number of folks in the portfolio that started their business on their credit cards, in their apartment, and they got a hefty valuation in the Series A because they were able to come in and show, even at a micro level, early consumer adoption and an early sense of what the unit economics might look like on a validated basis? Small sample, but still very compelling to us. So what's a small sample for consumer market? Is it percentage growth over time? Is it 5,000, 50,000 books? It can be as small as 100 if it's a controlled beta. And we're looking at that point in time for repeatability and you know how often at a loyalty basis they're coming back. We've seen scenarios where it was a small as a dozen, but in reality somewhere between 100 and maybe 100,000. If you can create some notion that there's real credibility and independence behind the numbers, that's very valuable to us. You've taken out one of the biggest issues, and that's consumer adoption risk. You've probably begun to show your ability to iterate, because my guess is you bring it up and you iterate. And a lot of these young teams will change the science or the offering every other day or every day. And that gives us a chance to watch what's happening with the site over time. And this is in many ways, I'm talking about startups, an iterative, intensively so business. And if that's in the DNA, fabulous. We've had the good fortune of being in business with a number of people out of PayPal. And I think the one thing that sets the PayPal alumni organization apart from many others is their ability to iterate. And, you know, it turns out that Steve and Chad, they were junior guys at PayPal. Junior, Junior. You know, Max is off with slide. But I mean, these were relatively young junior people in the organization, but in their DNA from PayPal was an ability to iterate in a very intense way with very short time periods, with thoughtful, open, honest feedback about the marketplace. I think there was also an ability at PayPal, excuse my language, to not bullshit themselves. They were very honest with one another about the consumer feedback, what was working, what wasn't. It really has set that culture apart. And I think we'll continue to see wonderful startups being led by people who are part of that DNA. And if you're thinking about starting a company, go get somebody that spent a couple years in that organization. As you think about blending your own team and the DNA of your organization. God, where do I start here? When I was trucking up and down Sand Hill Road with my co founder, I really had no clue about VC meetings and what they were expecting and bizarre behavior. Lots of questions at times. I didn't quite understand mystery on how to actually get the meeting. There was all these, you know, tribal Tales on how to get a meeting with Kleiner or Sequoia or MDV or whatnot. Maybe just start with when are you ready, boy? Wouldn't want to show the venture community my slide deck the first time I'm actually going through it. You really need to beat it up with some people that you would consider advisors. I also think it's important to think about who you want to have in that meeting. Single individual is fine, but if you've built the beginnings of a wonderful team, maybe unknown, maybe underdogs, bring them in, find a way to have them participate. I laid out what I think are the five most important aspects to kind of convey. But it's your meeting. My partners can derail a freight train. But it's wonderful to see an entrepreneur take ownership, take the mic and own that meeting and listen to the questions. If they're already going to be answered later in the deck, point that out and move on. It's a wonderful opportunity to be creative, but it's also incredibly important that you own that meeting and manage it. Many groups might be off looking at their BlackBerry or not paying attention. I'm not sure that's the group of people you want to be working with, to be candid. I mean, it's an hour. It's a wonderful opportunity. It's certainly been the most rewarding part of my career, being an entrepreneur and spending time in those early days iterating on the plan and eventually going out and getting funding. But it's a great honor for us in the venture community to sit on the other side of the table and listen to all of you. And you guys should feel that you have ownership in managenetme. Now, some might ask you who else you're talking to. Wouldn't tell. I think scarcity and a certain amount of opaqueness is appropriate in a handful of areas. You're in an environment here in Silicon Valley where there are probably a couple of hundred venture firms and you do have choices. And I would encourage you to go out and seek out the right partner. But also be aware of what market terms and market prices look like. If they don't get back to you after the first meeting and say they're going to after a week, I'd send maybe one email. I wouldn't take it personally. They're all pretty busy. But there are a lot of people in the venture community that do not follow up and let them know that they're going to not be interested. And it can be very frustrating. As an entrepreneur, I've been funded, but I've also been passed on numerous times. The debate itself that might ensue when somebody tells you why they're going to pass on the investment opportunity is something that I would encourage you to pause on as an entrepreneur and really listen because it's an opportunity to hone your presentation and your thoughts around the business. For the next meeting, please. What about warming up the VCs to worse the meeting? What, what's your strategy to get them prepared for the meeting? I mean, is it like, can you just, should you send them like paragraph email, maybe make a phone call and talk to them about it? Is it like, how welcome is that? Because you know you can have them for an hour and, and you want them to be mentally there, be there when they show up, or they are. So how do you warm them up? Yeah, I, I guess I have a slightly different view. I'm speaking as a entrepreneur now rather than Sequoia, because I may ask you for your PowerPoint slides if you send me something, but I actually think you want to attempt to create interest with a very brief paragraph. No longer representation of the unique value proposition and the unfair advantage. That's it. If they ask for the slides, I wouldn't send it. First of all, you can't get them to pay attention without slides, let alone handing them to, you know, they're going to move through the back of the presentation. It's an opportunity for you to manage the meeting. I also think that there are lots of reasons not to have your slide deck, especially in this Malthusian environment centered around the venture community. And so, yes, there are things you might want to do to warm them up. And I think it's appropriate to spend a few minutes talking about your backgrounds. But if you can get to that clarity of purpose, that compelling unique value proposition in the first five or 10 minutes, you've got their interest. In fact, I'll just tell you right now, some of the best presentations I've been in, they have gotten through all the core elements I just touched on in less than 15 minutes. Now, we don't let them leave in 15. Normally what we try to do at that point in time is bring the rest of the partnership down and somehow try to find a way to be in business with that group of entrepreneurs that day. We can go from meeting to term sheet to money in the bank in less than 24 hours. And the point is, if you actually do your homework in advance, create some scarcity value, work out what you think are going to be the key questions in advance, and really think through how you want to respond. You're in a wonderful position. You're going to get lots of people that say, well, you, we won't take a meeting unless we get to PowerPoint. Well, are those the kind of guys that you want to be in business with? I mean, in many ways the venture community works for you. I'm not sure entrepreneurs understand that. Day one. But after a couple years of having Pierre with his boot on my neck on my board, I realized, no, Pierre is really there as an asset to me as an entrepreneur. And I finally figured out how to leverage Pierre. But the point is, you want to be in business with people that you feel good about. And I would encourage you to be thoughtful on who you target in that group of 300. But not share, certainly not in this environment, especially with the iteration that goes on on the web and in the mobile space. How can an entrepreneur get a VC to make a decision quickly and not just drag it on for weeks? Competition. If you have a term sheet and it's got a short fuse, you're going to get everybody's attention. Now there are people that abuse that and represent that. They have term sheets and flat out don't. We don't like being treated as a stalking horse either. And so there's a delicate balance. But if there is meaningful interest, whether it's for angels or the venture community, I think certainly you're going to garner a different pace from the venture community. You know, we think about the business in lots of different ways, but if we hear from an entrepreneur that we have a meeting 10 days from now, but they recently received a term sheet, more than likely we'll drop almost everything that day or the next day, cancel some meetings and find a way to get together. I mean, it's our business to try to get in front of folks like yourself. And if that is an ephemeral situation, it's something we're absolutely going to jump on. I think you'll find that to be the case with most venture firms. You will find people kind of hiding behind their rationale. They don't want to have the debate. And that's a little bit unfortunate. I mean, if you're open minded as an entrepreneur and want to understand the rationale behind that partnership's decision and really listen and don't push back so much. It can be a wonderful opportunity to learn. A lot of firms and individuals have been burnt and, and wind up candidly pissing off the entrepreneur because they are passionate zealots and they don't want to be told that their baby is ugly and that becomes a bit of a challenge and you'll find them opaque if you ask and point out that you're not going to debate but you really would like to learn from. I think almost everybody in the venture community would be happy to share their thoughts. And by the way, we're often wrong. I'm embarrassed to tell you the list of great firms that we passed on, but they include companies like Sales, Salesforce and Checkpoint Software, the Firewall company and many others. So that should not discourage you as an entrepreneur. I mean you will get lots of interest and no doubt even in those cases, you're going to have lots of people that decide they want to pass other questions Daniel, a couple parts you mentioned the first two pieces, propositioning for advantage as the two ways to get your attention. Is that the type of stuff that you want to see structured that paragraph, say in the email to yourself before I present my slides or ideally that's the hook right Immediately I realize, boy, there's a compelling and unique value proposition and clarity of purpose. And so the big hurdle that we often go into a meeting on wondering whether there might be an opportunity is already addressed in the initial email. Haven't laid out much more than that, but I think it's a wonderful way to create interest in the venture community. You know, by the way, this whole mystery of how to get a meeting, it varies firm by firm, but certainly at Sequoia our emails are on the website and we're in the business with meeting folks like you and we're here to invest, not pass. So we reach out. There's no need to find somebody that's somehow associated with somebody else at the partnership. And I think that's true almost across the board today in the venture community. Wasn't the case 20 years ago, but certainly is now. The other part of the question I wanted to ask is where your eye with parents had at the moment when you said that you didn't think it was a good idea to have your slides just circulating the venture capital community. I know that Sequoia's webpage actually suggest a sense slides. I mean it's like ideas at Sequoia Capital now with your aluminum pull, now with your VC hat on. How can an entrepreneur say I wanted to get in touch with you. Avoid that process, you know, or avoid that means where we feel like we know there's no NDAs here. There's, you know, I'm sending these slides out blindly. What's the risk? Well look, I will normally ask for slides and look, I never leave the partnership in our case, and I think that's true for a lot of firms. But I'll ask because I want to qualify. Who else should I have in the meeting? Should I have, you know, Mark Dempster? Should I have Greg McAdoo? Should I have Mike Morris? I am trying to figure out how to make that a productive first meeting. And often the slide deck will allow me to gain more information about that. Even in our own partnership. I will not forward to the partners that, that I am asking to come to the meeting. The slide deck, why? Because they listen to six or seven presentations a day. I want them to pay attention. We all have add. And so as an entrepreneur, I've been in those meetings where people are on their BlackBerry or whatnot. It's very frustrating. You've been passionate, you've spent all this time working on the material and so I have empathy for you. But that said, I'm giving you my advice as an entrepreneur. I wouldn't send the PowerPoint. I'd certainly be willing to follow up with it after you present because it's likely to go from three or four people, potentially the whole partnership, where they're likely to have a conversation between your initial meeting and your next meeting about the opportunity. And at some point in time, you want to be transparent and forthcoming. And I think that's part of the relationship building that will occur from the first meeting on. But I think to get a first meeting, it isn't necessary to send PowerPoint just on the sending of the PowerPoint slides from an entrepreneur's perspective. I think I was pretty slow to figure this out, but a slide presentation that presents very well doesn't necessarily read very well and vice versa. And so as much as it's painful for the VCs to see these things over and over again, it's very painful for us to create them. I never wanted to create two of them, so I don't send it around. I hopefully have one that presents me incredibly important point. I'm glad you brought it up because there are firms, and I don't think this is true at Sequoia, but there are firms that will use the PowerPoint presentation in the email to be initial secondary filter process. And it turns out they'll look at the PowerPoint, they'll make a quick assumption based on the PowerPoint itself without having the benefit of hearing from you, that passionate entrepreneur and that energy that goes into what you're trying to do, and they'll decide not to Take the meeting. You may not hear about that for three or four days, but they'll come up with some B.S. excuse on, you know, double booked. And trust me, they're passing. And they're passing because they looked at the PowerPoint and it's just not compelling enough. And so I think you want to create the opportunity to be there and deliver the message face to face, firsthand. Yes. Thank you. You were mentioning earlier that at some stages might be actually useful to be a little bit opaque about the real facts, like who you're talking to and other subjects. It might be actually very honest with theses, like if you're not sure about dimensionals. So at which point do you sort of have to lay the cards on the table to establish a really good relationship with. Well, it's no different than any other human interaction, I think. Trust and honesty and integrity. There's real substance that will come out of those conversations. And I think being transparent and honest is a far better strategy than being glib or overstating, potentially even misrepresenting. That said, there are a number of items that as an entrepreneur, are not in your interest to share with the venture community. What other venture firms are you talking to? What was the valuation of the term sheet that you received? These are things that candidly, to create a market dynamic, you are far better off holding those cards close to your chest until you decide who you want to work with. Personal question. What's the quota's approach to clean tech investing? Where you see, see like the big opportunities, what's the big pitfalls and what's the differences for this process? Because I mean, a lot of times, for example, as you said, I mean, don't worry too much about market size, for example. And I feel like, especially for clean tech firms, market size is probably a bigger issue than starting an Internet firm. So we talk about energy because we think there are not only green or clean opportunities, but lots of interesting opportunities in gas and fuel and what we'd call dirty tech. But we are very active in the space. A number of the elements that I touched on earlier are still true. In fact, in the last year we have probably backed five, what I'll call energy opportunities out of a total of 15 investments. So. So almost a third of what we've done in the last year has been in the energy sector. Market size. Ultimately, look, it's not a negative to suggest that over time this might become a big market, but we're fixated on the initial focus and the unfair advantage, which is very hard to do. In a broad market with existing incumbents. If that was the case, then many of the incumbents would extend their product line and just move into the area. There are a set of elements that come together with a startup that I think create wonderful opportunities for all of you and a spectacular investment landscape for us. And those are the things that we're interested in. I am sure there are lots of energy opportunities out there that are interesting companies and businesses that will be profitable and create a nice return for the proprietorship. As an example, installing solar panels. I mean, there's a big opportunity here, right in the Bay Area, probably across North America. I am not sure that all by itself, being a professional services business is going to get us leaning way forward if there's some creative process around it. We might. I don't know if I answered your question or not, but large market all by itself is not a damning data point for Sequoia. The point is, you know, a lot of people listen to venture and they think they're focused on size of market and if they can't claim that they've got a billion dollar market, day one were not interested and they're worried about being pigeonholed as a feature. Oh, no. Those first six businesses that I brought up on Humble Beginnings were all features. Day one, little tiny businesses, please. My question is, besides money, what value does Sequoia add? And would Yahoo, Google and YouTube be these companies without Sequoia? I think it's very dangerous for us to suggest for a moment that we added anything to any of those opportunities. I think there's a philosophy at Sequoia that we're all about sitting behind the entrepreneurs and not getting in front of the press. We describe it as prey jumping, if you will, when there's a wonderful outcome for a company and the next thing you know you listen to the investors being quoted in the Wall Street Journal. So it's important to us that we properly represent our position. We were certainly investors. We think we were additive to the process and I'd encourage you to go ask them as entrepreneurs. That said, the key ingredient in our success has been identifying and intersecting with wonderful unknown underdogs over the course of the last 35 years. Philosophically, we have benefited from a culture that really started with Don Valentine, who has always focused on going long when things are going well and not selling out. And I think culturally that has transcended a couple of generations within Sequoia. And at least in those cases, you have a couple of independent companies there still. Even Yahoo one that wound up selling out YouTube. In those conversations with Steve and Chad, there was a lot of dialogue around remaining independent. A billion six at the time sounded like an enormous amount of money. I think if you look at the traffic and the business that represents to Google today and thought about that as a standalone company, you might argue that it's worth 10, 15, $20 billion today. That said, we absolutely supported our entrepreneurs to Steve and Chad in that decision. I think it was the right decision for the two of them and it's turned out to be a wonderful business and I think Google has been incredibly additive but we would never take anything away from our entrepreneurs. And I think there's a lot of pride within Sequoia on not being out front with the press or the credit, if you will. I have a follow up question on the energy sector. First of all, how many protests traditional energy are you seeing that have to do with traditional energy sources and monetizing on oil, gas, that kind of stuff. And secondly, when you receive a business plan related to energy and you see that the management team has maybe 80% of the solution figured out, but then you know of another team, someone else would send you something and they had maybe the remainder 20% figured out, do you ever serve as a connection between the two? And let me answer the second question first. So I think in terms of trying to act as an intermediary. Absolutely. And often attempt to do that. I think our batting ratio is, you know, on the order of, you know, 2, 300. It's not a spectacular track record in that area. In terms of trying to get teams connected, a certain amount of passion and DNA building has to get created in a startup independently and we don't want to ever force two groups together. That's often met with disaster. In terms of the number of traditional energy or what I would characterize as dirty tech opportunities that we've intersected with. You were probably meeting with three or four a week on that order. It's probably twice that number that I would characterize as green. But there is a lot of activity in energy right now. It's one of those hot sectors. Our worry is it's a bit Malthusian already and unlike the Internet mobile space, the capital intensity of this sector is a lot closer to what we characterize in our semi or systems business. So we are being cautious, extremely so when it comes to making energy investments. Although I have to tell you and Mark will appreciate this, we just recently signed a term sheet with a couple of guys who spent their careers at GE and large power companies that are in their late 60s. And although I painted this picture of very young entrepreneurs early on, we're delighted to be in business with those guys. And the expertise that comes out of GE in a number of fields is just staggering. And there are certainly opportunities. There was another question here somewhere. Running a business to the point where you can get people meaningful data back. Meaningful, meaningful data, you know, back from, I guess, where the users are. I guess it's cheaper to run business these days, consumer Internet with that in mind. Like, how do you know when the right time is to get money? I mean, if it is the case that you can get somewhere so little, well, it may not be money that drives you to that decision. I think if you can create a disruption where you have a meaningful increase in the potential value of the company and you've de risked a major component of your plan, you know, anecdotal, albeit meaningful, consumer adoption, some notion of what loyalty numbers might look like if we scale that up. Breaking through a major technology risk, anything that can create a disruption in the risk profile of your company, depending on where that lies, it's worth thinking about doing that on your own. Mastercard, on your own nickel. I was funded by Sequoia in 1996. Monte Kirsten and I put up our own money, took no salary, pulled together roughly half a million dollars and got our first product with six fabulous engineers out the door and got to initial market adoption before we ever went and saw anybody in the venture community. And it was a very different dynamic than going to PowerPoint. We had a product in the marketplace, we had meaningful adoption at that time. We had a downloadable product in the early days of the Internet and it meaningfully changed the economic equation around the ownership of the company. So we even at exit, had 74, 75% of the company within the employee base. And so as you think about ownership and economic value to not only your co founders, but to the team itself, if you can de risk the company in a very thoughtful, scrappy way, encourage you to do it. Not to mention for us on the other side of the table, it shows chutzpah and stones that you're willing to take that risk. I mean, this is the substance of what we're looking for. When we're talking about underdogs and passion, we love hearing about somebody taking that risk and we are absolutely willing to pay a higher valuation when we see real progress along that dimension. I'd encourage you to do that. Now, you know, if I put my Sequoia hat on, boy, please. The Moment you have the idea, come on down. We really do want to be the first phone call, but you know, in reality we're happy to be a part of either. What are the pros and cons of taking angel money or going to Series A. And have you ever turned down a deal because of an existing investor? It's a really tough question. I think there's a wonderful group of angels out there and if it turns out that you think the angels can be additive to the creation of the business and, and provide a perspective that would be valuable to the business creation, encourage you to go pursue that path. The challenge is as you build that capital structure, rarely does the angel community want to continue to invest in the Series B and the Series C and the Series D. And if you take a meaningful chunk of your initial capitalization table, the cap table, the way the company structure and allocate it to angels, you create a somewhat fragmented foundation. The venture community is basically expected to continue to support the company assuming certain milestones are being met while it's, you know, 5 or 10 million dollar valuation, 2050, 200, 500. And new investors will expect to see existing investors show them the money. And that's probably the only major risk in taking a little bit of angel money. If it's too much, it can become a problem. You know, to be candid for us, the angel community at Sequoia is a wonderful partner, but at times they're our biggest competition. You know, we make $100,000 investments. A lot of people don't think about Sequoia as somebody that's willing to do a seed, but you know, we're happy to be part of an early stage seed investment. Some of the very best returns in Sequoia came from incredibly small early investments. But it's a wonderful group. Be picky, think about who your partners are. Curious to know. You spoke a little bit about IP as kind of a defensive strategy. You said there's also signs of skepticism in that when you do something that's coming with a patent, I guess exactly how broad a patent that is, how much that really protects, what kind of consideration for you is that if somebody, if they have a technology that they think maybe this method, this product like a patent, how does, how does that play into any decision you're going to make? I think having a patentable technology and having patents is a wonderful way to think about the intellectual property in the business and a potential technical barrier. But it's probably more important to us that it's difficult to repeat and difficult to build than the notion that we're going to defend our market position. Not an iteration and quickness of feet, but by hiring some lawyers and using our patent to make sure that anybody that comes in and competes gets spanked. That's a very expensive proposition. I don't know if there's any attorneys in the group, but you are. Okay, be careful what I say. But it's a very expensive proposition for a startup to hire a legal team. And I've been on the other side of that a handful of times. And there's some wonderful people at Wilson Sonsini I've been in the business with on the litigation front and three guys out of MIT, all PhD, central casting in the video space, fabulous patents, the guys behind MPEG and hgtv. And we wound up pursuing a defensive set of tactics around their patents and quickly burned through $10 million of the company's money. And that happened in 15 months. And so concerned about, I mean, when you get some technology, do you look the other side of it is what's out there as far as we're absolutely worried about whether we might be stepping on somebody else's intellectual property. And that is a concern, and that is something that we will investigate in certain areas. Consumer Internet, we, you know, are less concerned. But there are sectors in mobile or in systems technology where we do think there's defensible patents that we might be violating. Memory is an example. Flash is a landmine when it comes to patents. And so we are sensitive by sector on the offensive nature of other companies. We, as an example, fear ti. We don't want to be on the other side of TI's legal team trying to defend a patent situation. And we'll do almost anything we can to work with the management team to avoid litigation and attorneys on that dimension. We think attorneys are wonderful for lots of aspects of building a business, not necessarily patent litigation. Other questions, Matt, how do you handle the risk profile differences between a VC and entrepreneurs in that a VC is looking for some huge hit? I mean, it could be a small chance of a huge hit, whereas an entrepreneur may be happy with walking away with them. It's like, well, I told you earlier, it turns out that there are times in our opinion that it makes sense to consider an acquisition and we'll even encourage an entrepreneur to do that. But when it's working, our disposition and culture is to go long because it's going to continue to surprise you to the upside. I mean, if you sat around the table at Sequoia and heard the history of Some of these early companies and even just read our LFP reports for what are Today large Fortune 100 companies, you'd understand that comment. But we will never vote against our entrepreneurs as a firm. I think it varies, and you heard it in the earlier discussion today, it varies by firm. Philosophically, we believe that we're in the business of producing extraordinary returns for our LPs and our batting average is, you know, around 500. So about half the companies that we invest in in the early stage business don't work out. And it's a very humbling aspect of venture the ones that do. We're hoping that maybe one out of a group of 40 investments in the portfolio produces what we would consider a black swan or an extraordinary return. It's our goal to try to be involved with the entrepreneur and the concept that might just create that kind of return every year. And they will rarely happen if you're not willing to go along. But there are all sorts of issues between the venture community and the investors and the entrepreneur that are challenging at times, including how entrepreneurs amongst themselves and their co founders might be dealing with the same question. Some wanting liquidity, others wanting to go long. I actually think that's a more difficult question. The venture community has at least dealt with it many times. When you have co founders that have different views, it's often the very first time in their lives that they've got an opportunity to get financially independent. It's a difficult question. It's one that speaks to getting comfortable with the human traits of your investors. Please. Have you founded companies which are designed to operate in several countries and, and if so, what were your concerns? Well, I think there is wonderful entrepreneurial talent kind of across the globe. We came to a conclusion four or five years ago that some of the most important tech companies will not be started in Silicon Valley in the next couple decades and that they'll be started in other parts. Eastern Europe, China, India and so forth. Not a big fan of having an early stage company try to target multiple, multiple geographies. Day one Open minded about R and D or certain elements of business being in multiple locations. But you know, the ideal scenario is a very tight knit, small elite team of times 10 producers working on, you know, with passion in initial product offering because the iteration itself really requires spectacular communication. But there's all sorts of examples. Now if you told us that you're a systems company and you wanted to open up Europe and Asia simultaneous with North America, we'd tell you you're crazy. It just makes no sense. It gets back to the sales learning curve from Mark Leslie, where you really need to focus on your messaging. And you're far better off figuring out what's going to work in Europe or North America than trying to tackle all three. In the consumer Internet space is very different. You open it up and you'd be surprised. You're going to have Australia and Asia. We're always stunned as to where the initial traffic comes from in our early stage companies. In the consumer Internet space, mobile, it's dominated by geographies. Outside of North America, much of the innovation is happening outside the United States. Two more questions. Trouble? Oh, no, you, please. Oh, sorry. Jim, how do you screen for entrepreneurs that want to go long? Specifically? Specifically, I know on your website you mentioned you look for immigrants, you look for people that have taken risks historically. What are the specific either questions you ask or screens? You have to know that someone's going to want to take it long as opposed to sell out earlier. I think the passion and the ambition around the concept itself and knowing that they have a desire to see something through to their vision, I think it's very hard to predict how they'll behave when they're faced with the opportunity. And you and I both know an entrepreneur that was actually pictured earlier who has already faced a couple of challenging questions around should he sell out, should he go long? But it's just hard to predict and it's kind of an in the moment situation. I'd like to think that we can screen for it, but at least to date, I don't think we've been very successful. Okay, I want to flip. I think to just one. One last comment. I think we covered most of this. I would just leave you with a personal anecdote about entrepreneurship. All of you in this room are in a wonderful environment and I'd like to thank our underdogs and individuals that have kind of cottoned onto a unique, compelling value proposition. And I encourage you to take the plunge. Have some courage. Even if it's not financially rewarding, I think you'll find it one of the most emotionally rewarding experiences in your entire life, if not your career. In deference to my wife and kids.