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February 7 - February 11, 2023
he observed that radically unequal outcomes were common in the natural and social world.
Thiel saw in the power law an additional lesson. He argued, iconoclastically, that venture capitalists should stop mentoring founders. Venture investors from Rock onward had taken great pride in coaching and advising startups; for a firm like Benchmark, this was the bread and butter of the business. One survey in 2000 found that coaching and advising were growing more important, not less so: a venture partnership called Mohr Davidow retained five operating partners whose full-time job was to parachute into portfolio companies to provide managerial support, and Charles River Ventures in Boston
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The way Thiel saw things, this evolution was misguided. The power law dictated that the companies that mattered would have to be exceptional outliers: in all of Silicon Valley in any given year, there were just a handful of ventures that were truly worth backing.[41] The founders of these outstanding startups were necessarily so gifted that a bit of VC coaching would barely change their performance.[42] “When you look at the
strongest performers in our portfolio, they are, generally speaking, the companies that we have the least amount of engagement with,” one Founders Fund partner observed bluntly.[43] It might flatter venture investors’ egos to offer sage advice. But the art of venture capital was to find rough diamonds, not to spend time polishing them.
Entrepreneurs who weren’t oddballs would create businesses that were simply too normal. They would come up with a sensible plan, which, being sensible, would have occurred to others. Consequently, they would find themselves in a niche that was too crowded and competitive to allow for big profits.[45]
To banish consensual thinking, Founders Fund broke with the industry practice of Monday partnership meetings, replacing the Sand Hill Road tradition of collective responsibility with radical decentralization. Founders Fund investors sourced deals independently, even writing some small checks without consulting one another. Bigger bets required consultation—the bigger the check, the more partners had to assent—but even the biggest investments did not require a majority to vote in favor. “It usually takes one person with a lot of conviction
banging their fist and saying, ‘This needs to be done,’” one partner explained, by way of summary.[52]
Soros was right about the market’s direction no more often than other traders. What distinguished him was that when he felt a truly strong conviction, he acted on it more courageously.[53]
Space travel was one of those technologies that had racked up progress in the 1960s and then more or less flatlined: the cost of launching one kilogram of mass into space was the same in 2000 as it had been in 1970.
Work for yourself. Capture the value of your own ideas. Rather than climbing a ladder, grow a ladder underneath you.
He would never develop the feel of a local, but as a veteran technologist approaching his fiftieth birthday, he had experience to contribute.[2]
A Taiwanese American who gained admittance to Harvard at sixteen and skipped her freshman year, Lin was a kinetic go-getter. She became the youngest woman ever to make partner at Goldman, and her energy and charm made her a natural deal maker. Bicultural and bilingual, she was also a bridge between two worlds. After Goldman hired her away from Morgan Stanley in the early 1990s, Lin arranged
for the bank to take a stake in a Chinese diesel company and advised the Chinese government on restructuring and privatizing its airlines. After that, Goldman parachuted her into Asia’s largest privatization ever, of Singapore Telecom. The fact that she was a woman did not hold her back. Relative to Silicon Valley, China’s fast-developing business culture was flexible, fluid, and somewhat less of a boys’ club.[10]
Lin began to look for deals that blended the advantages of the United States and China. They would be structured in the U.S. way, with Silicon Valley lawyers drafting all the documents. But they would involve startups founded by American-trained Chinese and would sell into China’s vast market.
American ethos. “You are unique, you are a marvel. There has been no person like you in the last 500 years and there will be no person like you in the next 500 years,”
Her plan was to make just a handful of investments, as few as five or six per year, and ride the winners for as long as possible.
The chief lesson they had learned was that there should be no California committee micromanaging far-off judgments. “Think global, act local,”
U.S.-backed Chinese venture capitalists therefore found themselves straddling two worlds. As veterans of China’s business battles, their instinct was to fight their corner. But as bearers of a Silicon Valley brand, they would get in trouble if they cut corners.
Silicon Valley’s early development could be divided into three phases. At first, capital was scarce, investors few, and entrepreneurs had trouble raising money: this described China in the late 1990s, at the time of Lin’s Alibaba investment. Next, money flowed in, the tally of venture capitalists shot up, and startups multiplied both in numbers and in ambition: this was analogous to China around 2010. Finally, as competition among startups became hectic and costly, the Valley’s venture capitalists performed a coordinating function. They brokered takeovers, encouraged mergers, and steered
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it was as though the venture-capital community were treating the whole nation to dinner.
This time, however, the investors balked. There were only so many restaurant meals they were prepared to subsidize.
From the day he attended his first Accel meeting, Efrusy was expected to participate in the decisions. He could propose an investment to the partnership, and if he convinced colleagues of his case, the investment would go forward. He could vote against proposals from others; even if the project was not in his wheelhouse, he was supposed to have a view on it. Nor was it enough to comment usefully; he was required to express a verdict, yes or no, and take responsibility for it. “There is a saying in our business, ‘If you are treated like an analyst, you are going to act like an analyst,’” Efrusy
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Golden was impressed by Skype’s innovation and its exploding popularity. But he soon understood that Skype would be a challenging investment; there was more “hair on the deal” than he had ever seen before, as he wrote in his investment note.[6] Accel was accustomed to backing solid, straight-arrow entrepreneurs, but Skype’s founders had been sued by the entertainment industry over online music theft. Accel favored startups that developed intellectual property that entrenched their market leadership; worryingly, Skype licensed its IP from a separate company and did not actually own it. Finally,
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“Check out Myspace,” Efrusy’s friend said. “It’s Friendster with fewer prostitutes.”
Kleiner’s descent was especially striking because of the path dependency in venture performance. VCs who back winning startups acquire a reputation for success, which in turn gives them the first shot at the next cohort of potential winners. Sometimes they get to buy in at a discount, because entrepreneurs value the imprimatur of renowned investors. This self-reinforcing advantage—prestige boosts performance, and performance boosts prestige—raises a delicate question. Is there really skill in venture capital, or are the top performers merely coasting on their reputations? The story of Kleiner
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As Accel’s Facebook deal suggested, and as many other case studies confirm, venture capital is a team sport: it often takes multiple partners to land a home-run deal, and the investors who lead the chase are not always the same as the stewards who guide the portfolio companies after the deals have been
completed. For a venture team to work productively, the culture of the partnership has to be right. This is what Kleiner Perkins mismanaged spectacularly.[43]
John Doerr’s idealism was sincere and mostly admirable. He believed passionately that VC-fueled innovation was a force for good, which made cleantech irresistible. He was right that the Valley’s near exclusion of women represented wasted talent and was socially untenable. By throwing his energy behind cleantech and female advancement, he shoved history forward. A few cleantech investments worked out—Nest’s smart thermostats, for example—and the early failures helped to clear the way for the more successful second wave. Likewise, Doerr’s hiring of women ultimately worked out for the women, even
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At the end of May 2009, while Neil Shen was cementing his leadership over Sequoia China and Kleiner Perkins was grappling with its struggling cleantech bets, Milner and Zuckerberg concluded their negotiations. Milner’s investment company, DST, bought $200 million worth of company-issued primary stock in exchange for a 1.96 percent stake, giving Zuckerberg the $10 billion pre-money valuation that he wanted. At the same time, DST arranged to purchase secondary employee stock at a lower valuation of $6.5 billion. The employees’ desire for cash outweighed any misgivings they felt about the price
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DST’s money satisfied both Facebook’s requirement for growth capital and its employees’ requirement for liquidity. It signaled that private tech companies could delay going public for perhaps an additional three years.[12] As a result, enormous amounts of wealth would be created away from the public stock markets and for the exclusive benefit of private investors.
Shleifer began by applying a technique that was standard at Blackstone but foreign to most Valley investors. Rather than looking at profit margins—that is, the share of revenues remaining after costs are deducted—he looked at incremental margins,
meaning the share of revenue growth that falls to the bottom line as profits. Any amateur could see that the three Chinese portals all had negative margins; put simply, they were losing money. But a pro would know to focus on the incremental picture, and this looked spectacularly positive. As revenues grew, costs grew much less, so most of the additional income showed up as profits. It followed that growth would soon drive the three portals into the black. By thinking incrementally, Shleifer could see into the future.
In Silicon Valley, investors pursue deals because other investors are pursuing them. There is a logic to this pack mentality, as we have seen: when multiple prestigious venture capitalists chase after a startup, the buzz is likely to attract talented employees and important customers. But
“Stalking the Tenbagger,” Lynch called this process.[18] The way Lynch explained things, if you liked a stock but other professional investors did not own it, this was a good sign; when the others woke up, their enthusiasm would drive your stock higher. By the same logic, if you liked a stock and Wall Street analysts did not cover it, this too was a good sign: shares were most likely to be mispriced when nobody was scrutinizing them. Finally, in an uncanny premonition of Shleifer’s China calls, Lynch listed a third important buy signal. When chief financial officers tell you that they haven’t
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“Why would I sit here and try to hit major-league pitching, if I can go to Japan or Korea and hit minor-league pitching?”
another Julian Robertson dictum: to assess the outlook of a company, you talk to its customers. He found out who was buying ads on the Chinese portals, contacted the purchasers, and probed them on whether they were likely to spend more. The good news, Shleifer discovered, was that the e-commerce players that accounted for most of the ad buying were extremely satisfied with the results: more ads meant more sales for them. What’s more, their own businesses were booming, meaning that they would surely buy even more ads in the future; therefore, the stocks of Sina, Sohu, and NetEase were still
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he still had to manage the liquidity risk—the danger of holding unsellable positions using capital that could be withdrawn at short notice. In July 2003 he came up with a fix: he would set up a separate pool of capital to make private investments. The analytical techniques of hedge-fund investing would be married to the structure of a venture-style fund, with the limited partners locked in for long periods.
when you are already in a precarious state, you don’t compound your risks unnecessarily.
Sequoia had no interest in recruiting comfortable executives who, as Moritz put it, “had been too successful, had lost some spring in their step, were not hungry enough, had too many outside commitments and, most of all, were not prepared to become rookies again.”[6]
Moritz once enumerated the challenges that this entailed: “recruitment, team building, setting of standards, questions of inspiration and motivation, avoiding complacency, the arrival of new competitors and the continual need to refresh ourselves and purge under-performers.”[9] From this long list, team building and the development of young talent were particular priorities. Sequoia believed in “nurturing the unknown, the homegrown, and what becomes the next generation,” as Moritz put it.
Unsuccessful startups generally fail faster than good ones succeed, so demoralizing losses materialize before the winners.
For any venture investor, these swings of fortune can play havoc with judgment. A dark period lumbers you with excess caution as you size up the next deal; inversely, joy can lead to hubris. Looking back on this period, Botha credits his partners with keeping him centered. When he was down, they encouraged him to take the shot. When he was up, they saved him from getting starry-eyed about a startup’s prospects.
The main innovation pushed by Jim Goetz was an emphasis on proactive thinking. He had begun his investing career at Accel, where he had absorbed the idea of the “prepared mind,” and he saw that this top-down, anticipatory approach could be especially useful at Sequoia.
Another prepared-mind “landscape” showed the shift of data from customer devices to the cloud, anticipating the new hardware configurations, software business models, and security vulnerabilities that would flow from it. Yet a third landscape focused on “the rise of the developer.” Worldwide, a mere twenty-five million coders—one-third of 1 percent of the global population—were writing all the software that was
transforming modern life. Anything that boosted the productivity of this small tribe would be immensely valuable.
The first step toward overcoming cognitive bias is to recognize it. Botha arranged for outside psychologists to present to the partnership. He led his colleagues through painful postmortems of past decisions, homing in on times when they had weighed evidence irrationally. Previously, the partners had tried to extract lessons from portfolio companies that had failed. Now Botha was equally focused on the times when Sequoia had declined to invest in a startup that subsequently succeeded. To enable scientific postmortems, the partners kept a record of all votes at investment meetings. “It’s not
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the story of every venture bet can seem to hinge on serendipity.
Sequoia illustrates the method behind the seeming arbitrariness and chance. The best venture capitalists consciously create their luck. They work systematically to boost the odds that serendipity will strike repeatedly.
In sum, the success of Roelof Botha no doubt reflected his talent and fortune. But he worked in a culture that pumped up talent and manufactured extra luck. Small wonder that so many of his teammates flourished.
Yet behind this fable of the hunt and the seduction, there was another story. As part of his focus on proactivity, Goetz had conceived a system he called “early bird”: seeing in the advent of the Apple App Store a trove of useful investment leads, Sequoia had written code that tracked downloads by consumers in sixty different countries. It was this exercise in digital sleuthing that alerted Goetz to WhatsApp: the messaging service was the first or second most downloaded application in around thirty-five of the sixty markets. Even though the service was not yet famous in the United States, it
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