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In ordinary times, the bubbly bias of the venture crowd is balanced by the stock market. VCs know that when startups seek to go public, they will face a tougher audience, less willing to pay up for dreams, freer to denounce a company or bet that its stock will tumble. This prospect disciplines venture behavior:
But now the Googlers cited the handful of successful founders who had retained management control—Michael Dell, Bill Gates, and their own angel investor Jeff Bezos. “What they didn’t see were all the others who had failed. That wasn’t in their data set,” one Doerr lieutenant observed tartly.37
Because Brin and Page had sold the venture capitalists only a quarter of their shares, they retained ultimate control. If they hired a CEO and then regretted it, they would have the power to fire him.
As of 2003, Sequoia was struggling to prop up a venture fund that had lost around 50 percent of its value; the partners felt honor-bound to plow their fees back into the pot to eke out a return of 1.3x.64 The equivalent Kleiner Perkins fund performed even worse, never making it into the black. Masayoshi Son, who had briefly become the richest person in the world, lost more than 90 percent of his fortune.
if the power law dictated that only a handful of truly original and contrarian startups were destined to succeed, it made no sense to suppress idiosyncrasies.
In 2010, Andreessen Horowitz invested $250,000 in the social-networking app Instagram. It was by some metrics a spectacular home run: two years later, Facebook paid $1 billion for Instagram, and Andreessen netted $78 million—a 312x return on its investment. And yet by other measures this was a debacle. Andreessen Horowitz made the Instagram investment out of a $1.5 billion fund, so it needed fully nineteen $78 million payouts merely to break even.
Although Son appeared to commit to Alibaba almost casually, on the strength of a self-interested tip from Goldman and two meetings with Ma, there was a reason for his conviction. Because of his position on the board of Cisco, he knew that router sales to China had begun to take off.
Implanting Silicon Valley’s equity culture in China involved some heroic maneuvers. The whole idea of tradable equity was novel to the mainland; its two clunky stock exchanges, in Shanghai and Shenzhen, had opened as recently as 1990. Employee stock options were not recognized in Chinese law, nor were the various sorts of “preferred” stock that Silicon Valley investors use to solidify their rights in startups.
“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,” she lectured. This paean to individualism was, as Xu recalled vividly, an eye-opening experience for a Chinese teenager from Sichuan.40 Donda West also stuck in Xu’s memory because of her son, who was often seen performing acrobatic tricks on campus. Years later, Xu was intrigued to discover that the boy, named Kanye, had become famous.
She adopted the standard vesting period of four years, conditional upon JD.com hitting its business goals. After just two years, however, the company had blown past its targets, and Xu happily released the payout early.
Benchmark’s partners had set up a London operation in 2000 and left the locals to make their own way; they had not logged enough air miles to integrate the satellite into the mother ship. The upshot was that in 2007 the London team formalized its de facto independence, stopped sharing profits with the California gang, and left Benchmark without a European presence. Meanwhile, Kleiner Perkins suffered a similar setback in China.
It was one thing to borrow U.S. legal structures that operated offshore, thereby enabling the use of stock options for employees. It was another to graft U.S. investment methodology, and indeed ethics, onto the practice of venture capital in China’s Wild West economy.
In February 2015, this maturation found expression in the first high-profile tech merger. Two ride-hailing companies, Didi and Kuaidi, ended their blood feud and joined forces.
“There is a saying in our business, ‘If you are treated like an analyst, you are going to act like an analyst,’” Efrusy explained later.
“Check out Myspace,” Efrusy’s friend said. “It’s Friendster with fewer prostitutes.”
Moreover, everything about this meeting followed the script laid out in the prepared-mind exercises of the past two years. Thefacebook’s founders were unorthodox and elusive, and their office mural was an invitation to a sexual harassment suit. But if you ignored their conduct and focused instead on their data, Thefacebook was a can’t-miss opportunity.18 Presently,
In an echo of the Plaxo finale, Parker was forced to forfeit half of his options. Five years later, those options would have been worth about $500 million.
dragged energy prices down further. Meanwhile, this run of market setbacks came on top of a political error. Doerr overestimated the federal government’s willingness to deliver on its promises to tax or regulate carbon.38
In the early years of Kleiner Perkins Caufield & Byers, the partnership had appeared lopsided. Tom Perkins was the flamboyant and domineering rainmaker, the creative genius behind Tandem and Genentech, and he overshadowed the other three named partners.
The one standout Kleiner success in this period involved the hiring of Mary Meeker, the former Morgan Stanley analyst who had pioneered the evaluation of digital businesses.
Milner himself had invested in VKontakte, the leading Facebook clone in Russia, and had witnessed its growth from the inside.
In August 2008, Zuckerberg had confronted the problem that besets successful startups that delay going public. Facebook’s early employees had become stock-option millionaires, but they had no way of converting paper wealth into a car or an apartment.
What’s more, he proposed a clever twist: he would pay one price for the company-issued (or “primary”) stock and a different, lower price for the secondary stock sold by Facebook workers. Up to a point, it was obvious that the primary stock should be worth more: it was “preferred,” meaning that it came with some protections against losses.
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 Milner offered. So DST ended up buying well over $100 million of the cheaper shares, pushing the blended valuation to $8.6 billion.
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.
Unlike venture capitalists, who have no choice but to stick with illiquid positions, a hedge fund is free to sell at any time.
“We’ve got to dig deeper,” Shleifer remembers thinking. “How durable is the growth? Investments require that you ask different questions at different prices.”
Shleifer’s mother was not happy to hear of her son’s plans. China was in the grip of a SARS epidemic. In deference to her worries, and possibly his own, Shleifer packed some face masks before heading off to Asia.
In June 2003, Shleifer landed in Beijing, donned his mask, and got a cab to the Grand Hyatt. The vast hotel was virtually deserted, and Shleifer was treated to the empty presidential suite at a gratifying discount. Evidently, other westerners had less faith in three-ply fiber than he did.
True to the hedge-fund tradition, Tiger Global would rely on its facility with earnings models; it would not make subjective VC-style bets on an entrepreneur’s character or vision. True to that same hedge-fund tradition, Tiger would also take a global view; it had no interest in embedding itself in a dense local network, the way that VCs did.
To Shleifer’s amazement, Milner thought the way he did. The son of a Soviet management professor who specialized in American business, he had been the first Russian to study at Wharton, and he was romantically pro-capitalist. The 1980s takeover artists—Henry Kravis, Ronald Perelman, Michael Milken—were among his heroes.
Relative to projected earnings, and when cross-checked against the value of foreign internet companies such as China’s Tencent, Facebook was a clear bargain, even if Tiger had to pay a higher valuation than Milner had.33 “We could buy Facebook, which was
Horowitz was something of a Paul Graham figure, but on a grander scale: a computer scientist turned entrepreneur who wrote a blog on business and life that attracted a cult following.
“Without Ben, I would have thought to myself I can set the price low and then generate more profits later by inventing something new,” Casado acknowledged. “This is the bias of the technical founder.”
It had fired Skype’s Swedish creators amid a series of management battles, and the Swedes had responded by suing eBay over the ownership of Skype’s core technology. When a private-equity group, Silver Lake, offered to take Skype off eBay’s hands, the Skype founders sued Silver Lake for good measure.
Stressing his faith in their ability to move their product to the cloud, Andreessen proposed a deal to bring the founders back into their firm. The Silver Lake consortium would buy a bit more than half of Skype’s stock. The Skype founders would get 14 percent in return for dropping their lawsuits. For his part, Andreessen would get the right to invest $50 million.
According to an assessment in late 2018, the next two a16z funds were struggling to outperform the S&P 500, registering provisional paper gains that placed them in the third and second quartiles among VC firms, respectively.
But this bet would be different. Founded sixty-four years earlier, it was not exactly a startup. With a demoralized team, it was not exactly innovative. Yet Lacob spotted potential. Together with a few allies, he paid $450 million for Northern California’s dilapidated basketball franchise, the Golden State Warriors.
Kevin Durant, the team’s star forward, assembled a portfolio of some forty startups, ranging from the bike-sharing enterprise LimeBike to the food-delivery app Postmates. Andre Iguodala, the six-foot-six defensive specialist, built a similar empire, while a retired Warrior, David Lee, was recruited by a VC partnership. Steph Curry, the Golden State’s transcendent talent, owned a piece of the picture-sharing app Pinterest.
When China’s president, Xi Jinping, visited the United States in 2015, he ratified the status of this new Florence. His first meeting was with the tech executives of Silicon Valley and Seattle, not with the politicians and bankers of Washington, D.C., and New York City.3
In 2013, when Aileen Lee coined the term “unicorn,” she counted just thirty-nine of these magical creatures. Less than two years later there were eighty-four of them.
Moritz and Leone, the most successful buddy act in the history of venture capital. Moritz was strategic, and Leone was operational. Moritz enforced discipline, and Leone enjoyed conversations at the watercooler. Moritz was a Brit who had taken Italian lessons. Leone was an Italian who joked that working with Moritz was like taking English lessons.
You had to be obsessed—obsessed like Steve Jobs, for whom perfectionism was not a choice, or obsessed like Alex Ferguson, the legendary British soccer coach whom Moritz chose as his collaborator and muse when he wrote a book on leadership.
The story of Roelof Botha illustrated the Moritz-Leone approach to talent development. Sequoia hired Botha from his position as PayPal’s chief financial officer in 2003;
Despite Sequoia’s cerebral and disciplined culture, the firm’s team-building efforts included a surprisingly soft side. Partnership off-sites began with something called “check-ins”: colleagues opened up to one another about marital tensions, insecurities at work, or a sickness in the family.
In accepting Google’s acquisition offer, the founders had behaved precisely as behavioral experiments predict: people are often willing to gamble in order to avoid a loss, but they are irrationally risk averse when it comes to reaching for the upside. Examining the pattern of Sequoia’s exits, Botha determined that premature profit-taking occurred repeatedly at the firm, despite Moritz’s earlier efforts to extend the partnership’s holding periods.
Then they would come to the Monday meeting prepared to take a stand. “We don’t want passive ‘do it if you want,’” Leone said. “The sponsor needs help. It’s a very lonely place to be the lead on an investment.”
After his wins in YouTube and Xoom, Botha followed up with a string of grand slams: the fintech company Square, the genetics testing outfits Natera and 23andMe, the social-media hit Instagram, and the database innovator MongoDB.
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.
One year earlier, Doug Leone had given a talk for entrepreneurs at Nozad’s carpet store and had encouraged Nozad to look out for deals that might be interesting.37 After that encounter, Nozad had become Sequoia’s ambassador to the Iranian diaspora in the Valley, a group that included Pierre Omidyar, the founder of eBay, and Dara Khosrowshahi, later the boss of Uber.
