BRIAN KENNY: In her 2013 blog post titled, “Welcome to the Unicorn Club,” venture capitalist, Aileen Lee, coined a term that has come to define the benchmark for investors the world over. Unicorns, that is privately held startups that are valued at $1 billion or more, are more common today than they were in 2013 when there were just 39 firms that met that definition. Today, the number is closer to fourteen-hundred and competition among the relatively small number of VC firms to find the next unicorn is fierce. For those who are keeping score, Sequoia Capital with 133 unicorns to its credit, sits squarely in the upper echelon. The firms it has invested in have come to represent more than 25% of the Nasdaq, or $1.4 trillion dollars in value. But on a business premised on venture, there are no sure bets and even survival isn’t guaranteed. Today on Cold Call, we welcome co-authors, Jo Tango and Christina Wallace, to discuss the case, “Sequoia Capital.” I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR podcast network. Jo Tango is a senior lecturer at Harvard Business School, where he teaches a course on venture capital and private equity, and also exited three unicorn companies. Welcome, Jo.
JO TANGO: Thanks for having me.
BRIAN KENNY: Great to have you back on the show. Christina Wallace is also a senior lecturer who teaches a course on launching tech ventures, and she is the author of a book called, The Portfolio Life. Welcome back, Christina.
CHRISTINA WALLACE: Happy to be here.
BRIAN KENNY: So, this will be fun. I found this case to be very interesting. And one thing about HBS is we have deep roots in the VC world. It’s something that the school is proud of. It’s part of our heritage. And so, I think it’ll be interesting for people to hear about sort of the VC world, the culture, and Sequoia’s place in it. I really enjoyed the case, so thank you for writing it. I know you have a couple of other authors. Do you want to mention the other authors on the case?
JO TANGO: Yes, we have two other colleagues, Sri and Johnson, who helped us with this and we’re grateful for them.
BRIAN KENNY: We can’t fit four guests in the studio, so that’s why we settled with the two of you, which is great. Jo, I’m going to ask you to start by telling us what the central issue is in the case and what your cold call is when you start the discussion in the classroom.
JO TANGO: Yes, it’s the summer of 2023. The new managing partner of Sequoia is going around meeting their investors around the world, supposedly 50 of them, to try to explain to them the changes that have happened. Partners have left. They slashed the size of their crypto fund. And their China-India operations have been spun off. So, I would open the case by asking students, “Sequoia: is this a change or a decline?” And start that way.
BRIAN KENNY: Christina, let me turn to you for a second. Why did you all decide to write this case? Why was it important?
CHRISTINA WALLACE: I think anyone who’s been paying attention to the venture capital world in the last few years has noted the roller coaster that has been VC. We go from a boom cycle, where valuations are insane and there’s money to flow everywhere, to very quickly that money drying up and people getting a little bit more tight-fisted. And Sequoia, obviously one of the behemoths in this industry, so everyone is keeping an eye on what Sequoia is doing. And out of that, as Jo has mentioned, some pretty significant changes. Everything from sort of retrenching from this global firm footprint to backing away from crypto and watching to see what they’re going to do in AI. These trends that they had really leaned into quickly. So, I think it’s something very timely. It’s something very interesting as we’re looking at the industry as a whole and a leader within it. And honestly, any chance I have to work with Jo, I say yes.
BRIAN KENNY: There you go. The world is so different today than when Sequoia first started, and we teased that a little bit in the intro. But basically, at that time there were many fewer players in the VC space. There were far fewer firms who would meet that definition. But things have really changed since then. So, Jo, maybe you can give us a little bit of background for people who aren’t as familiar with Sequoia Capital. And the protagonist in this case is Don Valentine. What was his vision for success for the company?
JO TANGO: So, it’s interesting you say that, because Don Valentine was known for a person who fostered deep inquiry and total bluntness. It might be apocryphal, but supposedly there was a sign in his office that said, “Who cares?” And apparently, when he sat in on pitches by entrepreneurs, he would often interrupt and say, “Who cares?” And he was very good at focusing the partnership and focusing entrepreneurs on what they would need to do to be successful. Or to use some HBS language, he was the king of high standards.
BRIAN KENNY: Yeah. So, let me switch back to you, Christina. So, the first home run, I guess, that they had was Atari. And for people who don’t know what Atari is, because this goes way back, maybe you can describe that and talk about how that sort of set the stage for their future success.
CHRISTINA WALLACE: Atari is the OG video game company, right? Anyone who grew up loving gaming first learned the company named Atari. And I think what’s so notable here is Don Valentine, he was a working class guy. He grew up, his father was a truck driver, his mom was a homemaker. He got a degree in chemistry, went off to the Navy, and then kind of made his way. And has a working history in the go-to-market side of a firm. He’s not a technologist by training, which a lot of the early venture capital partners are. So, what’s so interesting is he makes this first home run in Atari and a few more kind of tech firms behind that. It sort of sets the stage to say, “Okay, I know what I’m talking about. I’ve got good taste. I can vet the tech.” But very specifically, he and Sequoia are known for caring about the market and the go-to market as much as the technology, as much as the entrepreneur. And I think that speaks to one of the reasons why they’ve probably been so successful, that they’re very attuned to, “What is the customer need? Will this be pulled out of the companies that we’re investing in? Or are they going out and trying to make fetch happen?”
BRIAN KENNY: Yeah, what are some of the other big names that they invested in early on?
CHRISTINA WALLACE: Everything from eBay and PayPal to…
JO TANGO: Apple. Yahoo.
BRIAN KENNY: I’ve heard of those.
JO TANGO: Airbnb. Google.
CHRISTINA WALLACE: All of them.
BRIAN KENNY: Yeah.
JO TANGO: FTX.
BRIAN KENNY: Yeah. Oh, yeah. We’ll talk about that a little bit later, I think. Maybe not in any great detail. So, Jo, what are some of the things that they look at when they’re evaluating potential companies to invest in?
JO TANGO: Yeah, to Christina’s point, they look at the market. So, if you think about how VCs pick deals or projects, do they pick the jockey? The founder? Do they lean on the horse, the product, or do they emphasize the racetrack? Which is the market. Don Valentine was known from very early on saying, “It’s all about the market. I can’t improve a bad market. I cannot create a market from scratch. But if I have a great market, I can find the right horse and the right jockey.” So, they always have been very focused on market spaces.
BRIAN KENNY: Yeah, Christina, is that different or like what other firms do?
CHRISTINA WALLACE: It certainly stands out as somewhat of a unique proposition. I think there are a lot of VCs that say, “We are looking at founders first.” Where the founder, the founder, the founder is the talent, and, like, “I don’t really care what they’re building, find me the right founder, and we’ll back them, and we’ll see where they go.” And so, there are others that follow the technology trends and they’re like, “We are only investing in AI. We’re only investing in these spaces, and let’s find the right opportunities in that space.” And I think it’s a really interesting kind of industry agnostic perspective to say, “I want a market that is growing, that it has experiencing a major need,” and that there is an opportunity to exploit. In maybe a slightly less worrisome definition of that word.
BRIAN KENNY: Yeah, I know what you mean. So, this is a two-person dance, right?
CHRISTINA WALLACE: Yeah.
BRIAN KENNY: So, you’ve got Sequoia on the one hand, who may be looking at markets and potential players within those markets. What about the firms themselves? What do they need to be thinking about when they’re entertaining partnering with a firm like Sequoia?
JO TANGO: Well, we actually quote an entrepreneur in the case who said that, “The final pitch meeting at Sequoia was the most intense hour of my life.” And as is also documented in the case, they’re looking for people who are underdogs, who are fearless, and who engage in what Sequoia calls “black and white thinking.” In the sense that people who are thinking in the gray matter and the gray zones all the time are going to lose time. Sequoia seems to want entrepreneurs who can make decisions quickly, maybe fail fast, but then get to the right answer. There’s a certain intensity to the firm that is pretty well-known in the industry.
CHRISTINA WALLACE: And I think the firm reflects that. They’re sort of giving off the same vibes that they’re looking for from the founders. We have stories of them wiring millions of dollars to founders literally before the documents are even signed. Where once they make a decision, they move fast. They’re going straight to the deal and saying, “Let’s get this done.” And I think they’re looking for founders who respect that, and see the opportunity to partner with that kind of a thought partner in building these companies.
BRIAN KENNY: Well, if you look at the companies that you rattled off before, that they’ve invested in some of those unicorns, the leadership of those companies are known as hard drivers. People who are action-oriented, who are doing anything that they can to make the firm successful. So, that sounds like a successful partnership there.
CHRISTINA WALLACE: Yeah, for the most part it’s great, until it’s not.
BRIAN KENNY: Yeah.
CHRISTINA WALLACE: I think the flip side of that coin is simply that is a very specific way of seeing the world, of looking at opportunity. And when you have both sides of the partnership with that very specific viewpoint, you are by definition, going to have some blind spots. You’re going to have things that you’re both missing. And I think that that comes out when we look at some of these deals like FTX and others, where you sort of look at that from afar and say, “What are they thinking?”
BRIAN KENNY: Well, so let’s talk a little bit about that. What drove the teams, maybe it was Don’s decision, maybe it was a collective decision, to make some of these decisions that they did about expanding into global markets and about expanding into categories that may or may not have been proven to be successful?
JO TANGO: Well, I think this is the dynamic within a venture firm. If you’re successful, you’ll be tempted to create more success. And expansion can happen one of two ways, you offer a new product. So, do you go from early stage to later stage? What Sequoia has done. Or do you offer a new geographic product to your investors? U.S. only to China, India, and Israel? So, the playbook works, as Christina says, until it doesn’t. And there’s been a long history of firms in the U.S.—Benchmark for example started a European office. It didn’t work out. They spun it off, it became Balderton, which is very successful. So, what we see in business is that sometimes the playbook that gives you success today isn’t the one that will give you success tomorrow. And one of the meta points of the case is this: over time every empire ends, every country falls, and every company fails. And Sequoia is an example, perhaps, of this bigger trend in business, which is, are they on the verge of failing? If so, why? If not, why? And the bigger managerial question really is, as a leader, and we’re in the business of educating leaders who make a difference, is how do you know when you’re at the inflection point and can you peer around corners, given this challenge of sustaining excellence?
BRIAN KENNY: Yeah, and how does your culture help or hinder that process? We talked a little bit about the bluntness of the culture, but there’s also mentions in the case about collaboration and the way that they work together. I’m wondering, where does the culture help and where does it hurt?
CHRISTINA WALLACE: Yeah, I think one of the really notable things about their culture is this teamwork. They have this history of saying, “I don’t care if it’s not your portfolio company, if you can help, step up. I don’t care if you’re not on the board, if you’ve got an idea or a relationship, or if you’re the better partner to take this deal, I’m going to hand it off, because we’re all economically benefiting from us being one big team.” And I think you need that sort of collaboration to pair with the bluntness. In many ways, it rewards and offsets maybe some of the friction that comes with that truth-telling to say, “Hey, we’re telling the truth because we’re all on the same side here.” And I think that worked really well for them for a long time. The challenge is when someone makes a big bet that doesn’t pan out and everyone else who disagrees with that bet is kind like, “Dude, that’s my money.”
BRIAN KENNY: Yeah.
CHRISTINA WALLACE: “We all have to share in that poor decision,” is when you start seeing that culture kind of fray a little bit at the edges. And I think to Jo’s point, there’s always this pressure, certainly in venture and in venture-backed companies, to grow, grow, grow, right? Growth is the currency of the realm. And yet, there’s a point for every company where growth might not necessarily be… Exponential growth might not be the best idea anymore. And I think to Jo’s point of every company finds a moment where they fail, I think in many cases it’s because they reach a point where sustaining growth would’ve been the right choice, and instead they’re still driving for explosive growth. And what worked in one region doesn’t copy to another. What worked at one stage of this culture doesn’t work at a different scale. But there isn’t that self-awareness or even that pause to reflect and say, “Is this still going to be the right strategy when we’re talking about an exponentially different company than we invented it in?”
JO TANGO: And to build on that, what’s unique about all private capital firms, whether it’s private equity, venture, hedge funds, is there is no board of directors in any of these entities. It’s just people who own the firm. It’s usually a handful of people. They have watermelon for lunch, and spit the seeds in the common spittoon, talk about what they want to do. But then fast-forward, and because no partner wants to take a pay cut, and the way you add new partners without taking a pay cut to yourself is you grow the firm. You grow the fund size. You grow the strategies. You grow the geographies. And suddenly you have an operation in China and India, 10 to 14 hours time zone away. And so, then how does a firm that did well as a partnership scale? And if you look at McKinsey, Bain, BCG, people don’t remember firms like Monitor, L.E.K…It’s very hard to scale. So, the question that every, I think venture firm has to answer ultimately is are we a product company or are we a services company? The latter is very hard to scale. The former is very easy to scale. And it’s very easy to confuse the two strategically.
BRIAN KENNY: It seemed timing-wise, the tension started to really become pronounced with the international expansion, with the global reach. And oftentimes, there are cultural issues at play there that probably factor into that. What were some of the things you think might have caused them to step back from that?
JO TANGO: I think as a partner in a venture firm, when you join a firm that wants to grow, it’s all about marginal benefits and marginal costs. Which is let’s say you’re a great investor in Hong Kong, would you join a local firm, join Sequoia, or start your own? And that’s sort of the analysis everyone has to do. And at a certain point, you could say, “I would join an established firm like Sequoia because they’ve got relationships with fundraising. They’ve got a brand. I don’t have to do that.” Marginal cost. For anyone who’s worked in Asia or in Europe interacting with people in the U.S., it’s a royal pain. It’s a 12-hour difference between here and Singapore, for example. Someone is inconvenienced by any call, no matter when you schedule it.
BRIAN KENNY: Yeah.
JO TANGO: So, then going back to Christina’s point about collaboration, if you’re 12 hours ahead, are you really getting much collaboration from your partners when they’re asleep when you’re awake? So, then after a while, and if you’re somehow the hot hand, why do you need the brand? So, there’s always this tension in the venture world about marginal benefits and marginal costs, in that maybe it’s adverse selection in the end, is that when you don’t have a track record, you join a brand. But then when you have the brand, you do your own thing.
BRIAN KENNY: Well, and there’s a character, a person in the case who seems to fit that mold. It was one of the investors in China who developed the hot hand, as you say, and sort of became known as the person that was driving the success of the firm in that region, right?
CHRISTINA WALLACE: Mm-hmm. And then there were some complications that are not entirely clear around whether it’s ethical decisions, or legal decisions, or just weird uncomfortable frictions that they have. There are things that pop up. And as Jo’s point, in a partnership, when you don’t have a board, it’s all just everyone who has a stake in the firm looking at each other and saying, “I’m really uncomfortable with you making these decisions on the back of my brand.” And yet you have the Rolodex and you have the ability to make this kind of region work. Where does the tension of that relationship get resolved? That’s where certainly it gets tricky, before you layer in the geopolitical relationship between the U.S. and China.
BRIAN KENNY: Yeah, and then the other sort of factors around this and the climate. The access to capital that’s all of a sudden there and all the other forces that they’re sort of buffeting against at this point. So, what are they doing? Let’s turn the page and say we know they’ve been in some trouble. We know they’re experiencing some serious issues within their culture and within the firm itself. What do they do? How do they get out of this mess?
CHRISTINA WALLACE: Well, at this point in the case, in spring of 2022, they bring in a new managing director. And soon thereafter, a bunch of partners leave. There isn’t a ton of detail available as to why or how that series of moves takes place. But it’s some of the really big brand name partners that have been at the firm for a while. And so, if you’re an LP in this fund, you are giving them big chunks of capital year after year after year. Especially in something like an evergreen fund. There is no timeline on this. It’s just like, “Give us your money and we’re going to keep reinvesting it until you tell us you want it back.” It’s probably feeling really uncomfortable at this moment, where what I thought I signed up for doesn’t seem to be what I’m signing up for. Because this also happens in the same moment in 2022 when markets are seizing up, interest rates are going up, opportunities to invest are going down, and yet there’s still all of this dry powder. There’s capital that has to be deployed, but the opportunities to deploy it really smartly are dwindling.
BRIAN KENNY: Yes.
CHRISTINA WALLACE: So, there’s a little bit of this question at the end of case of, Okay, if you are the managing partner trying to come in and steady the firm, we’ve severed relationships with some of our international funds. We’re doubling down here in the U.S. We’ve got some opportunity. But how do we make sure there’s another 30 years of Sequoia or is this the swansong?
BRIAN KENNY: How did COVID affect the firm? Or the industry more broadly, was COVID a big factor?
JO TANGO: So, what was interesting about COVID is everyone was expecting a contraction, but then 2021 ended up being a record year of profits for the industry.
BRIAN KENNY: Crazy.
JO TANGO: And people started raising even bigger funds. And then to Christina’s point, the funds start to tighten in the U.S. And then the funds that look right size are a little bit small, 18 months later, look too big.
CHRISTINA WALLACE: COVID was tricky, because it was… For anyone paying attention, I think, it seemed very clear this is a short term, hopefully, extreme change of behaviors across the board. Consumer behavior, business behavior, government behavior, all these things. We saw the uptick in remote work, food delivery, grocery delivery, all of these things overnight. The adoption of technologies like QR codes that were not having a moment until suddenly they did. And so, I think a lot of firms, both startups and VCs, were like, “Ah, there’s this huge new market. Let’s go in.” And there was not really, as far as I can tell, a conversation of, “Is this permanent or is this a blip?” And so, you pair that with the near-zero interest rates, and so we’re awash in capital and we are taunted by this change of behaviors that opens opportunity. And everyone goes all in on these new trends only to have them completely unwound 18 months later, corresponding with the exact moment that interest rates rise. So, it’s a little bit like did anyone step back to say, “Are we doing this forever or just for now?”
BRIAN KENNY: Yeah, it was just sort of jumping at the opportunity without necessarily considering the long-term consequences.
JO TANGO: And then the irony in the midst of this with venture success when there’s a record amount of capital being distributed back to the partners and the investors is it creates massive instability at firms. Because if you suddenly have a track record and made a lot of money, and it’s now hard to be in venture, why wouldn’t you leave, start your own firm? Leave all your board seats behind and start over? So, I don’t think it’s ever been reported, but it’s public knowledge, when you look at the website. After Accel distributed its Facebook shares, many of those partners left. Jim Breyer started his own firm. Theresia Ranzetta started her own firm. Peter Wagner. What’s hard about this business is sometimes massive success creates a new set of opportunity paths for those partners, because they have track records and they have the ability to walk.
BRIAN KENNY: And that does happen in any industry. If you’re challenging people, and they’re rising to the challenge, and they’re doing well, then they’re creating opportunities for themselves. So, I guess that’s somewhat to be expected, which means shouldn’t you always be thinking about succession and being able to fill those voids when they open up?
CHRISTINA WALLACE: Yeah, but I think one of maybe the key difference in venture versus something like a legal firm or a consulting firm that also has these partnership models is venture is a 10 to 15-year time horizon. You put money into something and you don’t know for a decade or more where it turns out. And you take a board seat, you’re signing up to be a partner with these entrepreneurs, you’re an LP. You’re tying up that money with someone who’s saying, “I’m going to shepherd this money for the next 10 to 15 years.” And so, in these moments of everyone changing seats, as the music stops, it can feel, I think, even more volatile. And volatility, or at least the perception of that, breeds volatility, right?
BRIAN KENNY: Right.
CHRISTINA WALLACE: The perceived panic can create panic. And so, I think it’s a moment of change, and opportunity, and potential realignment of the power dynamics in venture.
BRIAN KENNY: What’s the mentality of the firms who are being invested in? Do they ever get into panic mode themselves and think, “Boy, things at Sequoia seem a little shaky these days”? And are they worried, I guess, about their partnership unraveling and affecting their business?
JO TANGO: I think generically speaking, there is a worry, because if you lose your sponsoring partner, you’re orphaned. Because another partner to replace that board seat does not have incentive to do so. Because if the deal works out, it was the prior partner’s deal. So, what you have is when partners leave firms, unfortunately, portfolio companies are somewhat orphaned. Plus you have to recreate a relationship with someone at the venture firm who doesn’t really know you, who didn’t emotionally sign up for this 10, 15-year journey.
BRIAN KENNY: Right.
JO TANGO: And when a good partner leaves and you have to leave all your board seats behind, usually, it just creates more work for everybody else who’s behind. So, from a game theory perspective, you want to be the first to leave.
BRIAN KENNY: Yeah, this has been a great conversation, as I knew it would be. I’ve got a couple more questions, so I’m going to actually start with you, Christina.
CHRISTINA WALLACE: Sure.
BRIAN KENNY: As we think about the challenges and opportunities for them going forward, how should Sequoia think about positioning itself to remain a top-tier firm? Or should they abandon that and really focus intensely on a smaller set of business opportunities?
CHRISTINA WALLACE: No one is going to say that they should stop focusing on being a top-tier firm, but I do think-
BRIAN KENNY: I know. That was a softball question.
CHRISTINA WALLACE: No, I think there’s a kernel of truth in that question, which is if you’re focused on your position in the industry, then you’re not focused on doing the work. And so, part of me wants to say, stop caring whether you’re number one, number two, number three, and put your head down and do the work. And the work in this moment is rebuilding the partnership ranks. And there’s a huge opportunity in this moment. Sequoia has not really been known for the diversity of its partners. And this is an opportunity to rebuild those ranks with more perspectives, with more partners who can see markets that have been overlooked, and consumer problems, customer problems that have not been solved that could unlock huge economic windfalls. So, I think if they want to embrace this moment of rebuilding, there’s a position that they can take to hold onto that leadership position. Or they can go all in in being a niche firm. There’s lots of directions they can choose, but they’re going to have to choose.
BRIAN KENNY: Yeah, that makes perfect sense. Has their brand suffered as a result of some of this? And are potentially candidates who are rising stars in the industry saying, “I don’t want to go work for them. I want to go work for this cool firm over here”?
CHRISTINA WALLACE: Yeah, they’re still Sequoia. They have the brand name that gets any founder, no matter how hot they are in their fundraising, to take a meeting. So, that’s certainly an appeal for a lot of folks. But there has been a little bit, I think, going so far down the FTX route. And there was a blog post that they wrote that was just so over-the-top glowing of Sam Bankman-Fried that particularly for founders who were women, and people of color, and people who have really struggled to even get that first seed check, to see this amount of money being lavished on someone who was so obviously not taking his responsibilities of building this business seriously was really frustrating. And I think there’s at least a handful of founders that are kind of like, “If that’s your judgment call, I don’t want you on my board.” So, there’s certainly an opportunity for them to reinvest in how they show up for founders and how they portray their judgment. And equally so for up and coming investors. There might have to be a little bit of wooing in a way that wasn’t true a decade ago.
BRIAN KENNY: Yeah, Jo, I’ll give you… Well, actually you can both answer this question if you want, but I’ll start with Jo. And it’s the way we always end the show, which is to ask you, if there’s one thing you want our listeners to remember about the Sequoia Capital case, what would it be?
JO TANGO: How does an executive delay or avoid a downward inflection point? As I mentioned, in history, every company declines, every empire, every nation. So, how do you get ahead of the curve? I’m old enough to remember that before there was Google, there was Yahoo. And before there was Yahoo, there was AOL.
BRIAN KENNY: Me too. I’m old enough to remember that.
CHRISTINA WALLACE: RIP.
JO TANGO: Friendster before Facebook. So, it’s always the managerial challenge we try to teach our students, which is how do you get ahead of the curve?
BRIAN KENNY: Yeah, anything you want to add to that, Christina?
CHRISTINA WALLACE: Exponential growth is not always the right answer. Be really thoughtful about the type of growth and the pacing of growth that makes sense for you and your firm.
BRIAN KENNY: And on that note, thank you both for joining me on Cold Call.
CHRISTINA WALLACE: Thanks for having us.
JO TANGO: Thank you so much, Brian.
BRIAN KENNY: If you enjoy Cold Call, you might like our other podcasts: After Hours, Climate Rising, Deep Purpose, IdeaCast, Managing the Future of Work, Skydeck, Think Big, Buy Small, and Women at Work. Find them on Apple, Spotify, or wherever you listen. And if you could take a minute to rate and review us, we’d be grateful. If you have any suggestions or just want to say hello, we want to hear from you, email us at coldcall@hbs.edu. Thanks again for joining us, I’m your host Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School and part of the HBR Podcast Network.
