INSUBCONTINENT EXCLUSIVE:
Editor’s note: James Buckhouse is design partner at Sequoia. Last Tuesday, the teams competing in Startup Battlefield at Disrupt SF, as
well as founders chosen as Top Picks in Startup Alley, visited Sequoia Capital’s office in San Francisco for a discussion with partners
Jess Lee, Roelof Botha, Mike Vernal, Alfred Lin and James Buckhouse
The following is a partial transcript of the session, which was moderated by Buckhouse.James Buckhouse: We partner from idea to IPO and
beyond, but it’s partnering at the idea stage that we love the most — that moment when anything is possible
And it’s happened throughout Sequoia’s history
YouTube incubated in our office
Dropbox was an unreleased demo
Stripe didn’t have a single line of code
Apple was just two dudes named Steve
And so our favorite place to be is in the earliest moments.We’re not here tonight to share with you lessons of our great wisdom on how
company building ought to go
We’re here tonight to say that we understand how hard it is
And the three partners that you’ve got here to talk with tonight — Roelof Botha, Jess Lee and Mike Vernal — are people who have
actually been in the trenches building companies themselves.CustomersJames Buckhouse: Great companies like Apple, Amazon and Zoom all have
this one thing in common: customer obsession
That’s an easy thing to think about when you already have a billion customers, and you already have a bunch of money
But what do you do when you’re at the pre-seed stage and you want to be customer-obsessed but you don’t even have a product yet, let
alone any customers? How do you even begin?Jess Lee: I think at the very earliest of stages, all that really matters is product market fit
A common mistake we see is that a founder is only obsessed with the product, and then goes on to think, “I have my product
Let me go find a market that works for this,” when it should actually be the other way around
You should look at the market first, and then get to know the customers in that market by doing customer research.There’s a great book by
Erika Hall where she discusses how to ask the right questions to customers in order to really understand their pain points, their
motivations and their needs
That’s a hallmark of some of the best companies that we’ve seen, even at the earliest stages
They spend a lot of time talking to customers and understanding what they want
Something we at Sequoia like to recommend when we work with seed and pre-seed-stage companies is to actually take the time to write down a
Who are your prototypical or your archetypes of different types of customers? In the very early days, you might think, “I know the
I don’t need to write it down.” But as soon as you add one new team member, who maybe isn’t as familiar with your customer, a lot of
things get lost in translation.For my company Polyvore, which was in the women’s fashion space, I had a lot of engineers on my team who
were men and didn’t understand women’s fashion very well
I would always beat my head against the wall wondering why a feature they designed didn’t quite make sense, and it’s because we did the
personas exercise a little bit too late
It made me wish we’d done it earlier
Once we had three very clear personas, I started to notice everything ran more smoothly
I found, whether it was the sales team or the engineering team, people started to clearly communicate the idea of what our customer really
People made better decisions at all levels
That’s why at Sequoia we always encourage even our earliest-stage companies to write their customer research down immediately, way before
they think they need it.ProductJames Buckhouse: How does an early-stage startup make sure that they’re on the right track and building the
right product?Mike Vernal: The key thing to me is actually not being data-driven; it’s much more about being hypothesis-driven
The problem is people think about product as art
But I actually think of product as being equal parts art and science
And I think the science part of it, which is really important, especially at an early stage, is being clear about what your hypotheses are,
what you think is going to work, why you think it’s going to work and really sort of pressure-testing that on a logical level
And, if you are able to, actually pressure-testing it with real data.One of Jess’s techniques, which I think is great, is the notion of
If you want to know whether something’s actually going to hum in the market, whether people are going to care about it, build a landing
Build a sign-up button for it
Run a bunch of ads for it
Test a bunch of different marketing copy and see if people actually want the product
I’ve seen a bunch of companies use this to great effect.I think that in general the mistakes people make with product is, one, being too
artistic and not scientific enough about things
And then two, to Jess’s point, the most important thing before you have a product is finding product market fit
Usually, finding product market fit in a category is a function of two or three important things
Identifying those important things and testing them to get clarity around that first, then designing the full product, is way better than
just starting with a masterpiece, and then slowly painting over and over the masterpiece until you get to something that is great.James
Buckhouse: For enterprise companies, Roelof, can you talk a little bit about the Sales Ready Product and Templeton compression
approach?Roelof Botha: If you go to our website and search for Sequoia Sales Ready Product or Templeton, you’ll find very useful
content that we put together
The insight came from one of the best leaders that we’ve worked with, in a variety of companies, who argued to not just go for an MVP, a
Minimal Viable Product, if you’re building an enterprise company, but what he termed a Sales Ready Product, an SRP.The difference is that
a Minimal Viable Product just gets over the hurdle but doesn’t convince your customer to jump out of their seats to buy your product
When we invested in Cisco in the late 1980s, the first product they shipped had so many bugs it didn’t work
But the product solved such an important need for the customer that they came back to Cisco and asked if they could fix it since they needed
the product to work so badly because there was a fundamental problem in trying two networks at the time
And that to me was a Sales Ready Product
You’ve got something that, even if it’s not perfect, really solves your customer’s pain point.And so to condense the whole theory
behind this: Spend a little bit more time, probably another three months, maybe another four, five months, from when you would otherwise
ship an MVP to ship an SRP
The reason it matters for an enterprise company is that your sales organization will be so much more effective
Your sales team will ramp up a curve far more steeply and you’ll get sales momentum much, much faster if you sell an SRP.CultureJames
Buckhouse: I’m going to do something a little bit unexpected here and call on Alfred in the back
Could you talk a little bit about what it was like at Airbnb, where they started with culture very early on?Alfred Lin: Brian, Joe and Nate
came and visited Zappos, where we offered tours, to see what the culture was all about (Alfred was COO of Zappos)
At Zappos, we started writing down our core values a little late, when we were at about 300 people
And I told Brian, Joe and Nate that that was too late.After that trip, they went back and wrote down their core values, before hiring their
They knew that they had to create a new category
Home-sharing was not something that people really thought about
And so they needed people who were willing to champion the mission
And that was one of the first core values that they wrote down.James Buckhouse: Oftentimes, people think that culture is the thing you do
later on, once your business has grown large and suddenly you have a lot of people
Culture matters a lot more than people think
And it matters earlier than people think
Jess, can you talk about your framework on core values?Jess Lee: This is something we spend a lot of time on with seed and pre-seed
companies, who think, “Oh, I already know my culture
I’ll wait to write it down later.” But it’s important to get it right up front. We encourage people to not pick too many core values
Generally, you want a framework that’s a core value and the behaviors you want that exemplify that core value
And most importantly, you need a story
You need some legendary anecdote or example from inside the company that really brings the core value to life.To use Airbnb as an example,
one of its core values is to be a cereal entrepreneur
The reason it’s cereal with a “C” is because at the time, Airbnb was running out of money
They weren’t sure they had product market fit, but they went to the Democratic National Convention to try the Airbnb idea when they were
down to the wire in terms of money
In order to just get the word out about the business they made boxes of cereal that said “Obama-Os” and “Captain McCain.” It’s a
good example of rolling up your sleeves and doing whatever it takes to get your business launched
Somehow, they actually managed to generate revenue that they put back into the business
The really memorable part of that is the cereal anecdote
Whatever it might be at your company, make sure that the lore lives on
That’s really what brings culture to life
It’s not just the value itself.James Buckhouse: Roelof, can you talk a little bit about the culture at PayPal in the early days?Roelof
Botha: There are a couple of elements in that
One is this idea of intercept versus slope
For those of you that are fans of math or science, it comes naturally, but sometimes you get to hire people who have a high intercept
They have a lot of experience
In our case, we needed to hire people who knew a lot about financial services, because we as the early, young team didn’t
You hire people with intercept, but then you want people with slope
People who are going to learn very quickly
And at the end of the day, part of what made PayPal successful was that we had a good slope and we learned very, very quickly.Our culture
We faced a bit of a crunch in June of 2000
We’d raised a bunch of money during the dot-com era, and then we were sitting with seven months of runway and no revenue, burning $10
It was a “you’re all-in” culture
Management meetings were on Saturdays, because that’s the kind of sacrifice we were going to make as a team to get to the other side
Culture was really important to the success of the company
We had a strong bond between us as team members because we were in the trenches
We had to figure out how to make this business work when the odds were against us and the press had given up on us.Most people on the
outside are going to think that you’re going to fail
Don’t be surprised by that
Draw strength from that, and rally your team around your cause. You should ignore that kind of feedback.LeadershipJames Buckhouse: How do
you discern a strong founding team?Roelof Botha: My favorite, especially with companies at the seed stage, is to have no slides and to have
a conversation with you about your business
What I find compelling is, the more I dig, the more excited I get, because your depth of knowledge, of understanding the problem that
you’re trying to solve, shows itself
There are a lot of people who start companies for the wrong reasons, and they have very superficial knowledge
So as soon as you start to pressure test it, it’s clear that there’s no depth.The founders who are the best are the ones that are so
motivated to solve the problem they’re working on, they’ve researched everything
You would have found a simpler solution to the problem if you could, and you didn’t
That inspired you to start this company
As I ask you questions, you just have this depth of knowledge
You’ve thought about it so many levels deep
Those founders are the ones that keep coming up with new ideas, and that’s why their imitators don’t do so well
We see this in our industry
You come up with a great idea, TechCrunch writes about it, everybody around the world reads about it and now you’ve got 15 competitors in
other countries going after what you’re doing
But guess what? They didn’t have the idea, you did
Since you had the original idea, you’ve thought about it more deeply and you can iterate faster than they can.James Buckhouse: Jess, how
about you? What do you look for to discern a strong founding team?Jess Lee: I do agree, and I think different investors look for very
There is probably a notion of founder/investor fit to some extent
For me, I especially appreciate a unique insight and depth of understanding of that customer and that market
But on top of that, the other thing I think about is grit
I think that being a founder is so hard
I felt like I was on the struggle bus the entire time. Either we weren’t doing well, which was a struggle, or we were doing really well
and then we were in a state of hyper-growth, and that’s also really hard
Your job changes underneath you every six months
Because even if you’re successful, everything that used to work for you as the CEO or founder is now broken because your team is now 50
people instead of 10.What is it driving you, to either solve this problem or just driving you in general? Because it’s just not easy, and
folks who give up too easily or came into this because they thought being a founder was going to be really cool, it’s not that cool all
the time, so I look for that
Sometimes it shows up in the form being really mission-driven, and you have some burning desire to solve the problem
Sometimes it’s just that you’ve been underestimated your whole life and you’re really mad about it, and you want to prove yourself
There are a lot of different ways to suss out grit, but that’s one big thing that I look for.One thing I also like to see, that is not a
must-have but I find very compelling, is if you’re a good storyteller
I think that at the end of the day you have to convince your family that you’re not crazy for quitting your job to pursue this thing
You’ve got to convince early employees to join you when you can’t pay them any money
You’ve got to convince early-stage seed investors to take a chance on you and give you money when there is nothing there yet
And you’ve got to convince customers
Being able to tell a good story, both taking something complicated and making it sound simple, as well as being able to influence and talk
about why your approach is interesting and different, not just better than the competitors
I think that’s important.One area where I do disagree with Roelof is that I do prefer to see slides
I think it showcases your storytelling ability
I look at a lot of consumer companies and your attention to design and detail is also an interesting thing that you can suss out with
slides.James Buckhouse: How about you, Mike?Mike Vernal: If you can’t describe the business in a minute or two, then you need to keep
Some bad meetings end up as the following: Someone will come in with 40 slides and want to convey all of the knowledge in the 40 slides in
excruciating detail.I think a couple of things
One is, many investors look at a lot of companies all day long so they might actually know more about your space than you might think
Then two, if you need 40 minutes to explain the business, marketing and all of these other things, then for an investor meeting that might
work because you have that time scheduled, but for the random engineer you meet at a party who you want to get excited about joining your
company, that’s going to be really hard.The best pitch is when I’m two minutes in and I’m like, “I get the business
This is super interesting
Let’s ask all these questions.” The tough ones are 40 minutes of being talked at, where there is no real interaction.Capital
strategiesJames Buckhouse: Different types of companies need different types of capital strategies
How do you all think about how founders ought to think about their strategy for capital?Jess Lee: It’s really important to think about
three things: First, what is the actual cash you need for your business? If you’re a pure software business you don’t usually need as
much as if you’re building hardware or you’re making physical goods.Second, what is the valuation that actually makes sense? True
valuation, when you become a public company, when you do M-A, is actually a function of your free cash flow, or a multiple of your revenue,
so just being able to understand in the long, long-term what is a likely five, 10-year-out valuation, and then making sure you don’t
overshoot that just because you can
That’s another first principle.The third thing is ownership
Doing the math, if you don’t need to raise a lot of money, if you don’t need to raise as many rounds, at the end of the day when ideally
your company is acquired for hundreds of millions of dollars, or billions of dollars, or you IPO, what is your ownership at that moment? We
have founders like Dropbox, that when they went public, Drew and Arash owned nearly 40% of the company
So you have to think — would you rather have 40% of a $10 billion company, or would you rather have 2% of a $20 billion company? That
ownership at the end of the day is really important
So you have to think about those three things, which is a pretty complicated equation.It really hit home for me when my company, Polyvore,
went through the M-A process and it suddenly hit me that all the acquirers were not using funny VC math
They were looking at our cash flow and the multiple of revenue
Luckily, we hadn’t raised that much money, as I’d wanted to keep as much ownership as possible
I was optimizing for ownership for the team
Because of that, we actually had a really nice outcome, where everybody made money because we hadn’t over-raised since we didn’t need to
We were a pure software-based, capital-efficient kind of company, but I think not enough founders think about that from first principles,
starting from the early days
They just look at who’s raising what, and how much they could possibly get
They want to maximize that, when in reality, it’s not actually the right way to think about it.Roelof Botha: When you raise money,
you’re recruiting a partner
I see too many companies, especially seed-stage companies, make the mistake of accepting funding from whoever shows up, when that’s
probably the most expensive equity you’ll ever sell in your business
You could potentially be selling it to people that are not going to be there six months or six years from now, helping you close a
candidate, helping you wrestle with an important strategic decision or helping you refine your business model
Those people aren’t going to be there, so it’s a recruiting decision
It’s also important to check their references
Your investor is going to do references on you
Why aren’t you doing references on them?
