Business Plans: Jim Goetz, Sequoia Capital

the topic today says business plan it's more about raising venture money and arguably from a perspective that everybody you heard from the prior session may not agree with it's a very Sequoia specific look at what we look for we're thinking about making an investment in a series a company my own background I was actually in this room and the date myself here close to 18 years ago Ken Osmond and Robert Maxfield from Rome Fame we're teaching the very early years of this entrepreneurship program I didn't start a company that year but about 6 or 7 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 you know all these odd behavior patterns and I just encourage you to ask today throughout the conversation so the title I have yours think big start small so take a look at those pictures Jerry and David Larry and Sergey Steve Chad and for those of you that actually into YouTube lore Jawad so look at that set of faces this is the formative time and 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 or wasn't a search engine it was all about PageRank and improving search for the search enza's 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 the product but in all cases is a great deal of passion and energy around a specific pain point they started very small not a lot of fancy titles no 42 Long's no fabulous resume of experience and that's all in the last decade if you go back another 10-15 years there are the Steve's from Apple a company today that associated with so many wonderful consumer businesses they are going after the hobby computer market at the point of time that Don Valentine invested very small market Tripp was a middle manager at Apple who was the pioneer behind Electronic Arts a publishing company I think most he were 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 land 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 market its large Tam's 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 a-week 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 P's and marketing key qualities that we look for in products and the whole go to market strategy in many cases this might be a hundred 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 hundred hundred and twenty 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 it Sequoia there are handful 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 one and two 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 financials oh no we do I have a couple partners that well literally in a presentation if you hand them the deck flip to the financials and we'll shred them within 90 seconds I'll talk about the things that they're looking for compelling a 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 will be important to the marketplace at large to your potential partners to potential recruits and it's something that candidly very few entrepreneurs get when they walk in the door in two three declarative senses can you explain to us what's unique compelling why you're different and how you're ultimately going to win and what you're unfair advantages so there is a template which I'm hoping many of you are familiar with from Jeffrey Moore how many people have read inside the tornado of 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 picking your target customer we hear often about target customers being the Fortune 2000 or 18 to 35 year olds almost at that point I'm not interesting to us who knows who the face book was for the target customer was for face book very students college toons Harvard students thank you what is it today 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 to 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 a defendant today the point is this template in really focusing on the key elements that Moore lays out in both of his books inside of 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 comes through our doors in literally five minutes can convey their initial market position so here's an example from Silicon Graphics a company that is faded which certainly had fabulous glory if that Google is located in their campus today if you're familiar with the Google campus for movie producers who have post-production special effects Silicon Graphics provides computer workstations that integrate digital fantasies and with film footage unlike IBM or Sun Microsystems their prime competitors SGI is 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 I mean you really have first-hand experience we love listening to entrepreneurs chat or Steve talking about the frustration sharing video after party they had first-hand experience and many of the entrepreneurs that we back are attacking a personal pain we loved back people that have 10-15 years experience in a specific industry I recently back two gentlemen out of the storage industry one was a key architect in the early days 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 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 and questions standpoint 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 it takes the time to educate us it's a wonderful opportunity after you get through that first challenge around positioning to grain 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 5 X improvement in price performance an adjacent market but what really is most interesting to us is this opportunity to find new categories we're often there is no market there's no town 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 we're in here there was some discussion around selling out versus waiting for an IPO 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 M&A 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 you know more in his books does a fabulous job talking about market tactics for high technology companies and it encouraged you to be familiar with how you might create a market entry strategy that is suitable for startup talking about channels as an example something that gives us a great deal of harper and if you're going after the enterprise with a high technology product is real typically 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 attraction 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 but that said there are a number of markets for 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 their 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 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 cold call 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 see long shots no question is a bit of a software business what about the googles in the Microsoft santiago's of the world why will they come and eat your lunch as a as a new entrepreneur sure they can have 20,000 people developing with your ugly what what happen is a good answer that is the lenses what's going to vary by venture firm but we're very comfortable investing in and around what we call an aircraft carrier the companies you mentioned it's very hard for them to shift momentum and will 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 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 and with this chart can they live up if you are in a new category as 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 the answer is yes but even day one as you think about anything more Cattleya 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 start-up 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 those of you that are philosophy fans thomas malthus in UK and its theory around population and eventually its 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 will often hear the patent story as a start-up patents they're interesting 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 to 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 on to roles that have a fabulous set of instincts around viral behavior intimate understanding of the market itself or delaying expertise is often a fabulous varied entry there might be a set of partnerships that the first mover is gonna 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 know I love talking about technology but as an investor it's less interesting than understanding how that technology or business process or unfair advantage is going to create a meaningful barrier to entry please it's an enormous barrier in our opinion very few startups get it candidly but we're seeing more and more than a web certainly Apple has differentiate themselves over a couple decades with simplicity of design but we're big believers in time we think YouTube it wasn't like YouTube was the first site to share video no their 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 leverage it's not up there and that this was not meant to represent a comprehensive list but certainly that's a wonderful way to go after a market do 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 team talked about humble beginnings but look at the titles chairman president 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 honey I kind of wonder outside 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 3 maybe 4 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 kawaii 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 consumer or 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 touched on this already but intelligence ambition a 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 you know 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 they've 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 is 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 u.s. it was born on the 4th of July in Italy Doug Leone 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 you can look at your numbers and graphs 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 to say you don't know that's ok and that 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 that we've been around for 35 years I've seen lots of piell's both the dream case 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 happened and it's a it's a full day it's a wonderful experience to razz your partner's on this but rarely do people hit their numbers that said it's the disparity and the magnitude of it that were fixated on so take the time on the financials and you know I would encourage you to go look at other companies and their filings and they go public on their very first couple of years we regularly will see plans that go from zero to product shipping to 25 million to 80 million to two hundred million dollars that almost never happens in the history of hi-tech I mean if you looked at Google in its early days and read Mike Moritz as description of the company in our LP letters you'd think you'd be ready to be shut down so the point is you can gain a great deal of credibility by being balanced on the numbers upfront and certainly a number of folks in the financial community specifically venture are going to be very fixated on your piano if you're doing something in the SAS area or consumer internet or mobile or advertising or even semies 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 semies and how that impacts gross margin versus MRRR for a SAS business and what your Radl revenue looks like or cost of customer acquisition or churn lifetime value these are all elements that suggest that you've really got your head around the economics of your business this is often more telling than the P&L and the balance sheet 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 get any questions on unit economics get the football on please yes with that is the amount of bands and stores expected each addresses now now we talk about shipping out dollars with you every customer and in case YouTube there was a bandwidth in a storage cost was measured in fractions of penny but per user and we're very concerned early on around monetization but more concerned about friction and there are lots of conversations that roll off and here had with the team around the balance and we wound up raising more cash not because we needed it for headcount because the bandwidth costs had actually crossed a million dollars a month turns out the storage is not a large issue for you to 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 cost were becoming fairly painful but that was captured even in the initial series a presentation that 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 CPM might look like and had some knowledge that we could eventually turn this over with 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 is not here but you know you hear groan in the room anytime of 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 then you might see in other areas the globe but you know through our team in China we're certainly certainly starting to see wonderful aspects of low margin businesses and I think that will continue okay sales learning curve this is something that 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 this textbook that go in to what your revenue ramp looked like how many salespeople you're going to hire and all sorts of elements of the business whether it's positioning sales compensation 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 percent just not how it works there's this enormous challenge in iteration on the recipe to get to a meaningful level 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 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 sales people 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 the sales force 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 a incredibly important early sales executive there and what the patience of the team they eventually built an enormous business but it took six seven quarters 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 around the 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 that 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 with just a little bit of money or bootstrapping 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 are able to come in and show even at a micro level early consumer adoption and an early sense of what the unit academics might look like on a validated basis small sample but still very compelling to us is it pesetas grulla time is it it can be as small as a hundred if it's a controlled beta and we're looking at that point in time for repeatability and you know how often and the loyalty bases are coming back we've seen scenarios where it was as small as you know a dozen but but in reality somewhere between 100 and maybe a hundred thousand 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 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 site 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 it this is in many ways I'm talking about startups and 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 you know themselves they were very honest with one another about the consumer feedback what was working what was and it really has set that culture apart and I think we'll continue to see wonderful startups being led by people who were part of that DNA if you're thinking about starting a company go get somebody that's spent a couple years in an 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 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 Squire MDV or whatnot let me 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 be heated 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 individuals fine but if you've built the beginnings of a wonderful team may be 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 partner's can do rail 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 than the deck point that out and move on it's 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 your blackberry or not paying attention I'm not sure that's a 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 and manage that meeting now some might ask you what else you're talking to wouldn't tell I ain't scarcity and a certain amount of openness is a proprietary Asst 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 yeah 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 let's do this friend you get them through their party meeting females on call and all contingent event that because you're going under for an R and and you want them to remember their be there when they show up for an R so how do you warm them up yeah 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 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 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 to 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 center around the venture community and so yes there are things you might want to do to warm them up 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 ten minutes you've got their interests in fact I 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 want to 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 would 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 you're going to get lots of people that say well you won't take a meeting let's look at the PowerPoint well are those the kind of guys that you want to be in business with I mean in many ways that 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 realize 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 competition if you have a term sheet and it's got a short fuse you're going to get a reason attention now there are people that have used 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 rain jewels or the venture community I think certainly you're going to garner a different pace from the venture community you know we we think about the business in lots of different ways but if we hear from non trinova that we have a meeting ten days from now but they recently received the 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 and something we were 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 rationality 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 partnerships 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 wind up candidly pissing off the entrepreneur cuz they are passionate zealots and they don't want to be told that their baby is ugly and that it becomes a bit of a challenge and you'll find them pay 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 to 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 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 in no doubt even in those cases they're going to have lots of people that decide they want to pass other questions Stockton the UNC structure that paragraph say the email to 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 the big hurdle that we often go into a meeting on wondering whether there might be an opportunity has already addressed in the initial email definitely not much more than that but I 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 it Sequoia our emails are on the website we're in the business with meeting folks like you and we're here to invest not pass so reach out there's no need to find somebody that's somehow associated with you know 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 slides just no certainly I know the Sequoias webpage actually suggests sent slides I think took ideas at my Beck Sequoia Capital now we're here now because without your VC hat on how can how can an entrepreneur say I want to be in touch with you avoid that process when that means what we feel like what we know there's no an ace here there's sending slides up Wiley what's the risk well look I will normally ask for slides and look they 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's I have Greg McAdoo show you 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 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 a DD and so as an entrepreneur I've been in those meetings where people are on their Blackberry or what that'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 well 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 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 PowerPoint slides from an entrepreneurial perspective I think I was pretty slow to figure this out a slide presentation that presents very well doesn't necessarily read very well yeah and vice versa and so as much as it's painful to 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 quickly are incredibly important but 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 to 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 BS excuse on you know double-booked Deana 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 and then what Nicole be actually useful to take about the real facts we're talking to and other subjects at my campus would be very honest with pcs like if you're not sure about financials so which point do you sort of have to lay the cards of the table to establish 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 you know being glib or overstating and 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 you know what was the valuation 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 once it was approached in tech investing where you see like the big opportunity suppose to be born Paulson what's the difference is for this process because I mean a lot of times for example because 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 the start 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 well call energy opportunities out of a total of a 15 investments it's 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 the existing incumbents you know if that was the case that 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 start-up that and then create wonderful opportunities for all of you and a spectacular investment landscape for us and those are the things that were 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 prior ship as an example installing solar panels I mean it's a big opportunity right there 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 to focus on size and market and if they can't claim that they've got a billion dollar market day one we're not interested and they're worried about being pigeon-holed as a feature oh no looks for six businesses that I brought up on humble beginnings we're all features day one little tiny businesses my question is besides of money what does Sequoia add and would Yahoo will and YouTube these companies without Sequoia III 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 press we describe it as prey jumping if you will when there's a wonderful outcome for company and the next thing you know you listen to the investors being quoted in the Wall Street Journal so 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 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 they're still even Yahoo one that wind up selling out you two in those conversations with Steve and Chad there was a lot of dialogue around remaining independent a billion six at the talent 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 dollars today that said we absolutely supported our entrepreneurs Steven chat in that decision I think was the right decision for the two of them and has 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 there's a lot of pride within Sequoia I'm not being upfront with the press or the credit if you will I'm called a person energy cycle first of all how many like traditional anything's are you seeing that habitable traditional energy sources that kind of stuff and secondly love it 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 in every major 20% figure out we ever serve as a connection between with you and we answer the second question first so I think in terms of trying to act as an intermediary absolutely an often attempt to do that I think are batting ratio is you know on the order of you know to 300 it's not a spectacular track record in that area in terms of trying to get teams connected the certain amount of passion and DNA building has to get created in a start-up 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 it's dirt eat a copper tuna tease that we've intersected with you were probably meeting with three or four a week on that order there's probably twice that number that would characterize as green but there is a lot of activity in energy right now it's one of those hot sectors are aureus is a bit Malthusian already and unlike the internet mobile space the capital intensity 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 a mark I appreciate this we just recently signed the term sheet with a couple guys who spent their careers at GE and large power companies that are in their late 60's and although I painted this picture of very young entrepreneurs early on we're delighted to be in business those guys and the expertise that comes out of GE in a number of fields is just staggering and there are certainly opportunity there was another question or somewhere of running a business we can get new meaningful data back into Xero meaningful meaningful data you know back from I guess what the users are I guess it's cheaper to run business these days and some internet with that mind like how do you know when the right time is to get money if it is the case that you get get some work it's a little well it may not be money that drives you 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 dearest a major component of your plan you know anecdotal I'll be a meaningful consumer about 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 option before we whatever 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 if exit had seventy four seventy five percent 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 D 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 Hudspeth and stones that you're willing to take that risk maybe this is the substance of what we're 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 that 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 it it's a really tough question I think there's a wonderful group of angels out there and it turns out that you think the Angels can be additive to the creation of the business and provide a perspective that would be valuable to the business creation encourage you to go pursue that path that the challenge is is you build that capital structure rarely does the angel community want to continue to invest in the series B and the Serie C and the service D and if you take a meaningful chunk of your initial capitalization table the cap table with a 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 that are being met well it's you know five or ten million dollar valuation twenty fifty two hundred five hundred and new investors will expect to see existing investors show them the money and that's probably the only major risk and taking a little bit of angel money if it's too much it can become a problem you need 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 on a thousand dollar 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 the Sequoia came from incredibly small early investments but it's a wonderful group be picky think about who your partners are here's to know you spoke a little bit about IP as an offensive strategy he said there's also signs of skepticism in that would you do something custom a patent against exactly how broad a patent that is how much that really protects what kind of consideration for you is that somebody if they have a technology that they made of this method this product happening as a play in any decision airing 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 it difficult to build then the notion that we're going to defend our market position not an iteration and and you know quickness of feet but by hiring some lawyers and using our patent to make sure that anybody that comes in competes gets spanked that's a very expensive proposition I don't have any attorneys in the group but you are okay be careful what I say but but it's a very it's a very expensive proposition for a start-up to hire a legal team in it I've been on the other side of that a handful of times and there's some wonderful people at Wilson Sonsini I'd 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 ten million dollars of the company's money and that happened in 15 months and so what absolutely worried about whether we might be stepping on somebody else's intellectual property and that is a concern 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 and 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 Feherty I we don't want to be on your 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 that the risk is a huge hit Rahzel well I told you earlier man it turns out that there are times in our opinion that it makes sense to consider an acquisition and we'll even encourage not to in order to do that but when it's working our disposition and culture is to go along 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 LEP reports but 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 averages you know around 500s about half the companies we invest in the early stage business don't work out and it's 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 and 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 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 along I actually think that's a more difficult question the venture community is 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 find it the only speech I designed to operate in several drop in solo conscious and it's so balanced well I think there is wonderful on perrault Alan come across the globe we came to conclusion four 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 so forth not a big fan of having a early stage company try to target multiple geographies day one open-minded about R&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 ten producers working on you know with passion and initial product offering because the iteration itself really requires spectacular communication but there's all sorts of examples now if you told us that your assistance company and you wanted to open up Europe and Asia simultaneous with North America we tell you you're crazy it just makes no sense it gets back to the sales are incurred 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 know you open you up you'd be surprised you know Australia and Asia you we're always stunned as to where the initial traffic comes from in our early-stage companies in the consumer internet space mobile is dominated by geographies outside of North America well much of the innovation is happening outside the United States two more questions trouble oh no you please aside to hang a screen for entrepreneurs want to go long specifically I know on your website you mentioned you look for immigrants who look for people that have taken risks or ibly what are the specific either questions you ask for screens you have to know that someone's going to want to take it long and supposed to sell out earlier I think the 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 picture earlier who has already faced a couple of challenging questions around should he sell out should he go along 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 flipped I think to just 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 think our underdogs and individuals that have come cotton on to a unique compelling value proposition and 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 emotional rewarding experiences in your entire life if not your career in deference to my wife and kids

Channel: Stanford Graduate School of Business

Views: 119,610

Rating: 4.8736844 out of 5

Keywords: Jim Goetz, Partner, Sequoia Capital, business plan, Entrepreneur Week, 2008

Id: gnmYSze9M2g

Length: 70min 20sec (4220 seconds)

Published: Tue Jul 28 2009