Lessons From a Lifetime in Venture - Slush 2022: Doug Leone, Sequoia & Luciana Lixandru, Sequoia
Returning from Slush, the worlds leading startup event, we brought back some very important messages after listening to Doug Leone’s opening speech. He touches on the current economic situation and compares it to one’s of the past, emphasizing how entrepreneurs can be positively or negatively affected by it.
TRANSCRIPT:
Luciana Lixandru:
We love Slush. We are so happy to be bac
k here this year and we love the energy and the music. I am particularly honored to be here today with my partner Doug. Introducing Doug in two minutes is an impossible task, but I will do my very best.
Doug started at Sequoia 30 years ago. He was the leader of the firm from 1996 until this year, during this period Sequoia went from a California-based and quite California-focused early-stage firm, to what it is today. A firm that's active in China in India, in Europe. We opened the office here a couple of years ago. We invest in Latin America, and we invest across stages today. From Seed, Series A growth, public companies.
Doug also worked with some legendary companies and incredible founders, just to name a few: Service Now - I think even in this market, it's an $85 billion publicly listed company. New Bank - the largest publicly listed new-age FinTech out there. And Wiz, which arguably is the fastest-growing enterprise software company out there.
So that is quite an impressive list of founders and we are really excited to learn from Doug's experience today. Let's go straight into it.
Slush this year is different from last year. It's a period of uncertainty. The NASDAQ dropped 30% since the beginning of the year. War, energy crisis, inflation. How do you feel about today? And is this period similar or different from 2001? And from 2008?
Doug Leone:
So the first thing I want to say is, thank you for being here. At my age, it's really an honor to be here in front of so many people that want to change the whole world. So I want to make sure you understand that this is a very genuine sentiment on my part. We live in a moment in time, where it’s a privilege to be in front of so many people that do that. So, a really heartfelt thank you to all of you. Thank you.
So, unfortunately and I'll give you the good news. The situation here today I think is more difficult and more challenging than either ‘08, which was really a protective financial services crisis. Or 2000, which is a protected technology crisis. Here we have a global crisis. We have interest rates around the world, increasing consumers, globally are starting to run out of money. We have an energy crisis and then we have all the issues of geopolitical challenges. My forecast is that we're not going to get away with this very quickly.
If you turn back to the 70s, there was a malaise of 16 years, even if you go back to 2000. A number of public companies didn't recover for 10 years. I think we have to be ready for a prolonged time, where we're going to find consumers running out of money (most of the economies that we all work and live in our consumer-driven economies, in the US it's 70% of consumers), so consumers running out of money, demand decreasing, tech companies’ budgets being cut. So I think we should be prepared for a longer period of challenges that we have faced in the past. How long? Who really knows, but it'll not be 12 months. We're gonna hope for a 2024 recovery. That would be my forecast.
Luciana Lixandru:
Doug, We have a lot of founders in the audience. What kind of companies do you think can win in this environment?
Doug Leone:
A few things. Companies that solve real problems, companies that can justify a hard ROI period, not soft productivity gains. Productivity gains as a soft ROI, but the way you go for someone who either controls a budget - let me help you save real money - or green gene - let me help you make some real money - and do so with a true mathematical argument.
And then companies that have strong leaders. What's a strong leader? A strong leader is somebody not only that has a vision and can execute in good culture, but in this market, someone that can communicate clearly with their employee base. Someone that doesn’t bullshit their employee base, because, at this time, you want to bring your employees in and ask them and tell them here's the challenges. And by the way, Google Facebook men are laying off so it's not that we're in an environment anybody can run away and just be honest with them and communicate. Here are the challenges, but more importantly, here's the plan - because you got to get people to buy in. It's got to be a clear plan, and then get everybody to “all hands” and say - ok we're gonna go dominate. Those are the kinds of companies in my opinion that are going to first survive and by the way, survival in this market is half of the battle.
And then Excel.
Luciana Lixandru:
Let's talk about that a little bit. I'm sure that you have a lot of advice for founders, you shared some of it already. Do you have specific advice for very early-stage founders? Let's say for seed-stage founders or growth-stage founders.
Doug Leone:
So the younger you go in a company, the more immune you are to economic conditions. Think of it at the other extreme and the way we solve all math problems, we look at the extremes. If you're a public company, you really are targeted, you're pegged to the public market environment. If you're a seed stage company, and you're a year and a half from product, revenue, and maybe two years from profitability and seven years from exit. You have nothing to do with the public market. So, realize where you are in that continuum. To me, the more important segmentation is you have to figure out if you're weak or strong. The lesson for me in 2008 was that we always learn from you. You have to realize we learn from you all the time. If you can afford it, do not take your foot off the product accelerator even in tough times. Because tough times are going to be followed by good times, and if you've had the ability to invest in Product, which is really the core of the company and sales being on the outer rim, you're going to come out with a much better offering when the time is right.
My advice is: in Product if you can afford it, continue to invest. In sales: don't go far out on the payback curve. It's not time because your competitors are dying, so there's no reason to push it. If your payback curve was a year, now is the wrong time to go get customers with a two-year payback.
Product first, revenues second, and then if you're really really weak you do the best you can to hold on to product marginal improvement. If you're strong, attack on Product, attack Product and find the right balance for sales and revenues.
Luciana Lixandru:
It sounds very straightforward. But I wonder how many founders really realize in the moment if they're in a position of strength or in a position of weakness?
Doug Leone:
Well, look, it's not that tough. The only thing that's tough is product market fit. It's the genius level you bring in product market fit. Each one is different. Everything else I mentioned is mechanical, me and re mortals can figure that out. It's what we experience - Business Partners. Notice that I didn't use the word investor Experienced Business Partners can help you solve and essentially what you're really doing is you're doing a SWOT analysis, strengths, weaknesses challenges, and opportunities. And you look at the market opportunity and figure out where you are. You know, in most cases, your competitors are going to die, and you're dealing with stodgy public companies that are not going to be innovating. Just do a clear SWOT analysis to figure out where you are because every strategy you do, and every tactic you em
ploy, has to do, not from the inside out, but from the outside in. It's a response to the market at large. Do a clear no holds-bar analysis with your trusted business partners. Figure out where you are and then take action. Really not more wish more complicated than that. Like everything else in life, the easiest solution is probably the best solution.
Luciana Lixandru:
We talk a lot about crucible moments, these moments that can really change the course of a company. As an industry, perhaps we're going through a crucible moment now.
When you make all the decisions you just talked about, is there any particular advice for founders from a mentality perspective? Is there anything that you've learned from the founders that you work with? That really helped them or that they use that as an example?
Doug Leone:
So I'm going to try not to be self-serving and really be helpful to you. Think of what happened in the last two or three years. Whatever you did was rewarded by some investor because of the plethora of capital. You were rewarded no matter what. You made a shit decision, a crap decision, you got money. You made a good decision, and you got money, which is a lousy way for you to learn your craft.
All that is gone. That healthy balance between founder and business partner is now in place. What you're going to learn now are the best lessons you're ever going to learn. Even in our business. Imagine an investing associate that joined us two years ago, everything they invested went up and to the right, they actually thought they knew what they were doing. What a terrific training time. And so I would view this as a cleansing period. I would view this as an incredible opportunity. This is a crucible moment, but not in the way you think. I think this is a crucible moment for you to undo some of the bad habits and become business people, true business people to invest your precious capital, in the things that really have pay back. And let's face it, if you have $10 million in a bank and can do one thing versus $45 million, I can do three things. Where do you think the better decisions going to be made? What do you think the better decisions will be made when you're loose or when you're desperate? And you really have to focus so this is a crucible moment for you. In my way of viewing it, it is a terrific crucible moment to shed some of the things you've heard before. Let me remind you, I have to be a unicorn. God forbid if I don't raise money at a higher price and the morale of the employees. Oh, that's gone. Communicate with your employees. If you need the capital, don't think about oh, it's $100 million less. The only question you should ask yourself is this.
How do we make our company not my company, our company, the strongest possible company three to five years from now?
That is the only question that matters. When we hold your shares, and we figure out what to do now your public. We don't ask ourselves, my lookout the stock went up 10 points maybe we should sell or distribute. The only question we ask ourselves is, what can this company be three or five years from now, because every wonderful company has always had a crazy buyout offer. The only thing that matters is the future. We all have the possibility of playing long term of looking the long term, which is really what our business is all about. Crucible moment to take advantage of the situation. Not so much to survive, but to figure out how to get stronger in a world where; fewer companies are getting started, the major companies have layoffs, you have a chance to upgrade, you have a chance to get stronger if you play your cards right.
Luciana Lixandru:
It almost sounds like you're saying that the last few years, were less good than today to start a company - which is counter-intuitive.
Doug Leone:
One of the things I learned in life is the truth is often the opposite of what you think. The last two or three years seem like a wonderful boom time. But look, talent was diluted. Many lookalike companies got invested. A whole bunch of investors came in that absolutely had no clue what they were doing. Think about it now. Fewer competition, fewer competitive companies, more talent, and the investors who are weak are frozen. This is a much healthier time for you and us. So I would view this as an amazing time. The two times I love most, are boom times and times like these. Boom times: you exit, you sell, terrific times like this as you invest, it can be a good time to buy and sell at the same time. This is a time to buy, to invest, to develop great habits. And so out of this gloom that's in the air, I would encourage you to shut all that gloom and really be aggressive and really think right now in terms of how to dominate. You have a chance to dominate. My partner Ravi reminded me 10 minutes ago: it is tough to pass more than one car on a sunny day when you're racing, but you can pass 10 cars on a rainy day. Think about that.
Luciana Lixandru:
I like the positive attitude and I'll build on that in 2001. Sequoia invested in two companies that are generational Google and PayPal. Of course, we also invested in many, many companies that are no longer here.
Was obvious from the early days that PayPal and Google would create something special, would survive this period, and would even thrive in that period? Is there anything those founders did that our founders in the audience can learn from?
Doug Leone:
It’s very interesting. There's a great line by a Google investor who I won’t name, that three years after the investment said “we've never paid so much for so little.” Google was a company that was a walk in the woods. There are many roads to heaven as my partner shall lender in India says very philosophical in India, there is no one way. Google is a company that took a long time as many of your companies will, and so that was not as obvious. PayPal was more interesting because it was a conglomeration of an incredible amount of talent. In fact, if you look at all the people that left PayPal, they started many, many companies.
PayPal was more obvious. The issue of Pay Pal was the gun to the head that eBay said is that most of the revenues from PayPal, were from eBay, and the fact that we wanted to hold on for a long time. It was one of those situations not unlike YouTube which was sold 353 days after we made the investment where the offer seems so extravagant. Think of YouTube, think of PayPal, think of Instagram, which sold $4 billion and actually saved Facebook. Many lessons there, these lessons there are; great companies are started during dark times. Don't accept what looks to be a terrific offer. I gave you the question you want to ask a few years from now, and there are many roads to heaven.
In the case of PayPal and YouTube, more of a direct line. Both in the case of YouTube blade market entrants in the case of PayPal, early market entrants, in the case of YouTube, a bit of a walk in the woods, so there is no singular way to get to heaven. You just have to find your way and have the conviction to stick with it.
Luciana Lixandru:
I'll ask you an unfair question. People talk often about those cases where a founder and a team had a great offer on the table. And it was really hard to say no, but they said no. And then went on to build even bigger companies that became legendary.
There are also stories that don't get told as often where founders reject a great offer. And then don't find success. I know it's an unfair question because I'm asking you to generalize How do you know?
Doug Leone:
Look, there are many investors. We're not that smart. But you have to assume through real logic that after 50 years, we've learned something. And what we learn is when the flywheel starts going, it surprises us. With you as a founder the first time you see it, you go oh my god, I can be worth X. In our case, we haven't gotten too many of those wrong mostly because of pattern recognition and experience. Well, we often recommend to founders, not founders in a Series A to not get bribed by new investors. “You haven't done anything, you've written three lines of code, if you take 10 million off the table, you get us as investors.” That's called bribery. It should be legal and people should go to jail for that.
But if you're a founder and built a business. You've got revenue, I would suggest the following: take 10% of your holding off the table, 20% max take the pressure off, which really then de-risks you, maybe your partner in life, and gives you the courage and maybe even the business alignment, to go for it for the long term. I think the answer to your question is to make sure you align yourself with the business partner and I want to say a word about that.
I'm so tired of hearing founders saying “that I got a term sheet, Whoa.” I got a term sheet to me is like saying, I went to a bar and the first person, male or female depending on who you are, spoke to me. I got married. That's what it sounds to me like, think about how you architect your product. Most of you are technical, you spend time architecting your product. Why don't you architect your cap table exactly the same way? Yet that doesn't occur to you? We hear I got a term sheet. Oh, he was first. So what? Be very careful in who you choose as your business partner. Do careful reference checks. Not only the companies that work. We all have companies that work but, give me a list of three companies that didn't work. Show me your character when a seal was struggling. What did you do? And those are the great references you want to ask out of your business financial partners.
Luciana Lixandru:
How about mistakes? Are there really obvious mistakes that founders should avoid in this part of the cycle?
Doug Leone:
Yeah, don't get caught up in a mania, the next round. Be pragmatic and play long-term. If you've got to raise $50 million, and your last round was 500. And this round was 350. First of all the 500 has what is called weighted average dilution, that you're not going to pay very much, and then explain to your employees that you're way better off with another 50 million at a reduced price. Your 409A will come down your next set of employees are going to have slightly lower pressure which is an advantage and go for it. Explain it to them, and now you have the firepower to win in the long term to me, that's the greatest error I'm seeing right now - trying to protect some artificial last rounds price for all the bad reasons.
Luciana Lixandru:
One of the reasons is that there has been so much press on startups. Let's say 5-6-7 years ago in Europe at least, startups did not use to announce their valuations when they raised money and today it has become quite common.
What's your general advice on startups' relationships with the press? Should they try to be front and center, build a brand, should they stay stealth for as long as possible?
Doug Leone:
Startups have two advantages, stealth and speed. Why would you ever give up any one of them? So my advice is a board member is shut the hell up, unless there's a reason to be loud. What are the reasons? Customers? I don't think a customer cares whether you raise money at 350, 650, or 850. I don't think a press release helps you in recruiting either. It is the sales skills of the CEO of a founder. And so most cases when you're small and weak, why announce? Just lay low and be like the restaurant that doesn't post their phone number and yet there's a line out the door.
There are times, you have revenue, have 42 salespeople, and you want a little marketing, air cover. That's when it's time to speak. You’re a year before the IPO you want to create a buzz - that's the time to speak. But most times, speaking only provides you with a cocktail kind of material, that you can show your friends what you're doing. That's a bunch of crap, resist that notion.
Luciana Lixandru:
One of the things that many of us appreciate about you is that you're very direct. And speaking about the press, Sequoia has been in the press a lot for the past couple of weeks.
What should we have done differently?
Doug Leone:
So first of all, I'm not going to mention any acronyms and you must appreciate that we don't know what's going to happen but I'll forecast for you - regulators, and investigators are going to come, so I’m not going to comment there. I'm going to make general comments. We are in the dream business with you.
Would you like us to lose that trait? Now I can tell you that after the last week for the next three to six months, we're going to dream a little less. Like having a child you forget the pain of having that child three months later, a year later. We want to be in the dream business with you. I can tell you we've done careful due diligence, but what you see at the end of the quarter in a due diligence statement, doesn't reflect what someone may have done in the middle of the quarter. We've looked at it, and there's nothing much we could have done any differently. We do not want to lose our virginity - our true belief to align ourselves with you and to dream with you. I think we lose that and we're out of business.
Luciana Lixandru:
Thank you for sharing that Doug. Any parting words of wisdom for our founders in the audience and the general audience
Doug Leone:
Don't listen to all this stuff you read. You have a great opportunity in front of you if you play your cards right. You have an opportunity to pass 10 cars - to not waste a good recession. That would be my parting advice.
Luciana Lixandru:
Doug, we love hearing from you. We love having you in Europe. Thank you so much for coming from California to Helsinki. I want to thank everyone in the audience. We love meeting founders so much that we organized
an Open Coffee get-together with all the Sequoia partners who are here.
Doug Leone:
Thank you for listening.