Jeff Wang: Sequoia Capital's $9BN Global Equities Fund on The Future for NVIDIA, Google & Meta|E1212

Intro (0s)

• There are currently more threats to Google's business than ever before in the company's history. (0s)
• NVIDIA's stock price is considered reasonable if it is expected to continue its growth trajectory. (4s)
• Seventy percent of the research process is focused on the theme, while only thirty percent is on the actual company, emphasizing the importance of choosing the right investment theme. (8s)
• The analogy of interpreting a treasure map is used to describe the investment process, highlighting the importance of selecting the right opportunities, akin to choosing the right island to sail to. (14s)
• The conversation includes expressions of excitement and gratitude for participation, with mentions of mutual friends and previous interactions. (40s)
• This is the first podcast appearance for the guest, who does not plan to participate in podcasts regularly, despite having listened to the host's podcast for a long time. (57s)

The Offer Moment in SCGE (1m12s)

• Sequoia Capital Global Equities (SCGE) was started in 2009, initiated by Jim Goetz, Michael Moritz, and Roelof Botha. (1m23s)
• The speaker joined SCGE in 2010, before the external launch and fundraising from limited partners (LPs). (1m35s)
• The motivation for joining was the belief in the mission to build a world-class public equities business in partnership with Sequoia Capital, considered the best venture capital firm globally. (1m44s)
• Initially, SCGE had $50 million of internal capital, which has grown to managing about $9 billion, mostly from external LPs, with internal capital now around $1 billion. (2m0s)
• The portfolio consists of approximately two-thirds public investments and one-third private investments, with the private investments being almost exclusively co-investments with Sequoia. (2m10s)
• The opportunity to build a public equities business with ecosystem advantages in technology was intriguing, and there was strong support from Sequoia's senior leaders like Jim Goetz, Michael Moritz, and Roelof Botha. (2m20s)
• Despite the appeal, joining SCGE involved taking a 70% pay cut and the risk of failure, as many hedge fund launches do not survive, which could have negatively impacted career prospects. (2m42s)

Transitioning from Shorts to Longs (2m59s)

• Initially focused on short positions, there was a successful transition to long positions, characterized by a unique ability to identify and capitalize on long opportunities. This approach involves expressing a disruptive thematic viewpoint on both the long and short sides. (2m59s)
• The shorting strategy does not focus on identifying frauds or valuation arbitrage but rather on expressing further conviction in long positions by considering the impact of positive views on certain companies, like SpaceX and Starlink, on other related businesses. (3m23s)
• The investment approach involves taking low leverage, as opposed to high leverage used by some hedge funds, to manage volatility, especially in the technology sector, which already has high beta and volatility. This strategy aims to achieve great returns over time without excessive leverage. (4m42s)
• The fund generally maintains a long growth and short value position, which can be challenging during market rotations favoring value over growth. These rotations, often driven by macroeconomic factors, can be painful but are typically short-lived. (5m43s)
• Over a 15-year period, the fund has experienced only one down year, emphasizing the importance of a long-term perspective and partnering with long-term oriented limited partners, many of whom are Sequoia LPs, who understand the volatility inherent in technology investments. (6m22s)

When to Call a Decision Wrong vs. Waiting for More Data (6m51s)

• It is challenging to determine when a decision is wrong versus when more data is needed, and it is important to remain dispassionate and objectively analyze data. (7m6s)
• A data science team is integrated into the investment team to provide a data-driven perspective in decision-making processes. (7m34s)
• In public markets, all investors have access to the same information, so verifying investment theses from the outside is crucial for decision-making. (8m10s)
• An example of a misjudged thesis involved Shopify, where post-COVID trends were incorrectly assumed to continue upward, but data showed a return to pre-COVID trends. (8m45s)
• Despite Shopify's continued growth, the expected trend was lower than anticipated, highlighting the need to remain objective and responsive to changing data. (10m3s)
• The experience with Shopify emphasizes the importance of being dispassionate and using data science and partner support to improve investment decisions. (10m21s)
• A quarterly review process is in place for the entire portfolio, involving re-evaluation of each position, with controversial investments receiving a fresh analysis from a different partner to provide a devil's advocate perspective. (10m35s)

Global Equities in 2016 (11m9s)

• In 2016, Sequoia Capital Global Equities (SCG) faced a leadership transition and considered shutting down its global equities business due to underperformance and lack of synergy within its ecosystem. (11m9s)
• The original portfolio manager, hired in 2009, attempted to replicate his previous hedge fund's strategy, investing in non-tech areas, which did not align with Sequoia's strengths. (11m49s)
• The decision was made to part ways with the original portfolio manager, and the remaining senior partner was tasked with developing a new business plan to convince the partnership of a better future direction. (12m25s)
• The new strategy focused on investing in growth tech with thematic overlap with Sequoia's broader interests and co-investing in late-stage private companies, moving away from non-tech investments. (13m5s)
• A 50-page PowerPoint presentation was created to present the new strategy to the partnership, emphasizing the advantages of focusing on Sequoia's core strengths. (13m39s)
• The presentation highlighted that the new strategy was less of a leap of faith compared to the initial setup in 2009, as the team now had more resources and a clearer focus. (14m4s)
• The public markets require a different discipline compared to a continuation fund, as they involve active trading and decision-making about whether to sell or distribute shares over time. (14m43s)
• A portion of the portfolio consists of prior or existing Sequoia portfolio companies, making up about a third of the total portfolio. However, the fund also invests in companies not previously in Sequoia's portfolio, such as Shopify, which was first invested in when it went public. (15m18s)
• The investment strategy involves knowing when to buy and sell specific companies, with a focus on long-term investment rather than short-term price fluctuations. The discipline of selling a company at the right time and reinvesting in another that outperforms is emphasized. (15m43s)
• The fund's bias is to retain investments in companies they know well and have confidence in, rather than frequently selling and buying based on short-term price changes. The focus is on whether the investment will be significantly larger in the next five years. (16m18s)
• Short-term price changes, such as a 10% increase, are not a major concern unless they significantly impact the investment's internal rate of return (IRR) over a longer period, such as 18 months ahead in a 3 to 5-year horizon. (16m45s)
• The fund actively makes decisions to trim or rotate investments when necessary, as seen in 2022 when many stocks were overvalued, and adjustments were made, including with Shopify and ServiceNow. (17m43s)
• The performance of the buy-and-hold strategy for existing portfolio companies is surprisingly consistent with the performance of new investments. The fund has also seen success with private companies where they can partner for growth. (18m13s)

The Move into the Private Markets (18m39s)

• The private portfolio has performed well, and there is a strategic move into the public portfolio, transitioning into a crossover fund that invests in late growth rounds of private companies. This approach is based on the belief that understanding these companies better before they go public is beneficial. (18m39s)
• An example of this strategy is the investment in Nubank, where Sequoia Capital participated in multiple funding rounds, including post-IPO, making it a top-five position in the portfolio. This involvement is believed to provide a deeper understanding of the company. (19m32s)
• Having a competitive perspective on companies helps inform both public and private market investments, allowing for flexible allocation based on where the best opportunities are perceived at any given time. Currently, the focus is more on public markets due to fewer opportunities in private markets. (20m40s)
• The crossover market is becoming more attractive as many hedge funds, referred to as "tourists," have exited after unsuccessful ventures in private markets. This, along with the reopening of IPO markets, enhances the appeal of crossover investments. (21m12s)

Will Private Markets Overtake Public Markets? (21m37s)

• There is uncertainty about whether private markets will compete with and overtake public markets in terms of volume and depth of activity, as public markets remain the largest capital markets with significant liquidity and branding advantages for companies going public. (21m40s)
• Some companies, like Aara, are eager to go public, driven by reasons such as employee interest and branding opportunities, despite the current challenges in the IPO market. (22m17s)
• Continuation funds have emerged as a temporary solution to provide liquidity to limited partners while the IPO markets remain closed, but it is unclear if they are a permanent or cyclical feature. (22m45s)
• The IPO market has been significantly below the levels seen in 2020 and 2021, and even worse than during the financial crisis, but there is an expectation that it will reopen in the latter half of the year or next year. (22m51s)
• Companies have taken time to adjust their financial profiles and revenue predictability to meet public market expectations, and many are now more prepared for IPOs as market conditions stabilize. (23m53s)
• Despite the ability to finance in private markets, companies like Link or Stripe may still choose to go public due to commitments made with investors. (24m54s)
• The discussion highlights the challenges faced by companies in the secondary markets, noting that only a select few companies can successfully navigate these markets, while the majority find it difficult. (25m24s)
• There is a strategic shift towards focusing on opportunities in public markets rather than late-stage private investments, as some companies are not going public as expected. (25m55s)
• The ideal portfolio composition is suggested to be 20-25% private investments, as this level provides a comfortable balance between liquidity and opportunity for public market investments. (26m24s)
• The portfolio is concentrated, with 15 to 20 long positions, and the top five positions make up about 35-40% of the portfolio, indicating a focus on significant investments that can impact the portfolio substantially. (26m50s)
• The approach to short positions is less about targeting specific net exposure and more about expressing conviction in long positions, allowing shorts to naturally fall out of the strategy. (27m20s)

Navigating Incongruous Long & Short Positions (27m38s)

• The investment strategy emphasizes the importance of selecting the right theme, with 70% of the research process focused on the theme and 30% on the specific company. This approach is likened to choosing the right island to sail to, where picking the correct theme is crucial for successful investments. (29m2s)
• Nvidia is highlighted as a leading company in the AI sector, but other companies are also performing well. The focus is on identifying the right theme rather than just the best company. (28m43s)
• The strategy involves avoiding themes that lack potential, regardless of how well a company is analyzed within those themes. The goal is to identify early indicators, or "wiggles," that suggest a theme or company is gaining momentum. (29m23s)
• A past investment in Twilio is discussed as a learning experience. Initially a good investment, it became less favorable due to competition and internal issues such as declining gross margins, questionable acquisitions, and key executive departures. These signs, when considered together, indicated underlying problems. (30m35s)
• The investment team holds quarterly discussions to gain fresh, dispassionate perspectives, which can be helpful in decision-making. (31m26s)
• A famous investment saying is to be greedy when others are fearful and fearful when others are greedy, though it is challenging to implement in practice. (32m10s)
• The best investment strategy is to focus on long-term goals and avoid overreacting to short-term market fluctuations, such as significant daily drops. (32m43s)
• Combining private and public investment strategies can be advantageous, as seen in the example of CrowdStrike, which experienced significant stock fluctuations but remained a strong business. (33m15s)
• The process of building a business involved starting with $50 million of partner money and facing challenges in fundraising, particularly due to the poor history of venture PE firms launching public funds. (33m49s)
• Convincing limited partners (LPs) to invest was difficult initially, but became easier with a proven track record and supportive LPs willing to take a leap of faith based on long-term relationships. (34m19s)
• The goal is to be the best tech public-private crossover firm globally, focusing on consistency and absolute returns. (34m43s)
• The fund is focused on long-term investments, unlike Citadel, which is known for its short-term strategies. (35m1s)
• The fund's structure includes a long-term investment horizon, a long-term capital base, and long-term incentives, which are designed to align with its long-term goals. (35m23s)
• Investors in the fund have a minimum capital commitment of three years, meaning it takes three years for limited partners to withdraw their money. (35m36s)
• The fund's incentive structure is unique, with carry being taken once every three years and vesting over a three-year period, encouraging a long-term perspective. (35m49s)
• The fund's 3-3-3 framework (three-year investment horizon, capital base, and incentive crystallization) is intended to promote long-term thinking among the team. (36m3s)
• Monthly redemptions and annual bonuses are seen as factors that could lead to short-term thinking, which the fund aims to avoid. (36m13s)

Managing Long-Term Business Planning with Monthly Redemptions (36m34s)

• Building a long-term business is challenging for hedge funds due to the uncertainty of their capital base, especially with monthly redemptions. This difficulty is a reason why many hedge funds fail, as it complicates recruitment and investment in resources like data science teams. (36m34s)
• Large hedge funds like Citadel benefit from strong long-term relationships with limited partners (LPs) and have a track record that helps them endure periods of underperformance. In contrast, smaller hedge funds face uncertainty about their future, making it difficult to plan and grow. (36m57s)
• Sequoia Capital has a unique approach that allows individual business units, such as Sequoia China and Sequoia India, to have full investment discretion while sharing a brand and administrative functions. This structure acknowledges the challenges of making investment decisions in different regions and sectors. (38m3s)
• Sequoia's leadership, including Doug Leone and Michael Moritz, actively contributes to the development of their teams through leadership and mentorship. They participate in portfolio reviews and help refine investment processes, which has been valuable for the growth of Sequoia's various business units. (39m7s)
• The approach of giving individual teams investment discretion contrasts with other venture capital and private equity funds that prefer to maintain control over investment decisions. This difference in strategy is seen as crucial for success, as the fundamental disciplines of different investment areas can vary significantly. (39m54s)
• Being based in Silicon Valley offers significant advantages, such as access to influential people and brands, but also presents risks, including the tendency to believe that technological advancements like AI will happen overnight, which is often not the case. (40m21s)
• The hedge fund attempts to mitigate the echo chamber effect of Silicon Valley by inviting external voices, such as Charlie Munger and Stan Druckenmiller, to provide different perspectives. (40m55s)
• There is excitement about AI's potential to disrupt industries, with call centers expected to experience rapid changes. However, the belief that AI will completely replace software companies is considered naive, as most companies are not as tech-forward as some leading firms. (41m32s)
• The productization of AI currently depends on owning customer relationships and data, with companies like Meta having an advantage due to their control over customer experiences and data, allowing them to integrate AI features effectively. (42m36s)
• Meta's ability to adjust AI features and pricing quickly, due to its ad marketplace, provides a competitive edge. Initially, large companies with significant data and distribution capabilities, like those in the "MAG 7," are expected to perform well in the AI space. (43m11s)
• AI can be integrated into products immediately by software companies, allowing them to quickly roll out AI features. However, they must negotiate new contracts with customers to demonstrate the value and determine pricing. (44m1s)
• Google and Amazon have significant revenue streams from Google Cloud and AWS, respectively, while Instagram serves as a major revenue source for Meta. (44m20s)
• Google Search is a highly valuable tool because it captures user intent with precision, as users explicitly state their needs. This makes it challenging to enhance search with AI, given its existing effectiveness. (45m6s)
• AI is particularly valuable for Meta in ad matching, as it can analyze user behavior on platforms like Instagram to predict and influence purchasing decisions, even when user intent is not explicitly stated. (45m20s)
• There are increasing threats to Google's business, more than ever before in its history. Meta is considered a significant potential competitor in the search space, with the development of chatbots integrated into platforms like Instagram, WhatsApp, and Facebook. (46m21s)

AI Integration: Boosting Revenue or Enhancing Customer Experience? (46m58s)

• The integration of AI into products is expected to increase average revenue per user (ARPU) and enhance customer experience. Companies like Meta are already seeing significant financial benefits, with AI-driven content recommendations leading to more user engagement, increased ad inventory, and higher cost per thousand impressions (CPMs), resulting in an estimated $15 billion in incremental earnings before interest and taxes (EBIT) for Meta. (46m58s)
• Software companies may take longer to realize these benefits due to the need to justify price increases to customers. Canva, for example, has raised prices on its Enterprise plan by three times, indicating a trend towards monetizing AI advancements. (47m50s)
• There is a $600 billion challenge in AI, where application companies need to achieve a positive return on investment (ROI) from substantial investments. The pace at which these companies can realize ROI is expected to increase, with companies like ServiceNow anticipated to implement price increases later this year and into the next. (48m27s)
• AI is beginning to contribute to incremental ARPU for many companies, although the progress has been slower than expected. Features that can be productized, such as recommendation engines and co-pilots, are being adopted by companies like Meta, which is leveraging GPU technology to enhance its offerings. (48m59s)
• Proven AI features like enterprise semantic search and case summarization are being integrated into various products, delivering ROI. However, a significant amount of capital is being invested in model training and research rather than productization, with estimates suggesting $100 billion is needed just to participate in this space. (50m1s)
• The number of companies capable of spending $100 billion on AI development is limited, and it is anticipated that there will be only three to five foundational AI models globally, with at least one in China and one in the Western world. (50m41s)
• The investment strategy involves focusing on application companies that can integrate AI into their products profitably, rather than overinvesting in semiconductor or hardware stocks. (51m26s)
• ServiceNow is highlighted as an example of a company with a strong core business and a clear opportunity to leverage AI, particularly in automating ticket deflection. (51m51s)
• Overinvestment in the semiconductor and foundational model layers is expected to benefit application companies by providing enhanced AI capabilities at a lower cost. (52m33s)

Why NVIDIA’s Price Today is Reasonable (52m50s)

• Larry Ellison and Elon Musk have been actively seeking to purchase GPUs, highlighting the high demand for NVIDIA's products. (53m3s)
• NVIDIA's current stock price is considered reasonable if the company continues its growth trajectory, trading at 25 times next year's earnings. (53m14s)
• The growth of hyperscaler capital expenditures is significant, with a 50% year-over-year increase, and it is expected to continue rising, potentially impacting companies like Google. (53m30s)
• Investing in AI involves strategies such as being long on NVIDIA due to its strong market position, while shorting companies that lack competitive advantages. (54m20s)
• NVIDIA's market share in the data center GPU sector is expected to remain strong, even if it doesn't maintain its current 100% share. (54m31s)
• There is a risk of overinvestment in AI, but strategic hedging can mitigate this risk. (55m13s)

Exploring Infrastructure & Data Center Deployment (55m19s)

• There is significant demand for infrastructure establishment, particularly in the data center deployment space, but concerns exist about the long-term sustainability and competitive advantage of businesses in this sector. (55m45s)
• While there may be growth in the data center construction and power electronics sectors over the next two years, the potential for increased competition raises questions about their long-term viability as investments. (56m1s)
• As a long-term investor, there is a preference for stable investments rather than frequently trading stocks, which may not be sustainable in the long run. (56m20s)
• Europe's importance in the global market is perceived to be diminishing, although it remains a valuable starting point for companies aiming for global expansion. (56m52s)
• Successful companies, such as Klarna, have expanded beyond Europe into the US and other markets, highlighting the challenges and opportunities of such expansions. (56m56s)
• The US market is considered the largest opportunity for software and fintech companies, with a significant portion of revenue for many companies coming from the US and Canada. (57m30s)

Concerns About Deglobalization & Its Impact on Investment Strategy (57m59s)

• There is a concern about the trend of deglobalization, which contrasts with the past few decades of significant globalization. This shift has led to a more insulated global environment. (57m59s)
• The impact of deglobalization on investment strategies is significant, making it more challenging to invest in Chinese companies due to decreased transparency and understanding of their internal operations. (58m17s)
• An example is the company PDD, which, despite positive ground-level indicators, has experienced stock volatility that is difficult to comprehend due to a lack of transparency. (58m41s)
• There is a belief that China will recover due to its high level of entrepreneurship and the quality of its founders, although the current administration has affected new company creation. (59m5s)
• Despite challenges, leading Chinese companies like PDD and Shein are expanding globally, similar to top European companies. (59m31s)

India's Promise: A Long-Awaited Opportunity (59m41s)

• There is a growing excitement about the potential of India, similar to the anticipation often associated with Europe, with many believing that the right time for significant growth is approaching. (59m42s)
• India has successfully created strong consumer and financial companies, but it has yet to produce major technology companies, partly because top technology founders often move to the US. (1h0m5s)
• There is optimism about India's future, as evidenced by the success of companies like Zomato, which has transitioned from high initial losses to becoming a profitable business. (1h0m23s)
• The intense competition in India, similar to what was seen in the US during the zero interest rate environment, has decreased, allowing companies like Zomato to improve profitability and business operations. (1h0m41s)

Lessons from Working with Doug Leone, Mike Moritz, and Roelof Botha (1h1m2s)

• Doug is highly regarded for his ability to build trust and his exceptional commercial instincts, often referred to as having a "great sniffer." He is known for his attentive listening skills, which he uses to identify opportunities and connect the dots. (1h1m9s)
• Michael is recognized for his talent in identifying and nurturing talent, as well as his communication skills. He is described as a star player in various roles and continues to assist in writing quarterly letters. Michael's approach emphasizes leveraging others' strengths rather than trying to develop them independently. (1h1m58s)
• A notable story about Michael highlights his unique open-door policy, which involved removing a wall from his office to promote transparency. During an intimidating interview, Michael challenged the interviewee to think beyond financial metrics and consider the potential growth and vision of a company. This lesson emphasized the importance of having a "dream gene" to envision future possibilities. (1h2m56s)
• Ruoff has successfully transitioned from being a great investor to a great leader, taking over from Doug, who led the firm from 2012 to 2022. (1h4m39s)
• Ruoff has been instrumental in developing the scouts program and supporting the product team, data science team, and the Arc Sequoia Capital fund, showcasing his long-term thinking. (1h5m2s)
• He is highly focused on team and culture, emphasizing the importance of putting team members in the best position to succeed. (1h5m12s)
• During semiannual management group meetings, Ruoff stands out by using concise two-page documents instead of lengthy presentations, demonstrating his thoughtful approach. (1h5m28s)
• At company events, such as the holiday party, Ruoff memorizes personal details about employees, such as the names of their newborn children, without using note cards. (1h5m49s)
• Ruoff is comfortable with the process of becoming excellent, understanding that it takes time and not getting frustrated by the gradual nature of improvement. (1h6m0s)
• His focus on improvement extends to his personal life, including activities like ping pong, pickleball, and golf, where he remains patient and dedicated to the process. (1h6m17s)

Quick-Fire Round (1h6m47s)

• Jeff Wang believes that optionality, both in financial and life decisions, is the most expensive thing one can buy. He observes that many young people focus too much on preserving options rather than making decisions, especially those who are highly accomplished. (1h6m53s)
• Jeff Wang respects Brad from Altimeter for his ability to connect dots across different stages and industries, particularly in the private sector, and appreciates his flexible mindset. (1h7m38s)
• The most challenging moment for Sequoia Capital Global Equities (SCG) was the 2016 transition, with 2022 being a particularly tough year due to poor performance. (1h8m11s)
• To maintain confidence and a positive investing mindset during a down year, Jeff Wang emphasizes focusing on the long term and not letting performance dictate mentality. He highlights the importance of staying even-keeled and fixing process issues rather than being swayed by market emotions. (1h8m29s)
• Regular anonymous surveys are conducted every six months to gauge team sentiment, which showed a decline in morale during 2022. Jeff Wang notes that team mentality is often influenced by performance, and it's crucial to manage the business without letting this affect decision-making. (1h8m51s)
• Jeff Wang regrets not taking Google more seriously during its founding, as he was at Stanford at the time and had connections with early Google figures like Marissa Mayer. (1h10m11s)
• The importance of being early in an industry's development is highlighted, particularly in public markets where timing is crucial, often measured in months rather than years. This is exemplified by the investment in Nvidia, where early investment led to significant returns. (1h10m40s)
• The current technology environment is characterized by unprecedented levels of capital expenditure, unlike any seen before, with significant free cash flow being generated by major companies, allowing for substantial investments. (1h11m33s)
• Concerns are expressed about the dissolution of family structures and its negative impact on children and future generations. The importance of considering the implications of marriage and family life is emphasized, with a recommendation of the book "The Meaning of Marriage" by Tim Keller. (1h11m57s)
• Marriage is discussed as a challenging commitment that is not primarily about personal happiness but about developing a Christlike love through sacrifice and endurance. (1h12m30s)
• A thought-provoking question often asked in interviews is what one would do if not in their current role, revealing personal motivations and interests. The speaker expresses a passion for investing but also an interest in creating products that impact billions, such as those at Instagram or Apple. (1h13m34s)
• Harry expresses a desire to be a filmmaker if not involved in venture capital, citing a passion for storytelling and fascination with people's stories. (1h14m3s)
• He appreciates the opportunity to share Jeff Wang's story, describing Jeff as a phenomenal talent whose story deserves to be told. (1h14m18s)
• The conversation highlights the value of bringing light to previously opaque areas through storytelling, suggesting a potential transition from venture investing to filmmaking. (1h14m30s)
• The interaction concludes with mutual appreciation, as Jeff Wang thanks Harry for the enjoyable experience of participating in his first podcast. (1h14m46s)