Gili Raanan: One of the Best Seed Investor of All Time: 1 Decacon, 7 Unicorns, 4 Acquisitions| E1128
18 Mar 2024 (6 months ago)
- Gili Raanan believes that investors should always be looking for their next investment and that all companies are for sale at the right price.
- He is excited to have a conversation with Gili and hopes they can go skiing together again.
- Gili grew up in a small town in Israel, far from Tel Aviv.
- He was a bright student who never did his homework and would make up answers on the spot.
- This characteristic of being smart and lazy drove him towards technology.
- He was attracted to computers because they could do what he told them to repeatedly without getting tired or complaining.
- Gili believes that laziness, in the right combination, can be a wonderful trait that promotes efficiency and focus.
- He views forming a venture team as filling gaps and ensuring that different elements are better than any of them alone.
- Founders should pick a lazy VC at the seed stage.
- Lazy VCs, in this context, are those who don't add value and let the founders build the companies themselves.
- At the seed stage, founders should look for company builders rather than just pickers.
- Every successful company has at least one board member who is the first call for the CEO and is present for big decisions.
- Founders should choose investors who will join them on the journey of building an important company.
- Gili Raanan joined Sequoia in 2009.
- He had previously invested in Sequoia for 12 years before joining.
- His first venture was in 1997 when he was 27 years old.
- Sequoia invested in his first startup, which was the first team to build a web application firewall in the late 1990s.
- The business was eventually acquired by IBM.
- Raanan relocated back to Israel and was recruited by Sequoia to be a partner in Israel.
- He met with Michael Moritz, who interviewed him before he joined Sequoia.
- Michael Moritz is a thoughtful and deep human being.
- During the interview, Moritz was more interested in Raanan's motivations and why he made certain decisions rather than just his accomplishments.
- Raanan realized that this was a different type of interview and had to focus on his motivations and drive.
- Moritz taught Raanan that getting to know someone involves understanding why they make certain choices rather than just looking at their accomplishments.
- Gili Raanan, a partner at Sequoia Capital, believes understanding an entrepreneur's motivations is crucial for successful partnerships.
- He emphasizes the importance of distinguishing between entrepreneurs driven by fame and fortune versus those with a genuine passion for their work.
- Raanan compares working at Sequoia Capital to playing for a top-tier football club like Manchester United, highlighting the transformative impact of the firm's brand and culture.
- He stresses the power of brand in attracting the best entrepreneurs, executives, and investors, creating a positive cycle that facilitates success.
- Raanan emphasizes Sequoia's culture of "endless hunger" and continuous improvement, where even after achieving significant milestones, the focus remains on identifying areas for growth.
- He believes that questioning oneself and striving for real greatness are key to staying successful.
- Raanan focuses on investing in people rather than products, as markets and technologies change rapidly, while teams remain the most stable element in a venture.
- He conducts unique interviews with entrepreneurs, focusing on their childhood, family, and personal experiences, to assess their potential and drive.
- Raanan seeks individuals who have faced challenges and have a strong desire to succeed, similar to Doug Leone's approach of looking for "misadjusted children" with a chip on their shoulder.
- He looks for early signs of uniqueness or excellence in potential investments, not just in tech, and seeks individuals who have overcome real-life difficulties and achieved success despite challenges.
- Raanan believes that sharing personal struggles can create intimacy and comfort during investment meetings, which he conducts in a converted shipping container in his backyard to foster a relaxed and open environment.
- One of Raanan's most noteworthy personal challenges was the tragic loss of his daughter five years ago, which he openly discusses.
- Gili Raanan doesn't have a specific preference for founders to be industry insiders or outsiders.
- He cares more about their enthusiasm and energy level when discussing their ideas.
- Raanan has invested in both types of founders and has seen success with both.
- He doesn't believe founders need to be experts in the field to innovate.
- Raanan cites the example of Adelon, which started as an on-prem security company but pivoted to cloud security after customer feedback.
- He also mentions Alalo, a data platform for cybersecurity founded by non-cybersecurity experts who partnered with cybersecurity experts.
- Gili Raanan believes market timing is crucial for building successful companies.
- At Cyberstarts, they use the "Sunrise process" to address market timing.
- Instead of chasing ideas and dealing with prospects' objections, they talk to a significant number of representative customers, especially large Fortune 500 companies' Chief Information Security Officers.
- They ask these customers to identify one pain point that Cyberstarts can solve with a $100 million investment in engineering over the next three years.
- This approach ensures that Cyberstarts companies address real customer needs and avoids market timing issues.
- Customers are more focused and willing to listen when the equation of power is shifted in their favor.
- Cyberstarts typically conducts 60 to 70 conversations with potential customers in the first three months to identify the most significant pain point.
- After developing a solution thesis, they return to these customers for feedback and validation.
- If the customers like the proposed solution, Cyberstarts builds it and then invites them to try it out, making them the first customers.
- Gili Raanan does not babysit founders but follows up after each conversation.
- They have a system where they rate meetings with founders and meet weekly to discuss their progress.
- The Sunrise process is an intensive experience where they ask all the tough questions a company might face in the next three to four years.
- This process allows their companies to accelerate and achieve significant revenue in the first 12 to 24 months.
- Out of the 17 companies that went through Sunrise and raised Series A, seven are unicorns, one is a decacorn, and three got acquired.
- The hit rate for Sunrise is very good.
- Fundraising for Cyberstarts is easier due to the Sequoia brand.
- The last Cyberstarts fund was raised in 90 seconds through nine WhatsApp messages.
- The Sunrise process is an ego-destroying process where founders face all the reasons people might not buy their product or like them.
- It is a difficult process that requires founders to prepare themselves mentally.
- Gili Raanan believes in getting back up after failure and not giving up.
- He feels the energy to keep going and sees it as a sign to stay in the game.
- Raanan ran a marathon every weekend for a year, highlighting his determination and resilience.
- Raanan emphasizes the importance of learning from losses and not repeating mistakes.
- He focuses on analyzing team dynamics and identifying where he went wrong in assessing them.
- Raanan believes in focusing on what works and doing more of it, rather than dwelling on failures.
- Raanan highlights the importance of focusing on what one does well and doing less of what one doesn't do well.
- He identifies picking the right teams and going after important companies as things he does well at Cyber STS.
- Raanan acknowledges that matchmaking between Founders is something he and his team are not good at.
- Raanan finds matchmaking between Founders challenging and believes it should be an organic process.
- He thinks creating real connections that last for over a decade is difficult and works better when it happens naturally.
- Gili Raanan prefers an unprepared mind when investing, allowing him to be open to the entrepreneur's ideas and not be confined by preconceived notions.
- Prepared Minds can be limiting and cause investors to lose their humanity.
- Raanan's business as a seed investor requires him to come into the process with a completely unprepared mind to avoid any biases.
- Raanan believes that the most expensive money for a startup is the seed money, as it is paid for with equity.
- Price sensitivity is important for both investors and entrepreneurs, as it affects the choice of the best investor for the company.
- Raanan doesn't think he has pricing power, as most of their deals at the seed stage look the same and they don't try to negotiate for small price differences.
- In Israel, large seeds of $6-10 million are common, resulting in a 30% dilution, which differs from European companies that raise less and dilute less.
- Raanan advises founders to raise at least $5-6 million for enterprise software or cybersecurity companies to build a team, develop a product, and acquire initial customers.
- For Cyberstarts pre-series A companies, $5 million is needed to build a strong team, solve a significant pain point, develop working technology, and acquire paying customers.
- Speed of execution is the most important trait in scaling from $0 to $7 million.
- Being first to market is not always an advantage in cybersecurity.
- It's better to enter the market later with more knowledge, context, and a better product.
- A better product attracts happier customers, better channels, and faster sales velocity.
- Speed of execution alone is not enough; product-market fit is crucial.
- Understand the pain point, target the right demo, run efficient technical evaluations, and set the right pricing.
- A repeatable process for product-market fit leads to successful execution, fundraising, and company growth.
- Cash can be used as a weapon to compete with competitors who raise a lot of money.
- Cash is essential for building a substantial company, but it's expensive.
- High valuations are necessary to avoid founders getting diluted by 50% just to raise the needed cash.
- The platform supports founders by enabling them to reach product-market fit faster, leading to higher valuations and more fundraising opportunities.
- 2021 valuations are back, especially in private markets.
- Valuations are skyrocketing, leading to a bull run for the top 1% and difficult situations for the rest.
- Cyber portfolio companies are raising over $1.5 billion in the next few weeks, impacting the entire ecosystem.
- High valuations create downstream problems, such as unrealistic option pools.
- Gili is optimistic about the market and believes raising significant cash to build a business is the right thing to do.
- Investors, board members, and entrepreneurs need to be responsible in spending money and building companies, regardless of the amount of cash available.
- Gili emphasizes the importance of considering liquidity in early-stage investing, as the current price-to-value ratio favors sellers.
- Gili believes liquidity is part of his business and all his companies are for sale at the right price.
- He acknowledges the complexity of determining the right time to sell and is not sure if he has always made the best decisions.
- Gili suggests early-stage investors consider liquidity opportunities and various contextual factors when evaluating exits.
- Cyberstarts has two types of funds: seed funds and an opportunity fund.
- Seed funds are $60 million in size and are used to write first and last checks to new teams.
- The opportunity fund is $500 million and is used to invest in follow-on rounds in Cyberstarts' own portfolio companies.
- Cyberstarts does not set the price for investments out of the opportunity fund.
- Cyberstarts has a reputation for being a reliable partner, so other investors are eager to give them the check size they want.
- Cyberstarts typically takes pro rata and has many friends in the industry who respect their partnership.
- Gili Raanan believes that rich investors are not necessarily better investors.
- He thinks that terrific instincts, knowing your game, building a terrific network, and other elements are more important than net worth.
- Money can make life more comfortable by reducing worries.
- Gili Raanan changed his mind on the importance of product marketing in the early stage.
- He now believes that demand generation is more important for early-stage companies.
- Raanan thinks the biggest misconception of the Israeli Tech ecosystem is that companies sell early.
- He believes that founders should focus on building sustainable companies rather than selling early.
- The best investment advice he's been given is to focus on the team.
- Raanan disagrees with the advice that customers always love what a company is doing.
- He believes that founders should not always be raising funds.
- Raanan learned from Doug Leone that caring about the founders and the companies he partners with is important.
- He believes the biggest investing mistake during the zero interest rate environment was attaching unicorn valuations to companies with only a million dollars in revenue.
- In the next 10 years, Raanan wants Cyberstarts to be the best investor in cybersecurity worldwide and the go-to place for entrepreneurs starting cybersecurity companies.
- He does not make long-term personal plans but wakes up every day with the drive and energy to move forward.