Pat Grady: Investing Lessons from Doug Leone, Roelof Botha and Alfred Lin | E1174

Intro (0s)

• Sequoia's involvement in a company can significantly improve its prospects.
• Pat Grady focuses on two key aspects when evaluating founders: founder-market fit and the founder's potential to drive the company's growth.
• Sequoia's success rate in picking companies is high, but they acknowledge room for improvement in identifying wildly successful companies that they missed out on.
• Pat Grady grew up in Wyoming and worked on roofing projects during summer holidays.

Background (1m18s)

• Pat Grady grew up in a small town and felt a strong desire to explore the world beyond his surroundings. His greatest fear is irrelevance, as he believes the most significant source of happiness and satisfaction comes from contributing to the world and being a good husband, father, and partner.
• He measures his success annually using a scorecard system with red, yellow, and green indicators to track his progress in different areas of his life.
• Pat Grady acknowledges his success in investing in companies that have achieved significant market capitalization but attributes it to favorable circumstances rather than solely his own abilities.
• The speaker emphasizes the importance of self-awareness and humility in investing, acknowledging that missed opportunities are often due to mistakes rather than lack of access to successful companies.
• Attracting the right talent can be challenging as some individuals may be drawn to established brand names rather than the opportunity to build something great.
• The firm's culture emphasizes a sense of urgency and the belief that success is not guaranteed, which helps attract driven and ambitious individuals who are hungry for success.

Bleeding Green Through Brand Hits & Challenges (6m58s)

• Pat Grady says he is personally hurt when Sequoia makes mistakes that deserve criticism, but not when the criticism is unfair or based on misunderstandings.
• He believes that unfair criticism often stems from a lack of understanding about how Sequoia operates.
• Sequoia takes responsibility for its investment failures and understands that limited partners trust them to make sound investment decisions.

Balancing Accountability & Culture at Sequoia (8m44s)

• Sequoia has a high bar for accountability, but it does not foster a culture of fear.
• The firm does not reprimand or fire employees for failed investments, nor does it overly praise them for successful ones.
• Sequoia focuses on inspecting the inputs and behaviors of its employees rather than solely relying on outcomes.
• If the activities and behaviors are good but the outcome is bad, it is considered acceptable.
• If the activities and behaviors are bad but the outcome is good, it is likely not a sustainable success.

How Investment Process Evolved Over Time (10m7s)

• Pat Grady's investment process emphasizes a clear investment thesis before conducting due diligence.
• A good investment thesis should be declarative and does not necessarily need to be contrarian.
• The most critical factors in investment decisions are the founder and the market.
• Exceptional founders can overcome modest markets, while average founders struggle even in large markets.
• Successful investing involves understanding the founder's ability to drive growth beyond the initial model, not just financial modeling and assumptions.
• Founders who can adapt, innovate, and attack new markets with new products and businesses have a higher chance of long-term success.

A Founder Who Outperformed & Accelerated the Most (15m26s)

• Brian Halligan from HubSpot outperformed and accelerated the company the most.
• HubSpot had a mediocre product in a bad market, but Halligan made strategic decisions that led to success.
• HubSpot acquired Performable in 2011, which improved their product and brought in talented engineers.
• HubSpot decided to build a great sales product instead of a mediocre one, which led to increased sales.
• Lesson 1: Focus on the long term. Don't get caught up in short-term trends or fads.
• Lesson 2: Be willing to take risks. Don't be afraid to try new things and experiment.
• Lesson 3: Hire great people. Your team is your most important asset.
• Lesson 4: Build a strong culture. A positive and supportive work environment is essential for success.
• Lesson 5: Be passionate about your work. If you're not passionate about what you do, you won't be successful.

Pat’s Founder Evaluation Framework (18m11s)

• Pat Grady's framework for assessing founders focuses on two key aspects: founder-market fit and the vector that describes the founder.
• Founder-market fit considers two variables: the problem variable (understanding the problem being solved) and the solution variable (knowing how to build the solution).
• The vector that describes the founder includes both magnitude (exceptional ability in a relevant dimension) and direction (motivation and drive to succeed).
• Pat also emphasizes the importance of understanding the founder's backstory, including their early experiences and motivations.

Additional Insights [35.0, 1040.2]

• Insecurities in childhood can be a sign of exceptional entrepreneurship.
• Exceptional entrepreneurs tend to start early, showing a drive for entrepreneurship from a young age.
• Pat Grady believes that founders should have a strong motivation and be willing to persevere through challenges to succeed.

Reflecting on Founder Selection Mistakes (21m7s)

• Pat Grady reflects on mistakes made in founder assessments.
• Peter Reinhardt of Segment and Nikolay Storonsky of Revolut are two founders Grady passed on investing in.
• Both founders clearly and concisely presented their companies in 5-10 minutes during their Series A pitches, leaving Grady with no questions.
• Despite the clarity of the pitches, Grady lacked conviction and passed on both opportunities, which he now considers to be terrible decisions.
• The lesson learned is that sometimes the best founders can effectively communicate their vision and strategy in a short amount of time, and that can be enough to make an investment decision.

Does Sequoia Really See Everything? (22m54s)

• Sequoia's value chain: sourcing, picking, building, and harvesting.
• Sequoia's strength is in sourcing (8-9/10) and harvesting.
• Sequoia's weakness is in picking (6/10).
• Sequoia's approach to improving picking is through apprenticeship.
• Sequoia's apprenticeship model allows junior investors to learn from experienced investors.

Who’s the Best Sourcer & Picker at Sequoia (26m45s)

• David Khan is a force of nature, always in the office working, and both high volume and high quality in sourcing.
• Sonia has made a name for herself in AI through blogs and podcasts, becoming a magnet in the field.
• Andrew Reed is a top picker with few false positives or negatives.
• He has range, leading investments in companies like Figma, Vanta, Bolt, and Robinhood.
• Sequoia tracks their winning percentage and it's 100% for the last 12 months, except for one situation where an existing portfolio company chose another investor.
• They give themselves a 9 out of 10 for winning.
• Sequoia doesn't rely on their brand alone, they work hard to build relationships with founders that make them want to do business with Sequoia regardless of the firm's reputation.

Pat’s Favorite Winning Story (29m39s)

• Pat Grady invested in ServiceNow in 2009 when the company was generating cash and didn't need funding.
• Doug Leone's unique discovery process involves asking numerous questions to understand the company and the people behind it.
• ServiceNow faced challenges with latency and downtime due to back-end issues.
• Doug Leone recommended Marty Abbott, who had previously helped YouTube with technical operations, to assist ServiceNow.
• Despite not needing funding, ServiceNow partnered with Sequoia, leading to a 20% stake for a $52 million investment, valuing the company at $260 million with $25 million ARR and $20 million in free cash flow.
• Pat Grady emphasizes the value of Doug Leone's involvement in meeting with founders and his exceptional discovery process.
• Doug Leone's effectiveness as an investor 10-15 years ago stemmed from his active leadership and engagement in the initial stages of investment deals.
• Leone's ability to understand and connect with founders and their businesses set him apart, creating a strong desire for entrepreneurs to work with him.
• Leone's meticulous attention to detail, as exemplified by his specific breakfast order, reflects his thorough approach to investing.

Impact of Investors on Enterprise Value (36m9s)

• Sequoia Capital has moderately expanded its team over the past 17 years, prioritizing the addition of front-office operators to support investors and serve its portfolio.
• To adapt to the evolving venture capital market, Sequoia focuses on concentrating experience and knowledge in a select group of investors, enabling them to provide exceptional support to founders.
• Sequoia has developed an internal technology platform and data science system to enhance efficiency and inform investment decisions.
• The Arc program, designed to support early-stage founders, has proven highly successful, receiving positive feedback and generating a strong network of referrals.
• Sequoia's approach extends beyond fundraising, as it teaches founders how to build successful businesses.
• Despite the potential delay in generating returns for limited partners, Sequoia remains optimistic about the promising companies emerging from the Arc program.

Maintaining Focus Amid Diverse Investment Strategies (41m3s)

• Danny Rymer mentioned the success of an index fund is due to their ability to keep the main thing the main thing.
• Keeping the main thing the main thing is the right question to ask when considering the diverse investment strategies of Sequoia.
• Experimentation is important to stay ahead, but the default for any experiment should be to shut it down unless it is a wild success.
• Sequoia's experiment in India and China was based on the thesis that the world was getting smaller, but this thesis was invalidated by 2023.
• Sequoia could have reached the conclusion that these would be isolated technology markets sooner, but they wanted to make sure they were making the right decision.
• Andrew and Julian are considered to be excellent hirers of investing talent.
• Andrew hired Matt and Hang on the same day, and they both started on the same day.

Learnings in Hiring Investment Talent (44m14s)

• Pat Grady shares his experience and learnings from hiring investment talents.
• The hiring process for Andrew Reed and Matt Hong in 2013 was rigorous, with 9,000 candidates initially and only two successful hires.
• The process was efficient and effective, emphasizing the importance of maximizing the top of the funnel.
• The art of hiring involves identifying a few essential qualities and ensuring the candidate excels in those areas.
• DNA hires, like Andrew Reed, are valued for their innate qualities and potential, while experienced hires, like David Col, bring valuable expertise.
• Carl Lenbach and Brian Halan are examples of experienced hires who stand out due to their exceptional DNA, such as their ability to interact effectively with founders.
• Brian Halan and Carl Lenbach view their role as being in service to the founder, showing humility, curiosity, and a genuine desire to help.
• Brian Halan and Carl Lenbach are exceptional in their interactions with founders.
• They view their role as being in service to the founder, rather than dictating to them.
• They demonstrate a lack of ego, humility, curiosity, and genuine care for the founder's success.
• Their approach makes them highly effective in supporting and guiding founders.

Insights on Timing Sales & Holding Investments (48m14s)

• Sequoia Capital has made mistakes in selling companies too soon (e.g., YouTube, PayPal) and holding onto companies for too long.
• Sequoia tries to be really good at harvesting investments by having a point of view on where a company can go after it goes public. This approach has paid off in companies like Square and Palo Alto Networks, where Sequoia generated more than a billion dollars more than co-investors by being more patient.
• Mark McClaflin was a great fit for helping companies grow from $100 million to $1 billion in revenue.
• Theresia Gouw has been a great fit for helping companies grow from $1 billion to $6 billion in revenue.

Pat’s Strengths & Weaknesses (52m50s)

• Pat feels he is weakest now in sourcing, which was his strength 10-15 years ago.
• Sourcing might be a young person's game, while picking benefits from experience.
• The more experience one has, the better their picking algorithm becomes.
• To separate good from exceptional companies, one needs to be in the details.
• Mid-career investors can be the best as they have both the right attitude and experience.
• Sequoia tries to distinguish itself by having experienced people stay in the field, making investments, and understanding the details.

The Advantage of Sequoia on Your Cap Table (54m55s)

• Sequoia's presence on a startup's cap table increases the chances of raising subsequent funding rounds.
• Sequoia-backed startups have a 4X higher average valuation in the next funding round compared to those without Sequoia.
• Sequoia's involvement reduces dilution for founders in future fundraising rounds.
• Sequoia has pricing power in seed and Series A rounds due to its premium brand.
• Sequoia's impact diminishes in later-stage investments where the company is already established.
• Sequoia focuses on the founder when evaluating investment opportunities.
• Exceptional founders can surprise investors by finding more market opportunities.
• Sequoia doesn't require a clear line of sight to a $10 billion valuation, but it does need to see a path to good returns with an exceptional founder.
• Pat compares Sequoia to the Golden State Warriors basketball team, which had multiple superstars playing together.
• The challenge is to keep all the exceptional partners working together as a team and managing their egos.
• Sequoia is like an iPhone; once someone joins, they don't want to leave because there's nothing better.
• Pat believes being a partner at Sequoia is the best job in the world, and they strive to make it true for the best people.

Foreseeing Sequoia's Challenges in the Next Decade (1h0m57s)

• Pat conducts regular "premortems" with the team to identify potential challenges Sequoia may face in the future.
• The biggest challenge is complacency and taking Sequoia's success for granted.
• Sequoia has every advantage, but they need to maintain a sense of desperation and hunger to stay relevant.
• Pat emphasizes the importance of behaving as if it's day one every day and not relying on past achievements.

Quick-Fire Round (1h3m11s)

• Focus on improving existing products rather than constantly introducing new features.
• Conviction is more crucial than consensus in investment decisions; beware of political voting.
• Memorable first founder meetings are characterized by passion and focus.
• Jim Goetz's ability to foresee the future and understand people's motivations sets him apart.
• Jim Goetz's strong conviction about the future of cloud computing in 2007, despite limited supporting data, stands out as a key lesson.
• Optimizing and refining current foundation models has the potential to revolutionize industries and generate trillions of dollars in market capitalization.
• The speaker expresses gratitude for the support and mentorship received from someone who recognized their potential and genuine passion, even in their early stages.
• The speaker stresses the significance of living authentically and having a clear sense of personal desires, rather than conforming to prescribed paths.