Earlier today, we joined in on Sequoia Capital partner Pat Grady’s interview with CNBC friend and former collaborator John Forte, and it turned out to be a comprehensive conversation (we wound up blabbing for an hour, which doesn’t always go to plan). Was). You can check out the video below, but we thought it was worth pulling up some highlights for those of you, including how it relates to the current market, which has never felt more so.
This is more than anecdote. According to a recent report by Wilson Soncini, which we referred to during this chat, during the first quarter of this year, average pre-money valuations for Series C and subsequent funding hit a record $675 million — more than double the full year 2020 average of $315 million. Meanwhile, senior liquidation preferences in so-called up rounds fell from 35% of related deals in 2017 to 20% in the first quarter — a trend that suggests investors are removing the terms to win deals. In some cases, founders are feeling so empowered that they’re calling out investor behavior that makes them uncomfortable, which is something you didn’t notice until recently.
But Grady said that not everything is as it seems to us. Indeed, he said Sequoia advised founders to hit the gas as recently as March of this year, but things have changed recently. Specifically, he said, “Over the past few months, a rollout of vaccines has kind of thinned out, so I’d say the fog has descended on the road. [and] It is not so clear that the company should accelerate any longer.”
We also talked about whether companies can stay distributed forever, Tiger Global, and why payments giant Stripe, one of Sequoia’s largest portfolio companies, isn’t a public company yet (though it has reportedly typically hired a law firm to help with the preparation). You can find it in the video if you are so inclined.
How COVID has affected Sequoia’s outlook compared to the 2008 financial crisis, when Sequoia famously published its now-famous “RIP: Good Times” memo:
PG: If you go back to that RIP memo, I would have been at Sequoia for a year or so. This was the first major disruption I saw — it was the first major disruption that a lot of our founders saw. So the question we were asking was, ‘What does this mean for us?’ Something similar happened in March 2020, due to which we had to remove the ‘Black Swan’ memo [when] What we said was, ‘Hey, you have to brake when you’re going down the curve, so slow down’ [and] Make sure you have your own bearings.’
What we said in March of this year was, ‘Okay, now we’re off the curve, go and pick up the pace.’ Unfortunately, over the past few months, the rollout of vaccines has kind of thinned out and so I would say the road is foggy. [and] It’s not so clear that the company should accelerate anymore. We are probably in the midst of more indecision now than we were a few months ago or even a year ago. . We are stuck in the middle. And so what we’re telling companies today is focused on the basics.
On signs that suggest Sequoia is slightly bearish, when fundraising all around continues at a record clip:
We don’t focus so much on the fundraising numbers, but we focus on the employees and we focus on the customers, and if you look at not only our portfolio, but also the massive public companies in the market So migration has increased. dramatically. There are a lot of people who said, ‘Hey, I leaned in, I worked hard, I put in my time, but now that the world is starting to reopen, I’m going to take some time off. . I’m going to visit see family. I am going to find a new job. I am going to start a company.’ And so the attrition numbers are really going up across the board.
If we look at the customer side of things—and that’s not a number you can take out of public companies because of the way they report [but it’s a number] You can see in private companies—a lot of companies generated less revenue in the second quarter than in the first quarter. So we’ve actually seen a little bit of improvement on the customer side of things [and] It doesn’t necessarily show up in the fundraising numbers.
On whether this pullback is good, bad or neutral for founders and investors:
The good news is that startups exist in the world to solve important problems, and we don’t have a wider range of critical problems to solve than we have yet, because of both consumer behavior and the way businesses operate. have turned. dramatically over the past 12 or 18 months. So if what I just said sounds like bad news, we actually think that on balance, it’s good news, because we see these jobs opening up in the world that founders are rushing to fill. I think that’s probably why the fundraising numbers are those, because everybody sees all those opportunities and they’re eager to jump in.
What happens when, given the current pace of startup funding, some of these many new opportunities always seem to converge – and portfolio companies collide, as with Sequoia last March:
We have always had a policy that we do not invest in direct competitors. What defines a direct competitor? Two companies that are going after the same customer in the same market at the same time. Now, if we have a company here in the US that is moving to the US market, and our partners in India or China or Southeast Asia have a company in the market that does something similar for their market, well, And maybe someday, down the road, they all target the same kind of customers. But as long as they are zero time different markets and don’t look like they are converging, that’s fine.
When we ended up with companies that had conflict, either we did the right thing as the situation you referred to, or when the two companies kind of converged over time, we set up information barriers and Have tried my best for this. act in good faith.
So the struggle, it’s tough.
There are two products in this market. There is a product that is fast and cheap money. And then there is a product that is an unfair advantage. The unfair advantage could be nothing more than that Sequoia doesn’t invest in a lot of companies. We don’t invest in a new company every day. We can partner with 15 to 20 new founders in any given year, and there is some information value in the fact that Sequoia does business with a single company. So if your unfair advantage is nothing more than the fact that Sequoia chose you, so to speak, that’s still a pretty good advantage when it comes to landing customers. [and] landing crew. If your product is money, feel free to give it to competing companies, because they’re going to get money from somewhere anyway.