October 10, 2018
The State (and Future) of Digital Marketplaces
The lineup of established tech founders backed by Sequoia Capital is a daunting one, but behind each company poster on the wall of the famed venture firm’s office on Sand Hill Road is a wealth of stories of nervous meetings, quick plane ride pitches and tough sales meetings, the backstage moments that help determine the success of each tech success. For the 2014 Midas List, veteran reporter George Anders and I collected dozens of those stories and distilled them into our cover story, Inside Sequoia Capital. But for the founder looking to pitch Sequoia now or in the future, we only scratched the surface.
Two weeks ago, we published a Sequoia Startup Confidential with some tips we learned about how the firm operates and how it might match with a growing startup. In part two, we introduce more tips from Flextronics CEO Mike McNamara, Jive cofounder Matt Tucker, and cofounders and CEOs Rob Spiro of Good Eggs, Adam Marchick of Kahuna, Steve Hafner of Kayak, Shashi Upadhyay of Lattice Engines, Sanjit Biswas of Meraki and Todd McKinnon of Okta.
Here’s what they say about dealing with Sequoia.
1. Sequoia moves fast–when it wants you. Many venture firms would love to get the access Sequoia has to great founders and deals. But one thing about Sequoia–it doesn’t take that access for granted. We noted in our cover story that Houzz CEO Adi Tatarko was impressed by Sequoia’s ability to be “very direct and really fast.” Emailed on a Sunday night, Sequoia partner Michael Moritz was in Houzz’s office the next morning with partner Alfred Lin. That speed goes beyond Palo Alto, too. Jim Goetz was one of two VCs to fly to Portland to meet Jive cofounders Matt Tucker and Bill Lynch. Matching that attention with the simplicity of a one-page term sheet soothed the pair, who were “trepidacious” about taking capital, Tucker says.
Adds Rob Spiro, Good Eggs’ founder and CEO: “I wouldn’t say their process is intimidating, but they clearly communicate that they are a powerful firm. They send a town car to pick you up and come pitch, and it happens very quickly and efficiently.”
But the key is that Sequoia has to want you. Lattice Engines couldn’t get in the door when it was looking to raise capital in 2006 without a product, remembers cofounder Shashi Upadhyay. By 2010 with more to show for itself, Lattice got Sequoia’s attention quickly, with partner Mickey Arabelovic reaching out via LinkedIn LNKD +2.1%. The vetting process was just as quick. “Doug Leone showed up at our office at 6am and stayed through noon interviewing every single member of the management team,” Upadhyay says. Then Sequoia jumped in to lead the Series B.
2. Meet the Sequoia angels. Many Sequoia founders like Meraki’s Sanjit Biswas end up as Scouts, its semi-secret network of affiliated angel investors who help bring the company deals as well as getting involved with the next successful entrepreneurs. But Sequoia’s also got some angel investors who have brought it major wins. It was Pejman Nozad who introduced Sequoia to Dropbox cofounder Arash Ferdowsi; the email to Moritz about Houzz came through its angel investor Don Katz, after a push for funding from fellow angel Oren Zeev. Nozad still helps local Iranian-Americans meet and greet with the Sequoia partners and calls the firm the “FC Barcelona” of venture: “A superstar is always there, but that star comes and goes and the quality stays the same. Barcelona is more than a football club, and Sequoia is unique in the culture it’s created.”
Another is Stanford professor and investor Michael Dearing, who’s introduced Sequoia to startups like farm to table site Good Eggs. According to Dearing, Sequoia tends to match well with founders who have three traits in common with the firm’s partners: exceptionalism that they’re the best, black and white thinking that leads to a strong sense of conviction, and a love for “wrenching change” that can turn an industry on its head. ”Sequoia takes pitches on two levels, intuition then business. Founders assume they’ll be judged harshly or it will be a very tough audience. What I’ve seen in reality is they are given a very understanding reception, because Sequoia is hard over to the operator side [with founders] compared to other firms,” Dearing says.
3. Sequoia’s about its network. Sequoia banks on its long history and institutional knowledge to predict dry cycles in tech and spot areas ripe for disruption. But arguably more important is the network that such a history gives Sequoia. To talk to founders, it’s almost unfair. (Just see who shows up for a founders family photo shoot.) Meraki ended up a $1.2 billion exit for its founders and investors when Cisco acquired it in 2012. But at its start, Meraki needed a crash course in board meetings and financial reporting. “Jim Goetz brought us to the Palo Alto Networks PANW +0.17% board meetings to learn how to present, and to talk about sales and product, then finance,” says CEO Sanjit Biswas.
For Kayak cofounder Steve Hafner, another Sequoia portfolio company became a counterweight. “We were introduced to these other founders by Michael Moritz and we gave them a look like, ‘yet another video site?’ And they looked at us like, ‘another travel site? Good luck with that!’ And it was YouTube.” For quarters after, Moritz would bring up each company with the other in board meetings. Kayak, which would ultimately go public and then get acquired by Priceline for $1.8 billion, was in Moritz’s good graces for its profit margins but couldn’t figure out an audience; YouTube had the viewers part down but couldn’t make money.
Moritz was also behind one of the larger mergers of two Sequoia companies in the 1990s, according to Flextronics CEO Mike McNamara. In 1994, as the CEO of Relevant Industries, McNamara was approached by Moritz. “Sequoia had an investment in each company, and along comes Moritz saying, ‘You ought to meet this guy Mike Marks [then Flextronics’ CEO]. You both talk about how you’re taking over the world.’ ” Over lunch, Marks and McNamara realized their companies’ connection. Mortiz stayed a board member for five years after the merger, and McNamara would eventually take over the combined operation, which became a $25 billion company at its peak.
4. Sequoia likes founders who push back. We detailed in the cover how Jive CEO Tony Zingale pushed back in his first meeting with Leone to establish he was a “smart m-effer” worth Leone’s time. And Kayak cofounder Paul English had to show up uninvited a second time to prove Sequoia’s judgment on the company wrong. But a common theme among entrepreneurs backed by Sequoia is that when it comes to locking down a term sheet, Sequoia won’t sweat the small stuff to get a deal done.
That typically means short and simple terms. But it can also be a bit more peculiar. One recent addition to the Sequoia portfolio, Kahuna, shared such a story. Cofounder and CEO Adam Marchick was on the verge of signing with Sequoia partner Omar Hamoui, whom he admired for his leadership at AdMob. Omar gave Marchick a term sheet, and Marchick gave him his own sort of term sheet back. “It talked about how Omar would be committed as a contributor and active on the board,” says Marchick. “And Omar crossed out his name throughout and put ‘Sequoia,’ and just signed it. That team atmosphere, we loved that.”
5. Sequoia gets hardware. One minute–that’s how long into Meraki’s pitch for new wireless hardware that cofounder Biswas made it before Doug Leone decided he wanted to see the hardware itself. “Within a minute or two of that, he got it, and he called in Jim Goetz, who also got it right away.” The next thing they knew, Meraki was at the Sequoia partners’ formal weekly meeting.
Sometimes the love of technical operators and hardware can come at the expense of other efforts. Moritz, a former journalist and bestselling author, is not a big fan of marketing, at least according to one of his founders. At Kayak, cofounder Hafner says Moritz told him not to spend money on advertising. “He would argue that great products sell for themselves,” Hafner says. Kayak didn’t start advertising until October 2009, missing one or two years of market potential in hindsight, its CEO says. But he’d do it over again for Moritz’s knack for the right product. “We called him Yoda. He was our product Yoda.”
6. Sequoia tells it how it is. After Lattice broke through and got Sequoia funding, Doug Leone went from speed-interviewer to on-call pitch critic. As CEO Shashi Upadhyay retells its: “Doug was coaching me before we raised our next round after Sequoia. He heard out my pitch and said, ‘This sucks!’”
Leone told Upadhyay that if Lattice were pitching Sequoia for the first time with the metrics and narrative he was hearing for its next round, Sequoia wouldn’t have invested at all. So Lattice started over and completely redid its pitch deck. It would raise a $20 million Series C round led by New Enterprise Associates’ Pete Sonsini in late 2012, with Sequoia returning as an investor.
7. Get ready for Sequoia hours. Okta CEO Todd McKinnon knows Sequoia well after the firm passed on his Series A round in 2010 only to lead its Series C round in late 2012. McKinnon’s now raised more than $80 million for his identity management startup over the last four years from Andreessen Horowitz, Khosla Ventures, Greylock Partners and Floodgate. The most important thing about pitching Sequoia specifically, McKinnon says, is to show right away that you fit a put-together, hard-working and results-oriented culture. “Have your ducks in a row and your homework done,” McKinnon says.
Some of that you won’t be able to just show in a pitch room–you have to prove it at all times, the founder says. His example: “If they are going to show up at Friday night at your office, you’ve got to be there. Actually one of the reasons Sequoia said ‘yes’ to us was they said, ‘We went to visit a competitor at 5pm on a Friday and no one was there. You guys were here.’”
Read the article on Forbes