The Exchanges

Q And how about when it comes to making decisions?

A Here I think decision science, behavioral science is pretty helpful. Sequoia, the top venture capital partnership in the world probably, Has formally incorporated decision science into the way it allocates capital. So it understands that human beings are wired in ways that bias decisions, and some of that can be pretty consequential for good venture investing. So for example, we know that we have loss aversion, meaning we are willing to gamble to avoid a loss, but we wouldn't gamble the same amount To reach for the upside. And since venture capital is all about reaching for the upside, you better try to correct that bias because otherwise you're going to miss those outlier events, which are really what drive power law returns. The way that Sequoia addresses this bias is that it says when you're going to write a memo to the partnership about a startup that you think we should back, the investment memo, it must include a pre-parade section, meaning the section where you dream about how fantastic this startup could turn out to be if everything went right. Just dream a little. When you're required to write that section of the memo, you are obliged to admit to how excited you are. Normally, as one Sequoia partner said to me, you know, we're human beings. We don't want to be embarrassed. We don't want to say how excited we are because most of the time something will go slightly wrong…

AI assessment note: “Sequoia... Has formally incorporated decision science into the way it allocates capital.”

Q So you have an industry with a handful of real leaders that have been enduring partnerships. How does the rest of the industry think about competing with them?

A Sometimes the answer is to differentiate, to be, let's say, a solo VC. There's been a bit of a trend of that, and say, the heck with building a franchise. Our goal is, I'm going to be a solo VC. I'm going to have my own personal network, my own personal qualities. I won't be leading as many deals, although I want to lead some. But I can add value in my own particular way. So in a way, that's an anti-competition strategy. Just don't even try to build something like that. Another way of coming at it is to use hedge fund parlance. Sequoia is so good at alpha that I'm going to go for beta. I'm going to have a strategy where I'm not necessarily the most brilliant company builder, but I will deploy capital into tech generally at such an amazing speed That my dollar returns will be higher. And that's the Tiger Global late stage investment strategy. Masayoshi-san pioneered this and then took it to the highest, most extreme level with his enormous vision fund. And the game there is not really value add and choosing the right company and working with the founder and being on the board and rolling up your sleeves. Never mind all that. It's not really value add. It's value add for the LPs, potentially. But it's just tech is going up. I want lots of it. And I'm going to deploy massively and I'm going to have an index fund for private tech companies. So I think those are the two ways of comp…

AI assessment note: “So I think those are the two ways of competing with Sequoia.”

Q How did those firms go about training great investors in the next generation?

A I think it's about creating incentives for the senior investors to really take seriously the idea of putting time into mentoring. The younger ones, and to be really generous about that, to really seek ways of putting your own interests second, because the future of the franchise really depends on the younger people being as good as you are, and you're not going to be at the top of your game forever, so you've got to get the succession plan in place, and that's not number five on your list, it's number one. Michael Moritz of Sequoia likes to say, when people ask him, what's your favorite investment? He doesn't say Yahoo or Google or even Stripe. Which are all investments that he's done. He says, my favorite investment is Sequoia. It's the effort I put into the partnership itself that has paid off the most. And this isn't just talk. I mean, Samir Gandhi is a successful VC at Accel today. When he was getting started in the industry, he was at Sequoia. And he described to me how one day Michael Moritz, the co-leader of the company, Sat down with him and said, let's have a look at your schedule. I want to figure out whether you're managing your time in the optimal way. VCs never have enough time to meet with everyone they want to see. And he literally went through his schedule and said, well, maybe this one you didn't need to do, or perhaps that one could have been a phone call, not…

AI assessment note: “creating incentives for the senior investors to really take seriously the idea of putting time”

Q So from networking, which gets you the sourcing of ideas, how about thoughts on the process of assessing deals?

A I think number two is to have what they call a prepared mind. This is a phrase that comes from one of the founders of Axel Capital set up in 1983, and he had this saying, chance favors the prepared mind. It was taken from the scientist Pascal, and his idea was, when an entrepreneur comes to see you, you need to know 90% of what they're going to say before they open their mouth. Because you have already figured out that there is an emerging technological wave. Let's say it's the spreading of networking technology in the 19 eighties or more recent era. It might have been the rise of cloud computing or the rise of AI. And you understand what are the businesses that need to be built to make the most out of those emerging technological waves. So with cloud computing, it might be you need security. For your information when it goes up into the cloud, you might need new kinds of semiconductor architecture to make the cloud systems work the best. But you've imagined all that in advance, and you've also imagined even the type of entrepreneur who is going to succeed in each category. So if it's some sort of new semiconductor architecture, you might have a sense of the other incumbent semiconductor firms that are closest to what you're looking for, and therefore somebody who spins out of one of those incumbents to do their own project. If it's the right kind of incumbent, that's a very go…

AI assessment note: “when an entrepreneur comes to see you, you need to know 90% of what”

Q Another issue that's come up is the gender divide in venture capital, and as you go through the history, it's pretty clear what's happened historically. How have you seen that evolving?

A I think the story here is partly that venture capital got going In the US in the sixties and seventies, when it was pretty typical to have very, very few women involved in high profile professions. And then that became a self-fulfilling pattern where these tight knit Partnerships consisting of five, six, seven partners recruited people who look like themselves, and then they went and backed entrepreneurs who look like they did. And it's partly that networks have an upside, as I've been saying, that you need to be able to check out the background of the entrepreneur. You need to be able to work very closely with them, so you need a level of confidence in them that comes from checking out through mutual friends who this person is. So networks, when they look a certain way, tend to perpetuate themselves And continue to look that way. And it's interesting to me that ecosystems that got started later, for example, China, are more gender diverse than the US one has been. But I think today in the US, what's happening is that people are waking up to the fact that this is a real problem, that if you look at Venture investors in Silicon Valley and find that 16% only are women. That's an absurdly low number. And if you look at the proportion who are African-American, it's only three percent, and that's a crazy low number. And you've got to do something about it, partly for reasons of soci…

AI assessment note: “I think today in the US, what's happening is that people are waking up”

Q Which two people have had the biggest impact on your professional life?

A Well, definitely my wife, who is a fantastic journalist and public policy intellectual. So that's been huge to be living with somebody who is always fizzing with ideas, and I can bounce ideas off her, and I always end up smarter after half an hour driving to see her friends or whatever. We get to talk in the car, and it's a learning experience all the time. Secondly, I'd say there have been mentor journalists along the way who have taught me a lot, but probably the individual who's mattered the most in my writing is my editor at Penguin Press, Scott Moyers, who has been my editor on three books and my agent for a fourth book when he had a brief rotation into being a literary agent, and he's just a wonderful editor and a wonderful friend.

AI assessment note: “definitely my wife... Secondly... my editor at Penguin Press, Scott Moyers”

Q Before we dive in a little bit to the early history, what's your process like in writing such detailed and broad book like this?

A Patience is the first ingredient. It does take me five years. That's mostly because understanding the subject and getting to see the people who are really at the center of it is a long process. You start by going to friends who might know friends who are related to the subject, and you go speak to those people. And at the end of every conversation, you say, well, if there are two or three people you can introduce me to, that would be great, and you build the network, and eventually you get to know the people who know the real people. If it all goes well, you've gotten to the center of the industry and had a chance to sit down with people who really explain how it works, and that's just a long process, and so I think the first requirement is persistence and patience.

AI assessment note: “You start by going to friends who might know friends who are related”