We joined Jon Fortt, a former colleague at CNBC, to interview Pat Grady, Sequoia Capital's partner. It was a broad conversation that ended up lasting over an hour. The video is available below, but we felt there were highlights that were worth sharing. This includes the current market, which feels frothier than ever.
It's not just anecdotal. A Wilson Sonsini report, which we referenced during this chat shows that the median pre-money value for Series C and later financings reached a record $675million in the first quarter. This is more than twice the $315 million median for the full year 2020. Senior liquidation preferences in so called up rounds fell from 35% to 20% in 2017, a trend that suggests investors are changing terms to get deals. Sometimes founders feel so empowered they call out investors who make them uncomfortable. This is something that you haven't seen until recently.
Grady stated that not everything is as it appears to us who are watching from the sidelines. He stated that Sequoia's March advice to founders was to "hit the gas", but things have changed in recent months. He said that the rollout of vaccines has slowed down in the past few months. Therefore, I believe the fog has settled on the road and it is not clear whether the company should accelerate.
We also discussed whether companies can always stay distributed, Tiger Global and why Sequoias largest portfolio company, Stripe, which is a payments giant, isnt yet a public company (though it has apparently hired a law office to assist with preparations). If you are interested, you can see the video.
How COVID has affected Sequoia's outlook in comparison to 2008's financial crisis, when Sequoia published the now-famous "RIP: Good Times" memo.
PG: I was at Sequoia for a little over a year, if you look back to the RIP memo. It was the first major disruption I'd seen, and it was also the first major disruption many of our founders had witnessed. The question was: What does this all mean? In March 2020, we published the Black Swan memo. We said, Hey, brake when you go into a curve. So slow down and make sure that you have your bearings.
We said in March that we were going to accelerate, and that the rollout of vaccines was progressing. We are probably feeling more confused now than we were just a few months or even a whole year ago. . We were kind of stuck in middle. Companies should focus on the basics, that's what we have been telling them.
The signals that indicate a slowdown in Sequoia's fundraising, but the fact is that it continues at an unprecedented rate:
While we don't pay much attention to fundraising numbers, we pay attention both to our employees and customers. Attrition has soared in our portfolio as well as the markets at large. Many people said that they worked hard and hunkered down. But now that the world has opened up, it's time to take some time off. I will travel to see my family. I will find a job. I will start my own company.
We can see that the customer side of things is less than what you get from public companies due to the way they report. However, you can see that private companies have a lot more revenue in the second quarter compared to the first. We have actually seen some pullback in the customer side of things, but that hasn't necessarily been reflected in the fundraising numbers.
Whether this pullback is beneficial, detrimental, or neutral for investors and founders:
Good news: Startups exist to solve problems. Never before have there been a wider range of problems. This is because consumer behavior has changed dramatically and how businesses operate in the past 12-18 months. If you think my previous statements sound bad, it is actually great news. We see the opportunities for new jobs in the world, and founders are eager to fill them. Because everyone sees the opportunities and is eager to take advantage of them, I believe that's why fundraising numbers are so high.
What happens when these new opportunities start to converge given the current pace at which startup funding is flowing and portfolio companies begin colliding, as Sequoia did in March last year?
Our policy has been to not invest in direct competition. What is a direct competitor? A direct competitor is a company that has the same customer in the same market. If a US company is going to the US market and one of our Asian partners has a similar company in that market, that's fine. Maybe they will all eventually target the same customers. As long as they are not converging and their markets are distinct at the time, it's fine.
We have been in conflict situations in our past. Either we did the right thing in this situation or we have done our best to act in good-faith.
It is difficult to resolve conflicts.
This market has two products. There is a faster product and one that costs less money. There is also an unfair advantage. Sequoia does not invest in many companies, which could be an unfair advantage. We don't invest in new companies every day. In any given year we might partner with 15-20 new founders. However, it is still useful to know that Sequoia has been in business with another company. Even if your unfair advantage is merely the fact that Sequoia chose to partner with you, it's still an advantage in terms of landing customers and employees. You can give your product to other companies if it is money. They will get money anyway.
