Sequoia Capital's $10 Billion Plan for the AI Economy

[00:00:00] Speaker 1: Last November, longtime Sequoia partners Alfred Lynn and Pat Grady became the firm's co-stewards. For more than 50 years, the Silicon Valley firm has backed some of the biggest winners in technology, from Apple and Google to NVIDIA. Today, it manages more than $80 billion. But as detailed in Bloomberg Businessweek, it recently raised another $10 billion across its growth and expansion funds. Since then, the Sequoia partners have made a risk to the franchise investment in Anthropic. They've returned to investing in chips and continue to hold onto one of the firm's greatest investments, SpaceX. With us now on Bloomberg Tech, Alfred Lynn and Pat Grady, to discuss what's changing at Sequoia, the technology companies of tomorrow. I want to start with our Sequoia. You published what reads to me as like a mission statement. It outlines principles the firm's held for quite a long time. And I think some new ones that you are trying to emphasize. Alfred, is that fair? [00:00:58] Speaker 2: Well, first of all, thank you for having us. It's really fun to be here with my co-steward and we get to do this together. And it's because it's our Sequoia. It's not. It was never Don's Sequoia when he named it Sequoia Capital. And it wasn't anything. 54 years ago. 54 years ago. And so Pat and I wanted to make sure that everybody at Sequoia thought of it as our Sequoia. That's principle number one. Principle number two. If you take care of the founders, they'll do right by our LPs. We do right by LPs. We'll do right by Sequoia. We do right by Sequoia. We can take care of the team. And then we can take care of every single person at Sequoia. That is a principle that has been at Sequoia for a long, long period of time. And also, we are only as good as our next investment. And that is not a risk of your franchise. It is what makes us Sequoia into the future. [00:01:49] Speaker 1: I noticed the smile when I read out the line. We'll get into how that manifests. I mean, it's a co-steward title. You regard yourselves as partners. Yes. As part of a partnership. Yes. You are not managing partners. Correct. Correct. You, as Sean McGuire outlined to me in a telephone call, you know, he rejects the notion that your boss is. You are partners in a partnership. So lots of people, they're like, how would that work, Pat? [00:02:15] Speaker 3: Well, so we, first off, on this boss thing, we had a funny conversation with one of our partners a couple of years ago where he referred to somebody as a supervisor. They're like, your supervisor? What are you talking about? He's like, well, he's my boss. He's my supervisor. We're like, no, no, no, no, no. This is a partnership. The only way that we're going to bring out the best in all of our partners is if it feels like a real partnership. Okay. So one of those principles that you mentioned with our Sequoia is this idea that influence should be awarded to expertise and reason and not to tenure and hierarchy. And what that means practically is in any given conversation, if we're going to make an investment decision, Alfred and I might have less of a say than our other partners like Sean or Andrew or Sonia or David or Constantine because they might actually have more expertise on a particular topic than I do. In fact, they have more expertise on most topics than we do. And so this idea that influence should go to the people with the expertise, not the people who happen to have been around for a long time, that's what makes it a partnership. And that's what allows us to play at our best. [00:03:10] Speaker 1: So there's no tiebreaker, essentially, that you two get awarded. You participate under the same rules as the rest of the partnership. Correct. I mean this with full respect. What does the term co-steward communicate that any other title doesn't? You know, why I think you both don't want to get bogged down in administrative duties. You want to participate in the partnership. [00:03:31] Speaker 2: That's part of the reason why we get to do this together. There's no and part of that is we we are partners across the board and we get to help lead the organization in part of leading the organization. It has to do with making sure that we have structure and we sign SEC documents. A lot of it is administrative and we get to split that so that both of us can stay on the field. [00:03:54] Speaker 3: I try to make sure that Alfred signs all the SEC documents. [00:03:56] Speaker 2: But literally that this is the part that is really good about this. This is a partnership. We want to show the value of partnership and we want it to be a team effort and not everybody has to do everything. [00:04:09] Speaker 3: And this idea of stewardship, if you go back to the original generational transition, which was in Don Valentine handed the firm off to Doug Leone and Michael Moritz in the late nineties, the standard at the time was to have the younger partners buy out the departing generation. Don instead gave it to them for free and said, your only job is to leave it better than you got it. And so that's become a very core part of the Sequoia culture. [00:04:32] Speaker 1: You continue that tradition. [00:04:34] Speaker 3: Yes, this idea that we are stewarding it for the next generation as opposed to there's no concept of ownership at Sequoia. All of the partners own the partnership together. Our job is to make it great. [00:04:44] Speaker 1: We're sitting here talking about, you know, you're eight months in essentially as co-stewards, but in that time, quite a lot of things have happened. I want to get to what you've enacted or changed that's different in that eight month period to the history of the firm. And one of the things outlined in the business week article is if you are a partner that is interested in an investment, you can propose at any time through a various means of mechanisms. So traditionally in Silicon Valley venture firms, you have your Monday morning meetings. You guys have said basically seven days a week, any time. Let's talk about it. [00:05:21] Speaker 2: Let's talk about like being customer obsessed. We are a customer. Who are your customers? Exactly. It's founders. And so we should work on the founder's timeframe. If the founder wants to make a raise, a fundraising, they have a timeline. We should abide by their timeline, not the other way around. Right. And this notion that we get to like have every decision happen on a Monday is kind of a little backwards. Are we the customer to the founders or the founders are customers? And for us, we want to make sure we're going to send a clear message that the founders are our customers and we're customer obsessed. [00:05:56] Speaker 3: And there's a second concept here, which is outlier founders want to work with outlier people. And so our partner, Ravi, has this idea of playing free. You know, everybody should play free. And we don't want Luciano or Andrew or Constantine or Sean or David or Sonia. We don't want them to become another Alfred or to become another Pat. We want them to be the best version of themselves. And the only way we can do that is if they feel like they can play free, like they have rope to just go at 100 percent velocity all the time. And then our job is to help enable them not to get in the way. And so we are we are tight on principles and we are tight on values. We're very flexible on process. [00:06:33] Speaker 1: So some people that might sound chaotic. Just literally, how does it work mechanically? It is chaotic. Somebody will send a WhatsApp to the rest of the partners saying, guys, got a great op. We have to meet now and talk about it. [00:06:44] Speaker 3: And what happens? A couple of days ago, an email came out recommending an investment, controversial investment. We go into a document. There's a lot of commentary in the document. Here's what's good. Here's what's bad. Here's what I like. Here's what I don't like. What are we going to do? We had six people on red eyes to New York a couple of nights ago. We went and spent a couple of weeks. This week, this calendar week. Tuesday night, we had six people on red eyes to New York, randomly around five different planes. I don't know why we took five different planes to get to New York. [00:07:09] Speaker 1: But it was a spur of the moment decision. [00:07:11] Speaker 3: It was a spur of the moment thing. We spent two hours with the company yesterday morning. Yesterday afternoon, we signed a term sheet. So gang tackle, get everybody in front of it. [00:07:18] Speaker 1: I'm just going to ask you which company. Oh, I know. I'm sure you would, but yeah. And the answer is on comment for now. [00:07:23] Speaker 3: Company TV, probably a monster. Probably one that's going to be huge. Was it a big check? As in the stakes were high? Come on, now. No, no. Hang on. Our job is to invest the smallest possible dollars for the largest possible owner. [00:07:36] Speaker 2: Our job is to put small dollars to work and make them large dollars. [00:07:41] Speaker 1: There is some case studies we're going to get to later in this conversation that would say slightly otherwise. Let me ask you this. Let me say, ask you this. Who can do the big dollars if we have to? Conviction over consensus. So in lots of partnerships, be they a venture firm or a law firm, you vote. Yeah. Your structure is very different. Things are not achieved by consensus. How does it work? [00:08:03] Speaker 2: We vote. But the point about conviction is that you need conviction to be committed for a company for a long period of time. We love building companies and helping founders build companies. We want to be an early believer and compound with them into the future. And that requires real conviction by the person who has the most expertise. And so when we debate, we are trying to sort of get to truth. We are a truth-seeking organization. And there's much better conversation when there's a debate than when everybody is, oh, yeah, I agree. And then it's usually a meh investment. [00:08:42] Speaker 3: And let me give you an example on that. Please. 2019, okay, 2019, Sean McGuire joins Sequoia Capital. Yes. He joins the early stage team, okay? 2019, Zoom had just gone public. We'd just gotten into business with Dylan Field of Figma, who I know you guys just had on. The combined market caps of Tesla and NVIDIA were approximately the same as the market cap of Salesforce. So to set the stage in 2019, the thing on the menu was software. Yes. Software was consensus. We love software. Everybody loves software. Sean, a brand-new early-stage investor, shows up and says, I think we should invest in a rocket company at $20 billion. We thought that was insane. But Sean had conviction. He had done the work. He painted the picture. This is pre-Startlink, right? This is when it was a launch company, and the main customer was the government, right? Sean painted the picture of what this thing had a chance to become, and it's become one of the best investments. We're talking about SpaceX. And so that was SpaceX, yeah. So that was conviction at work. That was 2019. [00:09:39] Speaker 1: What I'm trying to get to is the idea that in any number of voting partners, the majority might say, I have a lower conviction. I have a four. You guys do it on a scale of zero to 10. You don't count five. But just two might say, we are eights or we are nines. We love those kinds of investments. And you do go with the investments. [00:09:56] Speaker 3: We've been recording the data since 2014. So we now have 12, 13 years of data on this. And we thought that contentious investments would actually be the best investments. And it turns out it actually doesn't matter whether it's contentious or consensus. Yes. All that matters is presence of conviction. [00:10:12] Speaker 1: I want to get to Sean because it's outlined in the Business Week article. And Sean has been on this program and I've spoken to him somewhat regularly, right? The idea is that Sean has made, let's call it, say, incendiary posts on social media. He has said things that are divisive, but you regard him as being unique, right? He has a unique background and set of interests that you believe put Sequoia into opportunities that you would not otherwise have. I don't want to speak on your behalf, but, you know, let's talk about that. [00:10:47] Speaker 2: I think we should just talk about the balance sheet of Sean. Like lots of the balance sheet of Sean, the positives and negatives. I see. You just talked about a bunch of negatives. And I just want to make sure that people understand the positives. The guy was one of the, like, top ten Counter-Strike gamers when he was in high school. He was a day trader in high school. He then went and got a Ph.D. in physics, in quantum theory. If you sort of regard physics as hard, quantum theory is one of the hardest. When he joined Sequoia, he put together a hardware manifesto. He led us into hardware. He led us into SpaceX with a lot of conviction and a lot of courage because there was votes by GPs that was a one on a scale of ten. It was a one. And he kept pushing and pushing and pushing. [00:11:36] Speaker 1: Was he a ten out of interest? [00:11:37] Speaker 2: He was a ten out of ten. Ten tends to be either a zero or a ten. Okay. Fairly binary. Fairly binary person. And so, you know, in terms of conviction, he has strong conviction. He's been right a lot. He helped led us into crypto. And I don't want to talk just about the negatives because I think people need to understand the positives. [00:11:55] Speaker 1: And SpaceX is one of the biggest returns that this firm will see in its history. [00:11:58] Speaker 3: And I also go back to the thing we were talking about earlier. We want everybody to become the best version of themselves. Now, again, we are strict on values and principles. And so we need to believe that when people behave, they're doing so with the best possible intentions. And they're doing so with a standard of excellence that we expect of all of our partners. If they are doing that, and if we happen to agree or disagree with the output, the agreement or the disagreement doesn't necessarily matter. It's the inputs that we tend to focus on. [00:12:23] Speaker 1: I would say for the record that, you know, Sean told me that he would not work anywhere else. And, you know, he believes in the principles that you outlined. Also that, you know, his belief is that his intentions were never to have a net harmful effect on the firm. [00:12:37] Speaker 2: His intentions are always pure. And that's another thing I was going to mention. But he also has great courage. There's conviction. There are people with conviction, and they don't have courage. And, yeah, you can talk all day long, and then you don't sort of make the investment. [00:12:51] Speaker 1: What does courage look like? What's the action that you're looking for the partners to take? [00:12:55] Speaker 2: If you have a GP and you're not a GP, and there's a vote of a one by a GP, but you still keep pushing forward, that is courage. You're willing to get fired for something that you believe is going to be a great investment. And that turns out to be one of the best investments in Sequoia history. [00:13:12] Speaker 3: We have a list that we keep of all the different failure modes. So we can run into on investments. There are 40 or 50 of them, one of which is called Wimpy Sponsor. Wimpy Sponsor is you say you love something, and then you get a no, and you just go away. You just won't. You probably didn't love it if you got one no and you went away. If you actually love it, you're going to keep pushing and keep pushing and keep pushing and keep pushing and keep pushing. And that's what courage looks like. [00:13:34] Speaker 1: I'd like to talk about the anthropic investment. It's detailed in the Business Week article, but essentially it was something a bit new. It was an example of risk or franchise risk or risking the franchise. Where should we start with what happens? I mean, you were, along with Sonia, right, the sponsor on that opportunity. [00:13:58] Speaker 2: So there have been multiple sponsors of this. We work as a team. There are multiple sponsors on the company. Ravi had sponsored it for one round. Sonia had sponsored it with him for another round. And then we kept passing. Part of it was because we wanted to sort of be, we were early investors in OpenAI, and we thought, well, we can't invest in both. And for a period of time, that was our mode until we checked with all of our founders, and they were using both companies. [00:14:29] Speaker 1: And they were using the technologies of both. [00:14:32] Speaker 2: Both OpenAI. And they'd use them for different things. Exactly. And so, obviously, OpenAI started with the consumer app and finding information, and Anthropic had cloud code, and it was much more focused on coding. And so over time, we got greater and greater conviction. Our own engineering team was telling us how good the cloud code product was working. Right. So we gained more and more conviction over time that we should make an investment in Anthropic. On this billion-dollar round, this last round that we made an investment, it came together because we had just been following the company. And three months before, we had made an investment in the company. [00:15:13] Speaker 1: That was January of this year. [00:15:15] Speaker 2: Yes. [00:15:15] Speaker 1: Yeah. [00:15:16] Speaker 2: It was actually November, and then it closed in January. [00:15:19] Speaker 1: Disclosed then, yeah. [00:15:20] Speaker 2: And so we'd been following the company. The revenue ramp continues to go up. And we decided that we're going to make a fairly large investment in this round. [00:15:29] Speaker 1: A fairly large investment initially was a billion. But the idea... [00:15:32] Speaker 2: That was the original recommendation by Sonia and I that we invest a billion. And we were like, where are we going to get the money? Well, we have plenty of places we can invest from. Right. And I was pleasantly surprised. First with a call from Sean and then a call from Pat. And then in the room, we started with a number that I thought was like, huh, interesting. Where are we going to get that number from? Right. And the number started at five billion. [00:16:03] Speaker 1: And then you worked backwards then? [00:16:04] Speaker 2: Yes. So two and a half. [00:16:05] Speaker 1: Pat, come in and explain your take on the events that transpired. [00:16:10] Speaker 3: Well, I mean, the simple explanation for the investment is this is the tectonic shift of our lifetime. In a perfect world, we would have backed Anthropic many years ago. We didn't. And so the best thing we can do now is to come in at the most scale that we can muster. And so five billion was kind of a theoretical number mentioned to be provocative. We ended up at two and a half because we can't really do five billion across all of our different funds. And so two and a half is kind of the most we can do. And that's sort of how we ended up with that number. [00:16:38] Speaker 1: Is it fair to go as far as to say, like, how much money can we deploy without putting the firm at risk? [00:16:43] Speaker 3: That was part of the conversation. Two and a half or five would be comfortable numbers as far as that goes. But one thing, we've never done SPVs. We're not in this SPV business where you speak for something. [00:16:53] Speaker 1: I think we have not time today to talk about SPVs. [00:16:54] Speaker 3: Yeah, so we don't do that stuff. And so two and a half billion was what we could do out of the core funds committed capital. [00:17:00] Speaker 1: Yeah. Let me ask you this. I'll give some background. Growth, early stage. Since 2017, you've led the growth, co-led. You've co-led early stage. But you, SaaS, consumer. But there's a lot of overlap, right? You have made significant growth stage investments and joined boards. You've made early stage investments, particularly in AI. Just talk a little bit about how the two of you see that progressing, you know, forward looking. [00:17:26] Speaker 2: I think it's very, very simple, which is, like, if you've been in this business a long period of time, you know what a good early stage investment looks like. You know what a good growth investment looks like. So Pat has been traditionally a growth investor. He made the early investment in Harvey. I've seen how early stage companies grow and advocated for growth investments in Airbnb and DoorDash when they grew up. And over time, I think, if you've been in this business long enough, you'll make both early investments and growth investments. We have Constantine that championed Citadel Securities and Waymo. We talked about Sean. We have David that has invested in a neolab that's relatively early. We have Sonia, who's recently sort of flew with me to London to advocate for the investment in Ineffable. So our team is much more fluid. And we don't, just going back to, like, most of our partners don't like being put in a box. None of us want to be put in a box. [00:18:29] Speaker 1: You also regard the partners, sorry, Pat, to interrupt you, to say that these partners, if you stack them up against any venture firm in the world, they would be in the top 10 of the list of partners all the time. [00:18:42] Speaker 3: I genuinely believe that we have the best partners in the world. If Alfred and I got hit by a bus, we'd be fine. If whoever came next got hit by a bus, we'd still be fine. Right. But this idea of being able to go beyond early into growth, growth into early, consumer into enterprise, enterprise into consumer, I think one of the things you realize over time is that there are two core primitives in our business. And if you develop a good understanding of what outlier potential looks like in a person, and if you develop a good understanding of where a market has a chance to go over time, those two ingredients kind of transcend the stage at which you happen to intersect that company. And so that's what we see out of the folks at Sequoia, you know, as they progress, they can kind of go across stages. [00:19:23] Speaker 1: I have to ask you both, Bloomberg reported this week that Sequoia was one of the firms approached by situational awareness as they tried in the reporting to offload some private stakes. You know, we've seen what's happening in public markets, an opportunity to comment on that and how you see the situation. [00:19:39] Speaker 3: We'd be delighted to comment on that. We were aware of that situation. And it has been reported that we were talking with them about the anthropic stake. You know, King Griffin showed up with what was a better solution for Leopold at that moment in time, and he went with the better solution. I think that our observation is that there is this game on the field over the last couple of years investing in the AI supply chain. Leopold was one of the first people to recognize that that was the game on the field. And on balance, he played it pretty darn well. And so our suspicion is that he's going to be a fixture in Silicon Valley for a long time to come. [00:20:17] Speaker 1: I wanted to get to the Valar case study. We've talked a bit about Sean. [00:20:21] Speaker 2: On situation awareness, he did just wire $400 million to a company that we invested in. [00:20:28] Speaker 1: Oh, we actually reported on the $400 million, but I haven't got a clue who the company is. [00:20:32] Speaker 2: Yeah, no comment on that. But he's not. That's a good one. He's going to be here. He's really good. He's going to be around. [00:20:40] Speaker 1: We just have, sadly, two and a half minutes. I found what happened with Valar Atomics really interesting. Again, we're going over history, but would you just kind of explain how that happened? Sean was the sponsor. He made a really big proposal. Then what happened? [00:20:54] Speaker 3: Well, we have a partner named Liam Corgan who joined us just six months or so ago. Yes, and you. Yeah. Liam, physics undergrad at Harvard, happens to be an Olympic gold medalist. But he actually came from the nuclear industry before joining Sequoia. And so we have this person in Liam who understands the market to a great degree of detail. Yes. And then we have this partner in Sean, physics PhD, as Alfred mentioned, who deeply, deeply, deeply understands the technology. So the two of them together were working on this investment. And generally speaking, things that have multiple layers of technical risk remaining with a business model that is many years in the future, those are scary investments. Right. And so we're happy to take risk, but usually we do so with smaller check sizes. And so when the recommendation came out for a $300 million investment, you know, some eyes popped out of some skulls. Yeah. And we said, boy, that seems like a lot of money for a company with this much risk in it. But Sean and Liam made the case. We decided to get on a plane. We went to... You got on a plane. Alfred, you were in New York, right? I was in New York. [00:21:54] Speaker 2: I was on a civil security board meeting. [00:21:56] Speaker 3: Yeah. A few of us got on a plane. We went to visit them. We spent the whole day with them. We got to know Isaiah and his team. Isaiah is truly a one-of-one, force of nature, exceptional founder who we're now delighted to be in business with. I think we started to appreciate exactly how many of the different pieces they've put together, how novel their approach is, and how well they're executing. And at the end of the day, like Sean and Liam, we think they are right. And we rode with their conviction. [00:22:18] Speaker 1: We have literally 30 seconds. And I'm sorry to do this to you, but let's end it with your white swan memo. What would the title be if you did a white swan? [00:22:26] Speaker 2: I just think that there is a lot of negativity around AI, and it's really just misplaced. I think we have a tectonic shift in AI. We have a tectonic shift in hardware. Tectonic shift in semis. We have a tectonic shift in industrialization of America. The future is very bright. And if I had to write a memo today, it would be a white swan memo, not a black swan memo. [00:22:48] Speaker 1: Sequoia Partners, Alfred Lin, Pat Grady, thank you both very much.