Inside Sequoia's Investment Committee: Lessons from Don Valentine, Doug Leone and Alfred…

Yeah. We were young back then. now we’re getting like.

Yeah, look, my dad suffers from a condition, neurological condition, that showed up in my early 20s. I have no siblings, so when that happened, I started looking after him. He’s very unusual, my dad. He comes from a family of four, grew up in rural France, stopped school when he was 13. You know, he did that to put money on the table for the rest of his family. I saw him care for his parents when they were aging, and I just looked up to that. He’s quite unusual.

He’s an astrologer. Yeah. Not an astronomer, astrologer. So I always saw him kind of take a different path And when his disease started showing up. yeah, I I was there for him. And I know you’ve done the same for your parents. So

Yeah. My opinion is that if you have very clear values, everything else is easy. It might be painful in the moment to stick to them, but it’s just at least you have mental clarity about what you’re doing. And it doesn’t matter how much work you put in, you just know you’re doing it for the right reasons.

I don’t think that’s true in venture capital.

You did?

Yeah, I’ve been there three years, but I’ve been doing venture capital for I think Sequoia operates really like a sports team. Maybe you’ve heard that story before, but this is my first day ever at Sequoia. I’m in California. I visited the office before, but I wake up early, jet lagged and I show up to the office at maybe 5:00 a.m. something ridiculous like that. I felt obviously very happy about myself. I was sent to the office that day. And as I approached the building, I see some light inside.

And as I’m about to push the door, I see a man on the other side, and he looks at me. And with a deep voice, he goes, what are you doing here so early? And I’m I’m a little surprised, but with pride, I tell him, I’m here to take my first call. What are you doing here so early? And he’s like, I’ve already taken my first call. And then he just walked off and he was just so happy about it. Still, you know, lost the game.

That was Doug. Yeah, of course it was.

I don’t think so. We just hire people who are built like that. Doug is Italian. He’s European by roots and immigrated to the US when he was very young. And I’ve only known him for a couple of years, but I’m pretty sure he was always like that. And

Everyone thinks that we’re just waiting for the phone to ring for the next Anthropic to call us to invest. That’s completely false. Everyone at Sequoia is a hunter. You were 11 people a couple of months back in the early team. That’s basically what a football team is. And everyone’s just scoring on the field. It doesn’t matter how long you’ve been there. Everyone expects you to perform. In fact, the younger you are, the more people expect experienced people to perform because you just need them more. It’s very competitive out there.

And we think that people need to behave exceptionally well as individuals, but win as a team. That’s really important. I don’t think that people understand that as much. I’ll give you a story to illustrate it. Konstantin Buehler, my partner, helped us lead the investment in Citadel Securities, Ken Griffin’s company. They had never taken outside capital. The reason we were able to invest is Constantine built a relationship with Ken since he was a student. He had been his mentor for years and years And Constantine never gave up and just kept asking, can we invest?

Can we invest? Until Ken kindly said yes.

Yeah. I wasn’t there for the Citadel investment, but I’ve seen it happen with, well, recently with Anthropic, with special companies like that.

Yeah, we call that revisiting our priors. It’s very important that you update your priors if the environment’s changed. And I think it came from the realization that if AI is to be so transformative, we are just on the foothill of this incredible exponential. And now we’re three years into AI and we’ve seen that exponential starting to play out. And suddenly we realized the human brain is just not very good at dealing with exponentials. We can think very well linearly, but not exponentially. And in this case, I think we underestimate the company in the early days.

Do you you remember when it was about chasing the billion dollar company?

That’s extrapolating the power law. right?

Exactly. And picking has never been harder because you have just so much more volume of companies.

Yeah, absolutely. The difference is that some of these billion dollar rounds happen before there’s anything else. Sometimes you have what the market wants you to pay. then I think founders are also looking for company building partners. So you can invest. If you build trust with the founders, you can invest.

Personally, I haven’t. We invest in a bunch of them. I think right now, if you’re going to invest in new Neolab, you’re basically investing in the Quora in the stumbleupon when Facebook X came about. That’s my opinion. It’s not shared with everyone, but that’s the way I think about it. The only way you invest in a truly novel company is either if you back an N of one founder. Recently, we backed a company called Ineffable here in the UK was a large seed round, you mentioned.

David Silver. David Silver. And he’s an N of one researcher going after a very different type of architecture. So if it works, it’s completely massive because they’re not trying to do the exact same thing but better. They’re trying to be different. That’s the prerequisite now, I think, to be one of the successful Neolabs.

I think that that goalpost is moving. It depends on which sector you’re investing. In hardware now, for instance, which is like the new thing, right? That’s consensus, physical AI. The time to get validation is just a lot longer. And so you have to invest early, hoping that those companies can get through those phases of experimentation. And so instead of measuring these companies of how quickly they get from zero to a million in AR, you have to look at how quickly they get to a working prototype.

But you’re moving atoms, not bits. So it’s just a lot harder. It takes more time. And they just need a bit more capital. So I actually think that we’ll see more collaboration because of that. Funds will to work with other capital partners to help those companies get to those milestones.

No, no, no, I tell you why. it’s simple. It’s just the outcomes are growing. It’s also more capital intensive. But most importantly, it’s your time. In your career, you can make 20 investments. Some people do more than that. That’s just not my style. I partner with two, three founders a year. And so in my career, I can expect to do basically be on the board of companies. I’m not going to short myself. I’m going to work really hard for those founders. What I pitch them is that I’m going to be basically their co co-founder.

They decide how to run the business, but I sit in the passenger seat I help them close their first customers, close their top hires. Literally, I cannot do that with more than a handful of companies. If you look at Rillet, we met with 17 public company CFOs since the start of the year. Some of them have become customers. How do you do that when you have companies with in each of them? It just doesn’t work. It’s It’s a different model.

Time and Time again, if I have to pick, I’ll pick Dean Meyer, my partner who sits in Tel Aviv, basically lives on plane. He’s just a phenomenal human being. He was a professional football player for multiple years. So he has the competitive juices of Messi, but coupled with like the technical depth of someone who’s been working in tech his whole career. And that’s a very dangerous combo. I don’t know where that comes from, but he’s just amazing at reading people. He’s just got this ability to connect with founders, both like the very young spiky people, but also some of the guys who sold companies for billions of dollars.

That one’s easy. Luciana Alessandro, my partner who actually brought me into Sequoia. We worked together at Accel before, so I’ve worked with Luciana for most of my career now. When I met her, she had just invested in Deliveroo, then she did Framer, then she joined Sequoia, did Penny Lane, Stark more recently. It’s just banger after banger. And if you look at the pattern, there’s no pattern. It’s just across categories. She’s just been able to reinvent herself, from consumer to software to physical AI and defense. That would be my pick.

hard, but it’s part of the job. It’s not meant to be easy. Otherwise, everyone else would be doing it, right? Our partnership discussions are sometimes very fierce. We push each other like you have no idea. Credits to Sean when he brought in the SpaceX investment. We vote on companies. I think someone voted a one. I’ve seen fours, of course. I’ve seen threes. Never seen a two. I didn’t even know we could do one. I didn’t even know it was on the scale. But what happened is after that proposition occurred, he didn’t give up.

He just kept pushing. He forced all the partnership to fly over to see with their own eyes. We ended up doing a smaller investment that led to a big investment. And now couple of years later, that’s one of the best investments in the history of the firm. So the point is, it’s all about conviction. Every off-site, we look at our fund returns dating back from decades ago. And it’s very intimidating. You’re looking at this sheet with those phenomenal returns and you think, how am I going to contribute to the same degree or more?

And every time we try to be cute to look at the numbers, oh, maybe if we increase the ownership there and the dollars there. But as we’re always reminded, the best investments in all the funds are always the companies where the sponsor had the highest conviction. That’s just the one thing that’s been so that happened time and time again across funds.

Not all of them. I think where you turn small dollars into big dollars, they have to be controversial. I wasn’t there, but I heard the Airbnb story multiple times over where I think Brian Chesky had been turned down by most other firms. And he came to Sequoia, and Sequoia led a seed investment that was, I think, one of the highest money on money return that we’ve made. It was controversial. Sleeping on air mattresses on people’s floor and turned into marketplace sounded like a pretty bad idea.

But that turned out to be something very different. And actually having conviction, not just at the beginning, but to keep investing in those companies.

I didn’t know that story, but that doesn’t surprise me.

I was very surprised to hear that question. We try to partner with founders as early as possible. And in fact, what you find is because of this high bar, we partner with only so many companies every year. And when we do, what I see in practice is that there’s often capital that’s happy to pay a premium to that valuation. Were early stage investors at heart. And so for us, trying to partner as early as possible remains the priority. But there are other firms that may be investing later stages that like to come in early that are willing to pay a premium.

First, I’ve only seen that happen a handful of times. and I think that’s probably giving us too much credit. In his case, Brendan’s built a phenomenal business. We haven’t had the chance to partner with him. But in some of the cases where we did invest, it’s a supply and demand problem. The founders are building a special company. Why would they not command premiums after someone has invested?

Yeah. Look, I think the difference is also people are conflating different things are happening. There are multiple rounds that happen. And you know, we used to have Seed then Series A, Series B. And I think the milestones to get from one to the other used to take you 18 months. Now you can move so fast with AI that things happen so quickly. And so it’s only normal that you command a much higher valuation in a short amount of time if you’ve proven yourself to be right.

Yeah. Okay. So on that one, I have a strong view. I don’t know if it’ll be three years, maybe five, but this will come back. I tell you why. First, people are conflating again two things. Some are new markets and some are replacement markets. In the case of a CRM company, they might be AI native, but they’re still having to replace a core system of record for a business. And some of them are growing really quickly, but they still have to replace something. Here you’re talking about companies that are in a complete greenfield market.

Three years ago, there was nothing. And suddenly you have the capabilities that can replace basically what a human can do. And so naturally, those companies are growing vertically. In a few years from now, most of the customers out there will have a solution and will hit a replacement market. And so you’ll compare those companies with these other ones, apples to apples But right now, it’s apples and oranges, and no one’s really paying attention to that.

Wrong? I disagree with that. I’ll tell you why. The outcomes will be crystallized in years on average, maybe more. The best companies tend to stay private longer. That’s what the data suggests. But you’re making a decision that will impact the business over the next three years. So it may be true that they can attract more capital in the term, but ultimately, what matters to you is how much ownership you have and how big the company can get. And that will be true only when that investment crystallizes in almost guarantee that will happen for the biggest outcomes in markets that are more mature as opposed to markets that are completely greenfield.

That may be true, but you have you have 500 million. fun. That’s a lot of money to do secondaries with multiples. So I’ll challenge you back on that.

Let’s not get a good story get

It’s funny because, we’re well into it’s our fifth decade running. and probably for five decades, we’ve been doing Monday ICs in person or now on Zoom. We’ve been adapting the same recipe. What’s interesting is that we’re actually experimenting with new approaches. We’re trying to do things a bit more asynchronously. Well, first, yes, everyone is invited. But what’s interesting is we’re experimenting with a new approach where we actually each have to contribute asynchronously after a memo gets shared. And everyone can call up an IC if they want to get everyone’s opinion.

The reason for that is an IC is a great format for fast fast thinking. Speaking asynchronously is great for slow thinking. And so if you can get the benefit of both, you’re hopefully going to make better decisions. In an IC format, we’re each contributing one after the other. It’s sequential kind of rhythm, whereas in this case, we contribute each of us in a document, and at the end we reach a decision altogether. You can call an IC, but that helps us get the best from the partnership.

Yeah, Yeah, Yeah, The founders still pitch. It’s very important.

It sounds crazy, but I told you, we’re now twelve people in the early team, about the same number in the growth team. So it’s not that big.

Yeah, I try not to prep them too much. You need to see the essence of the people. If if you give them a script, no one’s to see what you’re seeing.

Yeah. Yeah. Sometimes we joke. Maybe we should make decisions without the IC. Yeah, it is true. It does change. But it also it’s it’s a signal. And then you decide as a sponsor what you do with that signal. Did you have questions about the founder being commercial, a good communicator? If you bombed the IC, maybe your questions were founded.

Yeah. Well, first, we we give feedback independently of the discussion so that we know before the discussion where people are, like the pulse. And so that’s a vote. And then we have the discussion. After discussion, everyone votes and the sponsor is equipped to make the decision they want with that information.

press green, it’s a bad investment. We’ll see how long you’re stick around.

It better be a good investment. Wow. Yeah, but it’s not an Alfred voted one thing. The reality is a bit different.

Yeah, Yeah, you know. The reason. but that’s super important, I I tell you why. Because if you want to be a good company building partner, it can’t be Harry’s investment or Julian’s investment. It needs to be a Sequoia investment in this case. I need to be able to call up Luciana. I need to call up George or Stephanie to say, can you make that introduction to that amazing connection you have that is quite cherished? It’s big bullet for them. They’re to make that introduction in a heartbeat.

You know, someone. Okay, so someone said the term front stabbing, which is the opposite of backstabbing, backstabbing, And I love that. I think that’s just the way you’re being very direct with your partners.

We definitely have heated discussions. Yeah, for sure. People can violently disagree. But ultimately, again, I go back to this is all signal for the person who’s sponsoring the investment to decide how much conviction they have in the investment they want to make. And ultimately, yes, the feedback may be tough, but that’s not an easy job. If you want an easy job, you go do something else. And it’s a feature. It’s not a bug. You want people to come in with courage. And if they don’t have courage, they won’t take risk and will have mediocre investments in the portfolio.

So that that happens. What we do in those cases, we find it weird. First, if everyone’s a seven or eight, quite dangerous. Because look, founders know what we to hear. The best founders are able to retrofit the narrative that they think is going to land with investors, and that can be dangerous. So in those cases, we try to have a devil’s advocate. So we ask someone to play the devil’s advocate and say, okay, what is wrong about that investment? what are the things that if it goes wrong, we try to write the pre-mortem of that investment before we make it?

And we try to spar around that conversation because in a couple of time, time, one of us may have to deal with the consequences of that.

Well, first, you have to be vulnerable with founders. Otherwise, they won’t open up. And that’s all the signal you need. And you do that very well, actually. My job is in minutes, I have to figure out what’s special about this person and what might make them exceptional. And I cannot make a mistake because this job is so unforgiving, not when you invest in the wrong company, but when you don’t invest in the right companies. So it’s, you know, emission mistakes, not commission mistakes. And basically, you have thirty minutes to figure out what’s their spike.

And my way of doing this is to open up first. They all expect to be pitching Sequoia, and they want to tell the story of their company. But what I want to hear is the story of the individual. And for that, I start sharing about my story. I tell them how it was like growing up with parents who split up, where my mom was the successful businesswoman with a nice view over Lake Geneva, but I was doing a week there and then a week back with my dad where we slept on a mattress in a one bedroom apartment and how it was fine. you know, it was fine.

I tell them how when my mom had cancer when I was six years old, I remember having to put myself to sleep because she was just too tired. But you know what? A year later, she beat the disease and kept running her business. You know, all these things are just like everyone has a story like that. I know you have many of them yourself, so I don’t want to use that to weaponize it. But it’s more that I think that’s the beauty of the job. Otherwise, you’re just in a transaction all the time.

I’m just so curious to understand what makes that person who they are that I just want to ask all these questions.

You just have to ask why multiple times. I remember this year is the first year I uncovered fraudulent founder. It was very interesting because I remember in the first meeting, that person said, you know, our numbers are going from zero to seven of AR in basically six months in pretty hot category. You know, in his introduction, he told us how he came from a small village and unfavorable country and how he got an offer to go study at Stanford and decided to turn it down to go study at another university.

And you just have to ask why? why? did you do that? It’s amazing. You got the grades to get accepted in one of the most competitive programs on the planet, and yet you decide to leave it to do something else. Why? And there may be very good reasons, right? But what’s interesting is just seeing the body language, the tempo of the conversation accelerating, the founder being nervous and just think, okay, that’s strange. So you just register. You don’t end the call. You give them the benefit of the doubt.

But it turns out a couple of days later, that founder, my partner George and I are on our way to the airport at five in the morning to go see that founder. And on the way to the airport, he tells us that he had something happen and he had a family emergency and he had to cancel our meeting. Later that day, we received messages from very respectable investors who were investors in the company who told us that he had come out as a fraud. I remember that day I sent a message to all our competitors about that because I do think it’s important that in those times where there’s so much opportunity, you also have people who take advantage of it for the wrong reasons.

And that was for me a clear case, you know, and it’s exactly what you said. They know what to expect. They know what you to hear, and they’re just going say it to you in a very programmatic way. So that’s why ask why five times and you’ll get to the bottom of it.

I’ll go back to the Don Valentine quote. If you look at founders you like versus founders who make money as a two by two matrix, your job is to figure out in which part of the quadrant we make money. And he used to tell that to many of our partners. And it’s not because you don’t like the founder that they won’t make you money. And arrogance might not be something you like, but it might make them very good at what they do. It’s maybe the cost of their spike.

But that’s why you have to go back to their spike first. If there’s no spike and you’re using that to hide a weakness, that’s the sign you want look for.

So first, I really agree with your last statement about references. We do that extensively. I’ll come back to that in a second because I think there’s an important point there. question around a founder misread, I had lunch with Anton Osaka from Lovable before he founded the company. I just didn’t see it. I’ll tell you one thing that I learned from that is I didn’t come to the meeting with a plan. I just had lunch with him and it was three of us and him. We were just chatting and I was not intentional about asking the right questions to figure out special.

And I underestimated him at the time.

I think that that part is very important. I remember the first ever diligence I did at Sequoia was for a company called Tacto in our portfolio. And I called up a bunch of their customers who were what we call Mittelstand. Those are small businesses that compose most of the company’s economy, right? We always ask the NPS question at the end, on a scale of zero to 10. what do you think of the product? And they were were just so consistently saying seven. remember asking, oh, why not more?

Because we can always do better. Very German. And I remember when the memo came out, one of my partners said, oh, why do you think the references are not more positive? And I said, customers. And basically, I remember telling my partners, if they’re French or German, you add one or two points. If they’re Americans, usually you want to retract one or two points on the other hand. So that’s also the beauty of investing here is that you just to take the local nuances into account.

You’re ripped adult.

The problem is if you try to pattern match people, you will just not invest in the right people. people. That’s what I found. Your job is just to figure out where does this person sit on the intercept and what is their future looking trajectory. If you meet a very young founder, you cannot compare them to an experienced operator. That’s apples and oranges. And the best thing you can do to figure out their future trajectory is understand on what trajectory they’re on. So going back to their past, you stop just at their professional history, in some of these cases, they’ve been working two years. but you have so much richness if you go back the first fifteen or years of their life.

And I’ll give you an example. I met two founders, French founders, both went to Polytechnique, most competitive technical program in France. And I could have said, oh, these two guys are equally good. What was interesting is when I started digging into their childhood story, one of them was the son of private equity tycoon who had also gone to polytechnique, while the other one had been abandoned by his parents when he was born and spent his childhood going from one care home to the other. That’s terrible.

But at the same time, it just shows you how much distance that person traveled to get where they are. And it doesn’t mean that they’ll continue on that path, but at least it tells you a lot about their existing trajectory. And so your job is just to figure out if they’re to continue on that path or not.

The one lesson from Doug is a question he asks in interviews. He starts by asking, who is your best reference and why? What’s interesting there is usually founders tend to say, there’s this person and this person, and they’re very happy to share all the great things these people have to say about them. And as they finish, you ask the counter question, which is who would be your worst reference and why? And see their calls change.

What’s interesting is how they answer the question. I’ve had founders be very direct about who their worst references were. And what was amazing those people and you just get a lot of texture. I’m not looking for perfection. I’m just looking for clarity.

I have so many.

You were also 17 years old.

Exactly. But, you know, the the worst employees make the best founders. You became a founder. Which is why

Okay, I love that. I’m gonna steal that. Just on the reference point, you you asked me about Sean. He has this ELO methodology framework where if you’ve played chess, ELO is the score you get attributed depending on how good you are. And it’s exponentially harder to get to a higher score because you have to beat better and better people to get there. And so his point is that if you’re you’re 2,400 rated player, which is extremely good outlier territory, you’re much more likely to be able to judge who another outlier is.

And I think in the case of chess, in 10 moves, a 2,400 rated player can tell another one. But if you ask someone who’s a 2,000 rated player, will be unable to tell the difference. It’s the same with references. You to ask exceptional people if someone is exceptional, not good enough people. And that’s often the problem with references.

You have to untangle their personality from their accomplishments. And maybe in those cases, the personality got in the way of the accomplishments. Okay.

Oh, Pat has got this great framework. People are like vectors, and vectors are the product of their direction and magnitude. Direction is, why are you doing this? Why are you so motivated about that? Where are you going? The magnitude is how ambitious that person is. Are they going to go through the pain to keep doing what they’re doing? I find that framework just so simple, as always with Pat, because if you try to understand the person’s direction and their magnitude, it’s to help you a lot just to predict where they’re going next in their trajectory.

Again, my first day at Sequoia, we were all asked to write this one sentence. We are only as good as our next investment. And we have that printed on the wall now. It was very intimidating to write that the first day at Sequoia. Very humbling. So that’s the focus, and I think you can just see it in the way people behave.

He’s definitely not on the break.

Alfred Lin. Alfred Lin. The latest piece of wisdom that I loved from Alfred was do not mistake an outlier operator for an outlier founder. And that’s very easy to make. You think someone did really well at this company. They’ve done so many things. They’ve launched these new products. Everyone liked them. That might make them an outlier operator. It might not make them an outlier founder.

the ELO one. Yeah, yeah. I’ll give you another one from Sean that I liked. Everyone thinks of people as either IQ or EQ. IQ is the intellectual horsepower. EQ is the emotional horsepower. He has these two other dimensions. One is judgment. The other is political coefficient. And basically, if you think of judgment as how you’re able to find solutions in complex systems. And same with PQ, it’s the ability to navigate politically complex systems. His argument is that judgment is actually more important than IQ, and PQ is more important than EQ.

Well, it depends on the founder. If it’s a young technical founder, I would ask Alfred, Shaun. If it’s a more commercial founder, I would actually ask Doug or Pat. But again, you mentioned those four names, but we have 11 people. And actually think, for instance, like Bogomil is amazing at reading people. So for some founders, I would definitely bring Bogomil. Bogomil. If it’s a company in fintech, I would bring George because he just knows all of them. He’s very calibrated.

Yeah. We’re three years into AI and we’re already at parity in terms of agent traffic to human traffic. I think it was Cloudflare this morning said that in five years from now, we’ll have 1,000 times the amount of agent traffic to human traffic. Again, we’re not good at thinking exponentials. But if we’re the foothill of the exponential, we better act as it will be. My thesis is that on the demand side, you have a new customer that we’re not treating as good as human customers, as the agent. today we have agents delegating tasks mostly out of convenience.

But tomorrow, as the AI gets smarter, it will be because they’re just making better decisions. If you have a 500 IQ AI, of course they’re going to make the decision on your behalf because that’s just a rational thing to do. And today we’ve basically built these interfaces, whether it’s on desktop or mobile, that are basically a layer that sits between your business and the customer intent. And you’re trying to translate that customer intent into dollar for your business. But if you abstract it, it’s just a layer, right?

What we’ve been extremely good at is optimizing that layer for 20 Better UI,

And so you end up with like a pixel perfect website that’s amazing at converting humans, but now we need to think of like a bits perfect platform that’s good at converting agents.

UI is obviously the first thing that people think about, but there’s the thinking fast answer and then there’s thinking slow answer. The thinking fast answer is UI is going to zero. Agents are able to swap your product in a minute and there will be no brand loyalty and it’ll be a to the bottom. The thinking slow answer is quite different. Agents are very similar to humans. They have biases. They have biases in their pre training based on what data they were scraped. They have biases in their post training because they were post trained by humans who were annotating.

And so what you see is that the agents are already very biased. They go to Cloudflare and Vercel when they’re looking for hosting solution. In fact, you have hedge funds who are buying data to understand how agents are making decisions, because that may influence the stock price of these companies. And so we need to understand, just like we did for customers, what are those biases and how do agents make decisions and how that may differ across the different model providers, but also depending on what product or service you’re trying to sell.

And we’re just at the very beginning of that transition. We have like, in the portfolio, have a company called ProFound that’s the answer to SEO for the modern marketer. They help you make your business visible to people who are using chat interfaces.

What I would say is just we have to consider that it’s not just a new category, it’s a new economy. You’re just to have a parallel economy for agents, just like you have a parallel economy for humans. And in that new economy, you will have new categories created. AEO is one of them.

Yeah, you still have a human in the loop when you’re booking your holiday, but very quickly, agents will just make their own decisions. You still want decide where you’re going on holiday. They might have made the best plan. But if you are the one who’s going on that holiday, you want to have a say. The difference is right now there’s 80% of the databases are written by agents. So why would humans have a say as the AI has become so good that they can pick better than humans?

So that’s the distinction I would have.

So what happens there? I don’t think that’s true because that’s assuming that you have no switching cost. The reality is you may have no switching cost for very menial things like, okay, you might want to book different plane tickets. That’s easy to swap provider. But if you’ve picked a database you’ve been building in that database, there’s data gravity, there’s enterprise controls. There’s all the things that enterprises care about that will remain something you build with trust. and trust, you build it over time. That will remain true no matter what.

Yeah. I mean, like everything in the adoption curve, this will sit somewhere else on that one. Right now, you’re seeing is agents are very good at picking tools that are connected with coding because that’s where agentic applications have really reached human parity. But you haven’t reached that level in other functions as much. And yeah, today, I think that will be probably just further out the spectrum.

We We invest in both. I think the human brain is not very good with exponentials, but it is also not very good at understanding that holding ideas in tension. You can hold opposing ideas in tension and still be correct because those truths will materialize at different times. In the case of fireworks, they’re ripping. And they’re ripping because we’re just at the beginning of the AI revolution. They built the best product and they appeal to the best customers. So they’re running away with the market. At the same time, you mentioned Rillet before.

They’re signing up the next generation of software companies now outside of software. And those companies will build their entire finance teams on top of Rillet. In a couple of years from now, this will compound into a very large and sticky business. And so do we invest in one or the other? No, we invest in both because we think that both companies can be really big.

It’s funny you say that because in the case of Rillet, we had the board meeting recently and they have this thing they called Project Iowa. And it’s basically appealing to companies outside of tech. And this is the fastest growing segment in the business. And we have car washes and regular auction companies signing up. So that a very interesting turning point in the company they’re both able to appeal in the tastemakers in AI, but also to the company that your uncle is running with his wife. And that’s really important because you want to participate in the real economy, just in the AI economy.

So on that point, very important. We’re in transient phase where most of the human facing applications still benefit from operating at the frontier. At some point, your customer support agent does not need a 200 IQ agent to change your plane tickets to Hawaii, right? What will remain true is that machine to machine interactions still benefit from 500 IQ AIs. And as we shift from customer facing applications to machine facing applications, operating at the frontier will matter less and less for the first group and more and more for the second.

And I think right now everyone’s wondering what should we do with open weight models for some of these applications where the frontier of what open source gives us is already good enough. And they should absolutely start thinking about that. And we’re encouraging portfolio companies to do that. For the ones where we’re still not at human parity, you absolutely want to be operating on the frontier, and it might be worth investing at even negative gross margins to earn the customers trust and build a superior product to your competitor.

Sure. Yeah. So the prediction was that the next trillion dollar company will be a software company that masquerades as a service business. It’s very important, the masquerading, because they cannot be a service company. Does that make sense?

Sure. We’re in the third year of AI. The first wave was about copilots. So it’s companies that are helping human workers be better at their job. The reason we started there is the models were just not good enough to do the entire job. But as you’ve seen in coding this year, we’re reaching human parity, if not more. And so the agents are able to complete tasks end to end And so instead of selling a tool that can help you achieve an outcome, you can sell the outcome directly.

And that I think is very interesting. To go back to the accounting example, today you might buy QuickBooks for 2K, but you spend 15K to close the books with your accountant. So what if you can just sell the outcome of the closed books instead of selling the software alone? And I think that’s really important because you have typically across the board a $1 to $6 ratio between how much you spend on tool relative to how much you spend on the service. And the question I was asking is, how do we figure out the categories that be able to capture the $6 where others are still focused in competing on the $1 The conclusion is there are some categories that are already getting there.

People may realize, but customer support is already in this phase. I call it the autopilot category. You have already $1 billion in AR in this category where outcomes are solved. And the way it works is, we have a company called Sierra. They’re an AI for customer support and customer experience. A typical way is they go see a customer who has X number of tickets to resolve an airline, and they know that today they have human agents that are answering these tickets. And for every ticket resolved, they might spend, let’s say, 50. while Sierra comes in and they say, well, we will resolve those tickets for, let’s say, a fifth of the price.

At the beginning, the customers may want to see how it’s working. So it starts as a copilot, but very quickly it moves to an autopilot. The beauty with that is effectively the AI is running the entire workflow end to end and is able to collect a fee from the outcome generating, not from the tool that it’s selling.

Yeah, it’s very hard. That’s why, unfortunately we haven’t seen many companies yet do that. And the combo is one, the models are still getting better and better But two, as you said, there’s still a lot of human judgment involved in those decisions. And so my framework is you have intelligence, which is what the models are really good at. Things are verifiable. How much do we spend for this in that month? And then you have the human judgment. People call it taste. People call it the sum of the small experiences you have interviewing someone.

The body language they have, are they leaning back or into the chair? That may lead you to ask a different question that you would have had in your preparation. That’s something that’s very hard for an AI to pick up because it was not in their training data. But today, what’s interesting is those tools that start as copilots, they’re basically in the judgment loop. And if they’re building the right product, they will be able to harness that judgment so that the judgment of today is the intelligence of tomorrow.

It’s interesting you say that because the stat is we’ve never seen so many system integrators and forward deployed engineers being hired in the workforce. And that’s direct correlation with the point we made, which is you still need human judgment and hands to do a lot of that work. And in the case of ServiceNow, I think they’ve never hired so many system integrators. You and I are investors in a company called Auctor. That’s an AI for software implementation. They work with some of the largest software vendors where they basically help their employees supercharge their implementation team.

And it’s just amazing how much leverage you can get. One person can do the job that 10 were doing before, but you still have the human in the loop. And I think that point is very important. I think what people didn’t understand from the article is that it’s not because you go from copilot to autopilot that you remove the human completely. What I’m just proposing is that we can build companies that will have software like margins, even though there are still humans that are making the judgment calls.

The difference is that you start with lots of humans, little AI, and you end up with lots of AI, little humans. Simple frameworks, you know.

Oh, absolutely. absolutely. But But the the thing that people also don’t realize is there will be new jobs. You’re just shifting the bottleneck somewhere else.

In practice, the data shows that we’ve never hired more software engineers.

That’s

true. And so you see you have opposing ideas that can hold true at the same time. The realization is Jevons paradox. You’re making building much cheaper. And so it turns out that people have lots of ideas and we can’t underestimate human creativity. And in this case, people are just building more. Yeah, find that exciting for you and I who are investing in those companies.

So I always tell you when I have low, medium, and high conviction what I’m saying here I sit a medium and a high. I will not invest in one of those companies for the following reason. I think you can make money in that business. The reality is I’ve only seen it in my career. The best companies are able to concentrate talent and you’re just not going to get frontier talent wanting to work for an old service business that’s kind of travesty into an AI company. They might have data, but not necessarily the data because it’s just really hard to harness the right data to make these businesses work.

So I actually think you should just build it from first principles. The best founders always figure out how to get distribution. They will have the talent. So if they can build the best product, customers will vote with their money and buy that product.

Certainly certainly in the labs. I think there’s a lot of jumping around in the labs. Yeah, people have very short tenures. and yeah, we we just don’t have that in Europe as much.

I I I think they probably keep the emails just in case because some of them come back.

Can you

I actually think they might do very well by investing in those companies that have the data and so on and won’t be able to hire frontier talent, but they’ll build very fine businesses. They just also, they’re not seeking the same outcomes that we seek. We want back the next trillion dollar company. I think it’s unlikely that’s a private equity backed company.

Probably legal. I think there’s just so many me toos in this category, whereas I think that the winner is already in existence. I’m obviously biased, but I think Harvey is very well positioned because they have the widest distribution. And yeah, I just don’t understand investors willingness to invest in the nth competitor.

They call it BCI, Brain Computer Interfaces. That’s where all the smart kids are going. So I’m a big believer that you should just follow where the smartest people are going. years ago, the smartest people were going to ML and AI. years from now, we’ll see those companies probably blossom. That’s the next frontier.

So the best agent company outside Sequoia is probably Cursor. One, they’re in one of the most important markets. But second, where there was a lot of chatter around AI wrappers. They were the first company to really understand that you could post train models and actually go deeper into the stack.

Well, they joined their portfolio company, so that helped.

Gloria from Puzzle, I think deserves a lot of credit. She’s got an incredible nose and works extremely hard for her founders.

I think probably Trade Republic. So we’re in business with Trade Republic, but I looked at the seed before I joined Sequoia. I remember telling the founder, I don’t think you’re going succeed because Revolut is going to smoke you. The point is like, it turns out that they barely compete and they’re both building amazing businesses. I fail to understand it was not winner takes all market. I underestimate the size of the category.

For infrastructure in particular.

Intensity. Intensity is important. It’s too hard to build a big business. You need intensity.

I don’t think we can be condescending and say we don’t bring our A game no matter who the competitor is. But I know you want names. Can I answer with a story? Yeah. So I never lost a deal, an investment in my time at Sequoia, but I’ve lost investments before. I lost my first investment two weeks into the job when I started venture a long time ago. And that company was Revolut, incredible, incredibly painful. I think Index and Bolderton did that round, if I remember correctly.

But basically the story is I’m two weeks into venture like you, I’m like 20 years old. I don’t know anyone. And I call up the one person I know in venture capital, Sia from from Seedcamp, Seedcamp, and he tells me, you should come to that pitch. We have 10 companies. And I thought, oh, great, 10 companies. That’s amazing. That was the only criteria that I was given. And I show up to this rundown place in East London on a basement, and there’s 10 founders pitching. One of them is Nikolai from Revolut.

Another one of them is Daniel Dines from UiPath. Think about the concentration of EV that was just in that day. And they’re both raising their Seed in Series A. I think Nikolai was the most obvious founder call I’ve had in my career. It was just so obvious how intense he was. And I proceeded to camp out of his office in Canary Wharf. And I just tried to identify him in the crowd every day because he wouldn’t respond to my emails. My colleague and I ended up having a meeting with Vlad, his co co-founder. and after trying to convince them to invest, they said that they would go with a competitor.

And I really crushed. I remember thinking this could be bigger than PayPal. We’ll see. Time will tell. But it’s, I think, a fantastic business. But at that time, I tried my chances and I said, can I invest personally in the company? And they begrudgingly pointed me to an SPV. But I penniless at the time. And even though I had the opportunity, I didn’t know how to fund the commitment. So I remember calling my mom on the way back, like your mom, she’s always been there for me for business decisions.

And she said, that sounds like a pretty good idea. How about I give you the money, but we’ll do 50-50? 10 years later, I’ve only kept buying shares in the business. I haven’t sold one, but my mom just sold most of her shares and she just retired at 74 years old. And so I always joke with my partners that they could only hire the second best investor in the Beck family because my mom went all in on Revolut at the Series A.

Well, it depends on which valuation, but we entered at 200 no. 180, 200 million. I think the latest valuation is over 100 billion.

Well, I earned 30k k at the time. you know, it was it was really bad. Actually, at the time, I I I worked for this guy, Ollie Samwer, who was the founder of Rocket Internet. and he’s amazing for so many things, but everyone knows he’s a very tough negotiator. And so when I joined his company, I said that I wanted more than 30k and he refused. And so I actually was able to negotiate that I was going to be able to invest in the companies in order to make enough money to survive from the investments.

And actually, you know, those angel checks are, you know, pretty healthy these days. Precedent, Attio, Albert, Revolut. Yeah, But my mom still has the best track record. She missed all the bad ones.

Oh, the funny thing is people love to say Sequoia believes X and Y, but we actually have very different opinions. There’s no house view on AI. You know, I can post this article about services being the new software, while simultaneously you’ll have David Kahn talking about the $600 billion question and simultaneously Pat and Sonia saying, this is AGI. you know.

Yeah, but at the same time, you cannot be bland. You want people to seek you out for who you are. and It’s what people forget about a

Exactly.

We’re trying to invest in spiky people, so we have to be spiky ourselves.

Again, I think it’s what I told before. We’re still in this phase where AI is maybe 120 IQ with the latest tests, but when we get to 500 IQ AIs, we’ll maybe find cures for your mom or my dad’s disease. We’ll find things that are just so transformative to humanity that it will make all these things we worry about today sound completely insignificant. So I’m actually I’m not from the world of science, but I’m very excited about companies that are helping push the frontier of life sciences, biology.

And the great thing is, actually in London, we have a lot of focus on that. You know, we just saw post, and it’s great to have these big brains focusing on these problems. So I’m actually really excited about that.

You’re my brother. Thank you, sir.