Editors note: James Buckhouse is design partner at Sequoia.Last Tuesday, the teams competing in Startup Battlefield at Disrupt SF, as well as founders chosen as Top Picks in Startup Alley, visited Sequoia Capitals office in San Francisco for a discussion with partners Jess Lee, Roelof Botha, Mike Vernal, Alfred Lin and James Buckhouse.
The following is a partial transcript of the session, which was moderated by Buckhouse.James Buckhouse: We partner from idea to IPO and beyond, but its partnering at the idea stage that we love the most that moment when anything is possible.
And its happened throughout Sequoias history.
YouTube incubated in our office.
Dropbox was an unreleased demo.
Stripe didnt have a single line of code.
Apple was just two dudes named Steve.
And so our favorite place to be is in the earliest moments.Were not here tonight to share with you lessons of our great wisdom on how company building ought to go.
Were here tonight to say that we understand how hard it is.
And the three partners that youve got here to talk with tonight Roelof Botha,Jess Leeand Mike Vernal are people who have actually been in the trenches building companies themselves.CustomersJames Buckhouse: Great companies like Apple, Amazon and Zoom all have this one thing in common: customer obsession.
Thats an easy thing to think about when you already have a billion customers, and you already have a bunch of money.
But what do you do when youre at the pre-seed stage and you want to be customer-obsessed but you dont even have a product yet, let alone any customers? How do you even begin?Jess Lee: I think at the very earliest of stages, all that really matters is product market fit.
A common mistake we see is that a founder is only obsessed with the product, and then goes on to think, I have my product.
Let me go find a market that works for this, when it should actually be the other way around.
You should look at the market first, and then get to know the customers in that market by doing customer research.Theres a great book by Erika Hall where she discusses how to ask the right questions to customers in order to really understand their pain points, their motivations and their needs.
Thats a hallmark of some of the best companies that weve seen, even at the earliest stages.
They spend a lot of time talking to customers and understanding what they want.
Something we at Sequoia like to recommend when we work with seed and pre-seed-stage companies is to actually take the time to write down a set of customer personas.
Who are your prototypical or your archetypes of different types of customers? In the very early days, you might think, I know the customer.
I can remember this.
I dont need to write it down.
But as soon as you add one new team member, who maybe isnt as familiar with your customer, a lot of things get lost in translation.For my company Polyvore, which was in the womens fashion space, I had a lot of engineers on my team who were men and didnt understand womens fashion very well.
I would always beat my head against the wall wondering why a feature they designed didnt quite make sense, and its because we did the personas exercise a little bit too late.
It made me wish wed done it earlier.
Once we had three very clear personas, I started to notice everything ran more smoothly.
I found, whether it was the sales team or the engineering team, people started to clearly communicate the idea of what our customer really wanted.
People made better decisions at all levels.
Thats why at Sequoia we always encourage even our earliest-stage companies to write their customer research down immediately, way before they think they need it.ProductJames Buckhouse: How does an early-stage startup make sure that theyre on the right track and building the right product?Mike Vernal: The key thing to me is actually not being data-driven; its much more about being hypothesis-driven.
The problem is people think about product as art.
But I actually think of product as being equal parts art and science.
And I think the science part of it, which is really important, especially at an early stage, is being clear about what your hypotheses are, what you think is going to work, why you think its going to work and really sort of pressure-testing that on a logical level.
And, if you are able to, actually pressure-testing it with real data.One of Jesss techniques, which I think is great, is the notion of fake doors.
If you want to know whether somethings actually going to hum in the market, whether people are going to care about it, build a landing page for it.
Build a sign-up button for it.
Run a bunch of ads for it.
Test a bunch of different marketing copy and see if people actually want the product.
Ive seen a bunch of companies use this to great effect.I think that in general the mistakes people make with product is, one, being too artistic and not scientific enough about things.
And then two, to Jesss point, the most important thing before you have a product is finding product market fit.
Usually, finding product market fit in a category is a function of two or three important things.
Identifying those important things and testing them to get clarity around that first, then designing the full product, is way better than just starting with a masterpiece, and then slowly painting over and over the masterpiece until you get to something that is great.James Buckhouse: For enterprise companies, Roelof, can you talk a little bit about the Sales Ready Product and Templeton compression approach?Roelof Botha: If you go to our website and search for Sequoia Sales Ready Product or Templeton, youll find very useful contentthat we put together.
The insight came from one of the best leaders that weve worked with, in a variety of companies, who argued to not just go for an MVP, a Minimal Viable Product, if youre building an enterprise company, but what he termed a Sales Ready Product, an SRP.The difference is that a Minimal Viable Product just gets over the hurdle but doesnt convince your customer to jump out of their seats to buy your product.
When we invested in Cisco in the late 1980s, the first product they shipped had so many bugs it didnt work.
But the product solved such an important need for the customer that they came back to Cisco and asked if they could fix it since they needed the product to work so badly because there was a fundamental problem in trying two networks at the time.
And that to me was a Sales Ready Product.
Youve got something that, even if its not perfect, really solves your customers pain point.And so to condense the whole theory behind this: Spend a little bit more time, probably another three months, maybe another four, five months, from when you would otherwise ship an MVP to ship an SRP.
The reason it matters for an enterprise company is that your sales organization will be so much more effective.
Your sales team will ramp up a curve far more steeply and youll get sales momentum much, much faster if you sell an SRP.CultureJames Buckhouse: Im going to do something a little bit unexpected here and call on Alfred in the back.
Could you talk a little bit about what it was like at Airbnb, where they started with culture very early on?Alfred Lin: Brian, Joe and Nate came and visited Zappos, where we offered tours, to see what the culture was all about (Alfred was COO of Zappos).
At Zappos, we started writing down our core values a little late, when we were at about 300 people.
And I told Brian, Joe and Nate that that was too late.After that trip, they went back and wrote down their core values, before hiring their first employee.
They knew that they had to create a new category.
Home-sharing was not something that people really thought about.
And so they needed people who were willing to champion the mission.
And that was one of the first core values that they wrote down.James Buckhouse: Oftentimes, people think that culture is the thing you do later on, once your business has grown large and suddenly you have a lot of people.
But thats not true.
Culture matters a lot more than people think.
And it matters earlier than people think.
Jess, can you talk about your framework on core values?Jess Lee: This is something we spend a lot of time on with seed and pre-seed companies, who think, Oh, I already know my culture.
Ill wait to write it down later.
But its important to get it right up front.We encourage people to not pick too many core values.
Generally, you want a framework thats a core value and the behaviors you want that exemplify that core value.
And most importantly, you need a story.
You need some legendary anecdote or example from inside the company that really brings the core value to life.To use Airbnb as an example, one of its core values is to be a cereal entrepreneur.
The reason its cereal with a C is because at the time, Airbnb was running out of money.
They werent sure they had product market fit, but they went to the Democratic National Convention to try the Airbnb idea when they were down to the wire in terms of money.
In order to just get the word out about the business they made boxes of cereal that said Obama-Os and Captain McCain.
Its a good example of rolling up your sleeves and doing whatever it takes to get your business launched.
Somehow, they actually managed to generate revenue that they put back into the business.
The really memorable part of that is the cereal anecdote.
Whatever it might be at your company, make sure that the lore lives on.
Thats really what brings culture to life.
Its not just the value itself.James Buckhouse: Roelof, can you talk a little bit about the culture at PayPal in the early days?Roelof Botha: There are a couple of elements in that.
One is this idea of intercept versus slope.
For those of you that are fans of math or science, it comes naturally, but sometimes you get to hire people who have a high intercept.
They have a lot of experience.
In our case, we needed to hire people who knew a lot about financial services, because we as the early, young team didnt.
You hire people with intercept, but then you want people with slope.
People who are going to learn very quickly.
And at the end of the day, part of what made PayPal successful was that we had a good slope and we learned very, very quickly.Our culture was very hard-working.
We faced a bit of a crunch in June of 2000.
Wed raised a bunch of money during the dot-com era, and then we were sitting with seven months of runway and no revenue, burning $10 million a month.
It was a youre all-in culture.
Management meetings were on Saturdays, because thats the kind of sacrifice we were going to make as a team to get to the other side.
Culture was really important to the success of the company.
We had a strong bond between us as team members because we were in the trenches.
We had to figure out how to make this business work when the odds were against us and the press had given up on us.Most people on the outside are going to think that youre going to fail.
Expect that.
Dont be surprised by that.
Draw strength from that, and rally your team around your cause.You should ignore that kind of feedback.LeadershipJames Buckhouse: How do you discern a strong founding team?Roelof Botha: My favorite, especially with companies at the seed stage, is to have no slides and to have a conversation with you about your business.
What I find compelling is, the more I dig, the more excited I get, because your depth of knowledge, of understanding the problem that youre trying to solve, shows itself.
There are a lot of people who start companies for the wrong reasons, and they have very superficial knowledge.
So as soon as you start to pressure test it, its clear that theres no depth.The founders who are the best are the ones that are so motivated to solve the problem theyre working on, theyve researched everything.
You would have found a simpler solution to the problem if you could, and you didnt.
That inspired you to start this company.
As I ask you questions, you just have this depth of knowledge.
Youve thought about it so many levels deep.
Those founders are the ones that keep coming up with new ideas, and thats why their imitators dont do so well.
We see this in our industry.
You come up with a great idea, TechCrunch writes about it, everybody around the world reads about it and now youve got 15 competitors in other countries going after what youre doing.
But guess what? They didnt have the idea, you did.
Since you had the original idea, youve thought about it more deeply and you can iterate faster than they can.James Buckhouse: Jess, how about you? What do you look for to discern a strong founding team?Jess Lee: I do agree, and I think different investors look for very different things.
There is probably a notion of founder/investor fit to some extent.
For me, I especially appreciate a unique insight and depth of understanding of that customer and that market.
But on top of that, the other thing I think about is grit.
I think that being a founder is so hard.
I felt like I was on the struggle bus the entire time.Either we werent doing well, which was a struggle, or we were doing really well and then we were in a state of hyper-growth, and thats also really hard.
Your job changes underneath you every six months.
Because even if youre successful, everything that used to work for you as the CEO or founder is now broken because your team is now 50 people instead of 10.What is it driving you, to either solve this problem or just driving you in general? Because its just not easy, and folks who give up too easily or came into this because they thought being a founder was going to be really cool, its not that cool all the time, so I look for that.
Sometimes it shows up in the form being really mission-driven, and you have some burning desire to solve the problem.
Sometimes its just that youve been underestimated your whole life and youre really mad about it, and you want to prove yourself.
There are a lot of different ways to suss out grit, but thats one big thing that I look for.One thing I also like to see, that is not a must-have but I find very compelling, is if youre a good storyteller.
I think that at the end of the day you have to convince your family that youre not crazy for quitting your job to pursue this thing.
Youve got to convince early employees to join you when you cant pay them any money.
Youve got to convince early-stage seed investors to take a chance on you and give you money when there is nothing there yet.
And youve got to convince customers.
Being able to tell a good story, both taking something complicated and making it sound simple, as well as being able to influence and talk about why your approach is interesting and different, not just better than the competitors.
I look for that as well.
I think thats important.One area where I do disagree with Roelof is that I do prefer to see slides.
I think it showcases your storytelling ability.
I look at a lot of consumer companies and your attention to design and detail is also an interesting thing that you can suss out with slides.James Buckhouse: How about you, Mike?Mike Vernal: If you cant describe the business in a minute or two, then you need to keep iterating.
Some bad meetings end up as the following: Someone will come in with 40 slides and want to convey all of the knowledge in the 40 slides in excruciating detail.I think a couple of things.
One is, many investors look at a lot of companies all day long so they might actually know more about your space than you might think.
Then two, if you need 40 minutes to explain the business, marketing and all of these other things, then for an investor meeting that might work because you have that time scheduled, but for the random engineer you meet at a party who you want to get excited about joining your company, thats going to be really hard.The best pitch is when Im two minutes in and Im like, I get the business.
This is super interesting.
Lets ask all these questions.
The tough ones are 40 minutes of being talked at, where there is no real interaction.Capital strategiesJames Buckhouse: Different types of companies need different types of capital strategies.
How do you all think about how founders ought to think about their strategy for capital?Jess Lee: Its really important to think about three things: First, what is the actual cash you need for your business? If youre a pure software business you dont usually need as much as if youre building hardware or youre making physical goods.Second, what is the valuation that actually makes sense? True valuation, when you become a public company, when you do M-A, is actually a function of your free cash flow, or a multiple of your revenue, so just being able to understand in the long, long-term what is a likely five, 10-year-out valuation, and then making sure you dont overshoot that just because you can.
Thats another first principle.The third thing is ownership.
Doing the math, if you dont need to raise a lot of money, if you dont need to raise as many rounds, at the end of the day when ideally your company is acquired for hundreds of millions of dollars, or billions of dollars, or you IPO, what is your ownership at that moment? We have founders like Dropbox, that when they went public, Drew and Arash owned nearly 40% of the company.
So you have to think would you rather have 40% of a $10 billion company, or would you rather have 2% of a $20 billion company? That ownership at the end of the day is really important.
So you have to think about those three things, which is a pretty complicated equation.It really hit home for me when my company, Polyvore, went through the M-A process and it suddenly hit me that all the acquirers were not using funny VC math.
They were looking at our cash flow and the multiple of revenue.
Luckily, we hadnt raised that much money, as Id wanted to keep as much ownership as possible.
I was optimizing for ownership for the team.
Because of that, we actually had a really nice outcome, where everybody made money because we hadnt over-raised since we didnt need to.
We were a pure software-based, capital-efficient kind of company, but I think not enough founders think about that from first principles, starting from the early days.
They just look at whos raising what, and how much they could possibly get.
They want to maximize that, when in reality, its not actually the right way to think about it.Roelof Botha: When you raise money, youre recruiting a partner.
I see too many companies, especially seed-stage companies, make the mistake of accepting funding from whoever shows up, when thats probably the most expensive equity youll ever sell in your business.
You could potentially be selling it to people that are not going to be there six months or six years from now, helping you close a candidate, helping you wrestle with an important strategic decision or helping you refine your business model.
Those people arent going to be there, so its a recruiting decision.
Take it seriously.
Its also important to check their references.
Your investor is going to do references on you.
Why arent you doing references on them?