# The Sequoia Investment Process

Investing Lessons from Doug Leone, Roelof Botha & Alfred Lin · Sequoia's Framework for Analysing Founders · The True Benefit of Having Sequoia on a Cap Table & Sequoia's Biggest Threat with Pat Grady

20VC · Jul 8, 2024 · 69 min · 14,759 words
Speakers: Pat Grady, Harry Stebbings
Source: https://www.996.fm/episodes/20vc--ep-3c869a7a/

## Cold open

**Pat Grady** [0:00]:

If you have Sequoia on your cap table, chances are your life just got a lot easier. There are kind of two things that I care most about when assessing founders. So, one is founder market fit. Two is the vector that describes them. The market determines how big a company can get. The founder determines how big the company will get. I'd say on sourcing, we are eight or nine out of 10. On picking, I think we're maybe a six out of 10. When a company is a wild success and you don't see us in the cap table, chances are at some point we screwed it up.

**Harry Stebbings** [0:31]:

This is 20 VC

## Intro

**Harry Stebbings** [0:32]:

with me, Harry Stebbings, and the show state is an immensely special one for me personally. I met this guest nine years ago. I was 19, I had no real following, and we'd only done about 20 episodes of 20 VC. He gave me time, mentorship, and friendship, and he's been really my adopted big brother in venture for close to a decade. Pat Grady, one of the most successful growth investors of the last decade. As the head of Sequoia's growth investing practice, Pat has invested in companies with a combined market cap exceeding a $250,000,000,000. Among his incredible investments include HubSpot, Snowflake, ServiceNow, Okta, Amplitude, Zoom, and Qualtrics to name a few. But before we dive in today,

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**Unknown** [3:36]:

You have now arrived at your destination.

## Conversation

**Harry Stebbings** [3:39]:

Pat, I am so excited for this, my friend. I mean, we've known each other for, like, nine years we've It's been a long never done this in person. It's been a long time. It's good to be here. Thank you so much for coming. Now, I spoke to literally everyone on the team, I think. And I've said to you before, everyone responded, which has never happened before, which is testament genuinely to you as a leader. Really, it's amazing to see the culture you've built.

**Pat Grady** [4:00]:

We have a great team.

**Harry Stebbings** [4:00]:

But I spoke to Sean McGuire, and he said, you gotta just start with the upbringing. And Matt Miller said this too. Growing up in Wyoming, doing roofs in the summer holidays, just talk to me about the childhood in terms of what do you think shaped you most? So you don't need to give a narrative on my Yeah. But what shaped you most? I think my one liner would be happy,

**Pat Grady** [4:20]:

but desperate. Yeah. And the word Sounds like my love

**Unknown** [4:23]:

life.

**Pat Grady** [4:24]:

The word the word desperate is probably a bit too dramatic in the context of the first word because it was it was very happy. My parents were wonderful people. I got a great brother. You know, it was a very loving family. There's no trauma. There's no suffering in my childhood. I think like a lot of people who grow up in small towns, you just have this desperate need to figure out what else is out there. And when you're in a small town, even if it's a very nice town, and and we lived in Gillette, Wyoming, which is in the Northeastern part of the state. It's coal mining country, but it's a really nice place to grow up. Even when you're in a nice place like that, you just feel like the world is small and feel like there must be more out there. And you kinda have this desperate need to go figure out what that is. And so when I was in high school, my greatest fear was boredom. And I think now that kinda translates into my greatest fear, which is probably irrelevance. Just kinda feeling like you are living a life that is worthwhile.

**Harry Stebbings** [5:12]:

When you say greatest fear is irrelevance, unpack that for me. Why is that the biggest fear for you now? And what does that mean? Well,

**Pat Grady** [5:19]:

you're going pretty deep right off the bat here.

**Harry Stebbings** [5:20]:

Well, you started it. I mean, that

**Pat Grady** [5:22]:

was was a great intro.

**Harry Stebbings** [5:23]:

My word.

**Pat Grady** [5:24]:

So I think different people have different answers to the question, you know, what is the meaning of life? And I think the simplest and most straightforward answer would just be happiness, but then it's kind of a recursive question. Okay, well, how do you define happiness? And I think for some people, the greatest happiness comes from some feeling of productivity or some feeling that you've contributed something to the world around you. Right? And so when I say irrelevance is my greatest fear, it would be the point at which I am not a good husband. I am not a good father. I am not a good partner. I am not contributing to the world world around me because I think that's the thing that most people get the greatest sense of satisfaction or joy out of. Do you score yourself?

**Harry Stebbings** [6:02]:

Like, do you measure that?

**Pat Grady** [6:03]:

No, I don't. Should I?

**Harry Stebbings** [6:04]:

Yeah. I I didn't How would you measure it? So Matthew McConaughey does it very well, actually. And he basically thinks about it in the red or in the black. Okay. And he plots his life in a quadrant, which is it's friends, it's family, it's work, and it's marriage. And he basically puts a red or a green at the end of the week, I think it is Okay. In each. And if consistently there's red in the same spot, he knows that he needs to rectify something in his life.

**Pat Grady** [6:30]:

I do this annually. So I actually have a scorecard that I do once a year, and it has different buckets on it, and it's similarly red, yellow, green, and then I figure out what I can do better the next year. Do you consistently have

**Harry Stebbings** [6:41]:

the same reds? No, actually. That's good. So then you do learn and improve.

**Pat Grady** [6:45]:

Theoretically, I would just get everything into the green and stay there. So it's not it's not exactly continuous improvement, but yeah, certainly try to learn and improve. So we have that. Can I ask, did you know that you would be successful? It makes me uncomfortable to hear the word

**Harry Stebbings** [6:58]:

successful, so so I will resist the temptation to debate that. Can I be just difficult? And as your adopted little brother for this session, I'm gonna push. Sure. Kind of, but you have to acknowledge at some point that when you invest in companies that turn into 200,000,000,000 in market cap, that is success in this field.

**Pat Grady** [7:16]:

Maybe, but you could also do the counterfactual litmus test. Let's say you'd picked any random person off the street in March 2007 and plopped them down into Sequoia, where they have one, the greatest business card you could possibly hope for, two, the beginning of the cloud mobile transition, and three, you're about to head in the global financial crisis where all of a sudden every company trades at two times revenue. Those are pretty magical conditions to start with. And so the fact that I've been associated with some nice companies may not have much to do with me. It might have everything to do with circumstances.

**Harry Stebbings** [7:47]:

I always remember something you said to me on a call, and you probably don't even remember it, but it always stuck with me. I said, god, like, you just you just hit every winner. And you you said to me, you know, every company that goes public that we're not on the cap table of? It's really a miss when you look at our multistage investing practice. Yeah. That really stuck with me.

**Pat Grady** [8:06]:

Yeah. That is the thing. People see the winners. What they don't see is we have a chance to get into business with pretty much any company out there. And so when a company is a wild success and you don't see us in the cap table, chances are at some point we screwed it up. Is it hard to inspire that humility in new joiners? I was talking with this guy named Ben Jacobs the other day who was used to be the CIO of Viking, and he left to start his own firm four or five years ago. And one of the comments he made really stuck with me, was when you work at a name brand place like a Viking or like a Sequoia, you're attracting people who want to be part of something great, not people who want to build something great. That really stuck with me because one of the things that has allowed us to remain relevant for fifty plus years now is this sort of underdog mentality and this sense of desperation and this sense that tomorrow is not our birthright. Like, we have to work to earn it today. And I do worry that we may have adverse selection when we try to find people because they're attracted to the name brand, and they're attracted to a place that's already versus being attracted to a place where they feel like they can build. And I think we screen for that reasonably well. And I think if you look at our team, for the most part, they are hungry, ambitious, chip on the shoulder, overachiever types. And so I I think we have pretty good DNA, but it is something I worry about.

**Harry Stebbings** [9:22]:

Does it hurt you when you have brand hits? And when you have some the challenges that we've seen over the last years? Because you bleed green. Yeah. And people said this in emails, you bleed green.

**Pat Grady** [9:32]:

Yeah. The answer is nuanced. If the brand hit is fair, the fact that we're taking the brand hit doesn't hurt me. The fact that we screwed up and deserve the brand hit is what hurts me. If the brand hit is unfair, that hurts a little bit, but I tend to ignore it because I know that it's not reality. And so the thing that hurts me is not people talking about our mistakes. The thing that hurts me is when we actually make mistakes, particularly when they are self inflicted wounds, they were avoidable, we should have known better. That's the stuff that's painful, and you can only have so many of those and continue to perform at eye level.

**Harry Stebbings** [10:04]:

What do you think is a fair versus unfair brand hit?

**Pat Grady** [10:07]:

Media goes in cycles. Like, I I remember one time somebody gave me sort of the three points for what constitutes an interesting story. There's counternarrative, there is counterintuitive, and there is hyperbolic. And so, counter narrative is everybody is saying x, but we're gonna say y. Counterintuitive is you may believe that x is true, but it turns out y is true. And then hyperbolic is the first, the worst, the best, the last, you know, that sort of thing. This third one kinda leads to these media cycles where you can be the hero or you can be the villain, but there's no middle ground. Rarely do you see an article published that says Harry Stebbings, pretty good guy. Perfectly media guy.

**Unknown** [10:44]:

Yeah. He's he's got some pros. He got some cons. You know, overall, pretty good guy. Right? That's not an interesting story. It's not. An interesting story is Harry Stebbings is amazing, or Harry Stebbings is the worst. Right? Do you know what I got called the other day?

**Harry Stebbings** [10:56]:

Former teenager. I was like, Warren Buffet also qualifies. That's amazing. But, yes, I get The youngest, the oldest, whatever that is.

**Pat Grady** [11:06]:

And so as far as specific criticisms, the stuff that's unfair, I think, is just related to misunderstanding about how Sequoia works. And so a lot of what you read about leadership transitions and that sort of thing is out of date. You know, again, leadership has been pretty stable in The US Europe business for the better part of a decade. Anytime we have an investment that blows up, that is our responsibility. The reason limited partners trust us with their money is because they trust us to find the right investments, make the right decisions, do rigorous diligence, and there is always some other card that you could have turned over to produce a different conclusion. And so anytime an investment blows up and people give us flack for that, that that's deserved. Like, that's our job. We're in the risk taking business, and so not every investment is gonna work. But at the end of the day, anytime an investment fails, that's on us.

**Harry Stebbings** [11:51]:

When an investment fails, Sequoia has an extremely high bar. How does that go down internally?

**Pat Grady** [11:57]:

You will never see anybody at Sequoia reprimanded, fired, chastised for a failed investment. You will never see that. Similarly, you will never see anybody at Sequoia promoted, lauded, praised for a single great investment. And, again, it's because we're in the risk taking business. If you have a string of bad investments, there's probably something wrong in your process. If you have a string of good investments, there's probably something right in your process. And so, one data point doesn't make a trend. If somebody has a bad investment or a great investment, we're not gonna react. We do try to inspect the inputs as much as possible because we're in a long feedback cycle business. And so the, the activities that somebody is doing today may not produce tangible results for another five or ten years, and so we try to inspect the activities. We try to inspect the behaviors. If the activities and the behaviors are good, but one of the outcomes happens to be bad, that's okay. If the activities and the behaviors are bad, and one of the outcomes happens to be good, that's probably not okay.

**Harry Stebbings** [12:55]:

Can I ask you bluntly, what is your process today, and how has that changed over time? I've always said this about you, to everyone who'll listen to me, which is, you know, mostly my mother these days. But I think you are the most incredibly structured thinker, I know. No. No. Really, you take very complex things and you break them down into very cohesive structures that are understandable. And then everyone else on your team said the same, which made me feel vindicated to this. So my question to you is like, what is the process for you, and did it change over time?

**Pat Grady** [13:26]:

It's pretty straightforward. Conceptually, it's a process of crystallizing the thesis and then stress testing it to make sure that it's real. And that's it. I think one mistake people make is they sort of launch into diligence on something before they really have figured out what they wanted diligence. So the crystallizing the thesis part of it, that is the declarative statement, we should invest because. We should invest in Zoom because, a, spectacular founder, b, someday every room will be a Zoom room. That's it. It doesn't have to be a complicated thesis, but it does have to be a crystal clear thesis.

**Harry Stebbings** [13:58]:

Does it have to be a counter narrative? Can it be a prevailing narrative, which is everyone sees it and we all agree, or does it have to be like a narrative violation?

**Pat Grady** [14:07]:

I don't think that there are any bonus points awarded for degree of difficulty because there are a lot of very smart people in the world of venture capital. One currency is I'm going to be contrarian and right, and then I get to be smarter than everybody else. I don't care whether we're contrarian or not. I just want us to help the daring field legendary companies and generate exceptional net multiple money returns for our limited partners. And so some of the investments that I've been a part of, so for example, HubSpot back in the day, we led the Series D in 2011. We would later find out that we were the only term sheet. Nobody else wanted to invest. And even inside the partnership, it was controversial. Why was it controversial? It was controversial for a bunch of different reasons. The numbers were okay. The product was okay. The storytelling was very good. And the thing that actually got it over the line, probably two things, and this is true of almost every investment. It always comes down to the founder of the market. Right? Hopefully, I've gotten better over the years of trying to understand people. In 2011, I was good at understanding numbers, not so good at understanding people. Fortunately, Jim Getz, I was number two on the investment. Jim Getz was number one. Fortunately, Jim Getz has always had an amazing way of understanding people. And when he saw Brian and Darmesh, he saw something very special. And so that was part of what got it over the line. And then the second thing with the market, and this might be where I contribute a little bit, we had done a bunch of work around marketing or trying to understand the structural changes in the market, and HubSpot fit really well into the overall market thesis. So there's a little bit of a market thesis, a lot of Jim Getz' magical understanding of human beings. And then quite frankly, the way that Brian and Darmesh executed on that business is fabulous.

**Harry Stebbings** [15:42]:

I remember speaking to Brian when I had him on

**Pat Grady** [15:44]:

the

**Harry Stebbings** [15:44]:

show and him Yeah. Yeah. About your rigorous, diligence process.

**Unknown** [15:47]:

What do you do when you're having Every time he tells that story, it gets longer. A longer and longer reality, time. Might have been three weeks.

**Harry Stebbings** [15:53]:

Years, and

**Unknown** [15:54]:

he took

**Harry Stebbings** [15:54]:

my house, and What happens when you don't like the market, but the founder is amazing? I laugh with our team, but I'm like, we have a series of the most unattractive markets in our portfolio with the world's best founders.

**Pat Grady** [16:08]:

You know, my overall framing on this is the market determines how big a company can get. The founder determines how big the company will get. Meaning, market in some ways establishes the ceiling on an opportunity, and there are different orders of magnitudes in terms of the markets that you can go after. But you could have the biggest market in the world. If the founder's just not that good, you're not gonna get anywhere. I will take market of modest size being attacked by a spectacular founder over a market of gigantic size being attacked by an okay founder. Between the two variables, the founder variable is more important.

**Harry Stebbings** [16:45]:

I always say the difference between a $1,000,000,000 company and a $10,000,000,000 company is a truly exceptional founder. Yeah. They will find that second product, that second And

**Pat Grady** [16:52]:

this is a big learning for me over the years because in the world of growth investing, everybody has the same basic inputs. Everybody looks at the numbers. Everybody talks to the customers. Everybody spends time with the team. And then everybody builds the same basic financial model, and it tends to end five years out, and it tends to have decelerating growth rates and, you know, some reasonable margin assumptions and some reasonable multiple assumption. And if you just invest on the basis of that model, you're never gonna distinguish yourself as an investor. Because the key question is actually what happens after that model ends. So when you get five years out, has that founder grown even faster than the company? And is that founder now attacking new markets with act two and act three and different products and different businesses? Or has that founder run out of gas, and the company is grinding to a halt, and eventually it's gonna go, you know, fire sale to a private equity firm? And so the founder variable ends up being the most important thing.

**Harry Stebbings** [17:42]:

Which founder that you've worked with most exemplifies what comes first to mind in out accelerating accelerating the company and outperforming that five year end of model mark? There are a bunch. I've been lucky to work with some

**Pat Grady** [17:52]:

pretty excellent founders. I'm forcing you to choose your favorite child. I will choose Brian Halligan again. So by comparison, if you look at Snowflake, amazing product in an amazing market. Right? If you look at Zoom, amazing product in an amazing market. If you look at Okta, amazing product in an amazing market. And so there are really powerful tailwinds for those products in those markets. If you look at HubSpot, mediocre product in a crappy market. Today. Not today. Not today. Circa 2011. Okay? And so the reason I say Brian is because one strategic decision after another, he and Darmesh just absolutely nailed it. There's the decision to focus on the SMBs, where all the math told you to go upmarket, and Brian and Darmesh correctly concluded, well, everybody else is doing the same math. If we go upmarket, it's gonna be a red ocean. If we stay down here, it's gonna be a blue ocean. Someday, we'll become the default, and the unit economics will get better. That's exactly what happened. It was acquiring Performable back in 2011, a few months after we got into business with them, because they wanted to build out this new part of the product, which is sort of the middle of the funnel. HubSpot at the time was top of funnel generation, performables, middle of funnel marketing automation. That ended up being a transformative acquisition because the engineering team there was excellent. And one of the guys that they brought in with that acquisition is still the CTO of HubSpot today. One of the other guys they brought in with that acquisition was the chief product officer until a couple years ago. And so that was transformative because that took them from good story, bad product to good story, great product. And then the other one was when they had kind of built out the full marketing suite, and they said, okay, we got the full marketing suite. What's next? Well, if you got marketing, the logical act two is gonna be sales. The traditional way to do that would have been to just build some mediocre sales product and hand it to your go to market organization and let them sell And they decided to put a hard constraint on it and say, look, nobody is allowed to touch the sales business. The sales business has to stand on its own two feet. Hey, sales business, keep building stuff until you find something so good it sells itself. And so putting a hard constraint on it and saying, look, we don't want to live with the three or four or five x LTV to CAC sort of business. We wanna build something that can be 10 x plus, something that can sell itself. And that was transformative to the business too. And so I think just one good strategic decision after another, they just nailed it.

**Harry Stebbings** [20:05]:

I I couldn't agree with you more. Think the CRM story is incredible. You mentioned Jim Goetz having the superpower of, like, founder evaluation. Yeah. Yeah. I I spoke to Julien Bek before, he actually said that you had a superpower of founder evaluation today. But you said you have a framework for it, and maybe it differs between early and growth. Can you talk to me about that framework, and how does it differ?

**Pat Grady** [20:26]:

My framework is there are kind of two things that I care most about when assessing founders. So one is founder market fit, and two is the vector that describes them. And so for founder market fit, people tend to commingle two distinct variables in here. There's the problem variable, and there's the solution variable. The problem variable is, do you understand what problem you're solving? And a lot of times that means, do you have somebody who comes from this domain? And so one example, we're in business with this company Harvey, which is doing AI for legal services. Winston comes from the world of law, so he understands the problem. The other variable is solution. You may understand the problem, do you actually know how to build the solution? Well, Winston doesn't know anything about AI. I mean, does now. Two years ago, he didn't. Fortunately, his co founder, Gabe, comes from the world of AI research. And so Gabe understands how to build the solution. So you put those two things together, you have both the problem and the solution accounted for. That's pretty good founder market fit. The second thing that I mentioned, which was the vector that describes the person, you know, vectors have both direction and magnitude. The magnitude component, people tend to refer to as, you know, the spike around a founder. I don't necessarily need it to be a singular identifiable spike. If it's just a track record of consistent performance, that might count. But I need to believe that there's some exceptional magnitude on some dimension that matters. And then for direction, this kind of comes down to the motivation. Like, why are they doing this? Building a startup is insanely hard, as you know.

**Unknown** [21:53]:

And

**Pat Grady** [21:53]:

and it's and it's not for

**Unknown** [21:54]:

the faint of heart. Being a CEO might be even worse. Right? And so you need to have some serious motivation or

**Pat Grady** [22:02]:

you're just not gonna stick with it to the degree that you need to to build something that matters. And so trying to understand that is important too.

**Harry Stebbings** [22:08]:

Do you spend much time on the backstory? Like, I really care about how they first made money, like, actually insecurities in childhood. One of the most clear signs to me of an exceptional entrepreneur is they always start early. They always sold Nokia mobile phones on eBay, a lemonade stand at school, whatever that may be. You never came out of McKinsey or Bain and made your first entrepreneurial project.

**Pat Grady** [22:30]:

Absolutely. You know, Eric Yuan, as the legend goes, it was his ninth visa application that finally got him into The US. He was seeking out a better opportunity for himself, and he stuck with it because he really wanted to see it through. There are lots of little tidbits like that in the founders we work with.

**Harry Stebbings** [22:44]:

I have made many mistakes in terms of founder assessments. Many. When you look back on yours, what did you not see that the benefit of hindsight you should have seen?

**Pat Grady** [22:54]:

There is one thing, and there are a couple of founders that I'm thinking about on a mistake that I've made. So Peter Reinhard of Segment would be one of them, and then founder CEO of Revolut. Well, let's start on Peter. What did you not see that you wished you'd seen? So I met both of those for Series A's, and both of them told me the entire story in like five or ten minutes. It was super clear. And at the end of the five or ten minutes, I couldn't think of any questions to ask because they had already answered any question that I would have wanted to ask. And then they just kinda looked at me and said, so do you wanna invest or what? And I didn't know what

**Unknown** [23:26]:

to

**Pat Grady** [23:26]:

do. And

**Unknown** [23:27]:

so and so, you know, I went off and tried to do some homework and tried to come up with an answer, and it was almost too

**Pat Grady** [23:33]:

simple. And because it was so simple, for whatever reason, I didn't have the conviction to lean in. And we ended up passing on both of those. And in retrospect, both of those were terrible decisions. And so I think maybe the lesson is sometimes it really is just that simple. Like, sometimes the very best founders can articulate things in a complete and compelling way in five or ten minutes, and that's all you need to hear. When

**Harry Stebbings** [23:57]:

I think about Nick there in particular, with respect to him, I think about actually something Peter Fountain told me, which is like the best founders should make you feel a little bit uncomfortable.

**Unknown** [24:05]:

Yeah.

**Harry Stebbings** [24:06]:

They won't make you feel at ease.

**Unknown** [24:07]:

Yeah.

**Harry Stebbings** [24:08]:

And I remember asking Nick, Nick, what's your favorite book? And he goes, I don't read book. I do PDF. Alright. What's your favorite PDF? And it was Ray principles. Oh. Yeah. Yeah. That makes sense. But I love that. People have the perception that Sequoia just see everything. Is that true?

**Unknown** [24:27]:

It's not literally true, but but it's effectively true. So if

**Pat Grady** [24:33]:

were gonna decompose our value chain, and let's say there's sourcing, picking, winning, building, harvesting. So Harvesting is selling. Harvesting is actually generating returns. Yeah. So sourcing, are we getting in front of interesting stuff? Picking, are doing a good job of selecting? Winning, are we able to invest in the companies we want to invest in? Building, are we actually helping founders build market leading companies? And then harvesting, are we eventually turning that into returns for unlimited partners? If I were to go across the value chain, I'd say on sourcing, we are eight or nine out of 10. We're not perfect. And particularly at the very earliest stages, it's really hard to have complete coverage because founders can come out of anywhere. But I think for the most part, we're in front of good stuff and we're in front of it early enough to have a real point of view. So I think on sourcing, we're probably an eight or nine out of 10. On picking, different people may disagree. I think we're maybe a six out of 10. Because there's so much uncertainty in this business, it is incredibly hard to make these decisions. I think we're probably as good at it as anybody, but it's just really hard.

**Harry Stebbings** [25:37]:

Which firm do you think is the better picker if you had to choose one?

**Pat Grady** [25:40]:

I'm not necessarily willing to say that he's better, but somebody who I really admire is Mamoon at Kleiner. I think Mamoon has an exceptional track record of investing in companies that are not at all obvious at the time. And I think about the Series B and Figma, which is a round that we looked at and passed on. I think about the whatever round it was in Slack when it had just become Slack. Rippling? Yeah. Rippling's a good point. So I think so I think Mamoun, if you look at his track record, it seems like he's a pretty exceptional picker. I totally agree with

**Harry Stebbings** [26:06]:

you. Okay. So we have that picking. So we have picking. What would you do to be better then?

**Pat Grady** [26:09]:

We spend every off-site on this topic. I think the answer is, to be true to the nature of this as an apprenticeship business, the answer on getting better at picking is not to erect a bunch of scaffolding around people to try to help them make better decisions because this is not a manufacturing plant. Right? We're in the outlier business. You can't design a system that's gonna systematically identify outliers because each outlier is gonna be different. They're gonna be one of one if they're a true outlier. So whatever system you design and backtest, it's gonna miss the next one because the next one's gonna break the mold. And so the way you solve for that is, again, be true to this as an apprenticeship business, have experienced investors in the field doing the work alongside the people who are earlier in their career so that they can see how it works. And they can see from a variety of people. You know, one of the benefits I had when I joined Sequoia, I wasn't assigned to a particular partner. I got to work with everybody. So I got to make investments alongside Doug Leone and Jim Goetz and Roelof Botha and Michael Moritz and all these other people who really knew what they were doing. And through all of those repetitions, I got to kind of figure out, how does Jim think about investment? How does Doug think about investment? How do I wanna think about an investment? And I think

**Harry Stebbings** [27:16]:

that's the best thing you can do. You have to understand, as a venture nerd, this conversation just makes me so happy. Who's the best sorcerer in Sequoia?

**Pat Grady** [27:26]:

The first name that comes to mind is David Khan. David joined us about a year ago. He is an absolute force of nature. I get into the office pretty early. He's always in there on a Zoom when I get in. He's always in there when I leave. David is just a total force of nature. Think his some people are high volume. Some people are high quality. He's both. I think Sonya has done a really good job of making a name for herself in the world of AI and creating magnets in the form of blogs, in the form of a podcast that we're releasing soon. I think Sonya has done a really good job putting herself in that position. Who's the best picker? A lot of people are really good pickers. I'll keep it on the growth team because that's where I'm better versed. I'd probably have to say Andrew Reed. If you look at Andrew's portfolio, very few false positives, very few false negatives. Most of the stuff in there is very good, and a lot of it wasn't obvious at the time. So the Series C and Figma, when Figma had, I think, 4,600,000 of ARR, that was not at all obvious, but Andrew had spent three years studying the design market and had a real point of view. I remember when he did that, and it was I

**Harry Stebbings** [28:27]:

think it was close to 400,000,000 price. Yeah. And everyone was like, nuts. Yeah. Under that xAI, and it was like, seriously. Yeah. This is just crazy.

**Pat Grady** [28:36]:

Yeah. And Andrew Andrew's also got range, though. I mean, you mentioned Vanta. He led our series and Vanta. There's a big company over here in Europe called Bolt. He led our investment in Bolt, which is the ride sharing business. He led our investment in Robinhood. I mean, he's got pretty good range.

**Harry Stebbings** [28:49]:

Winning?

**Pat Grady** [28:50]:

Yeah. Does Sequoia always win? What percentage of the time do you lose? We do track this. I think it's a 100% in the last twelve months. Actually, I take it back. There's one situation where an existing portfolio company was raising a Series B, and they chose somebody else. And to be fair, we didn't make an offer. But had we made an offer, we probably would not have won, so I would count that one against us.

**Harry Stebbings** [29:11]:

Would you give yourself a 10 out of 10 for winning then?

**Pat Grady** [29:14]:

We don't give 10 out of tens, but I'd probably give us a nine out of 10 for winning. Some people want to believe that because we have this nice brand, we can just waltz in and founders will hand us shares in their company, and that is far from true. Like, it is an absolute knife fight every time. And we try to have a team and a culture where even if your business card meant nothing and nobody had ever heard of the name Sequoia, you could still be put in position to win because you've built the sort of relationship with the founder that just makes them want to be in business with you independent of, you know, what firm you're from. What's your favorite winning story, Pat? You've been at Sequoia now for seventeen years? Yeah. In sales parlance, people talk about the difference between making something happen and order taking. And the venture business in the last several years has turned into a business of order taking. And it's a business of order taking in the sense that a lot of companies are raising money, Rounds are happening frequently. And when the round comes along, you raise your hand and say, okay, well, we'd like some, please. That is very different than the way that it often worked ten plus years ago, where companies may not have been raising another round. They might have been generating cash. They might have had no need for money. And it was a business of figuring out if there was some reason that they would be better off if they had you as a shareholder, articulating that to them in a compelling way, and getting the opportunity to be shareholders. And one that I think of is in 2009, Fred Luddy was building ServiceNow down in San Diego, and nobody had really heard of it. It was just a SaaS company that happened to be working. It was generating cash, and so there was no need to raise any money. There was no round planned. What

**Harry Stebbings** [30:48]:

sort of cash was it doing? Just ballpark.

**Pat Grady** [30:50]:

This is actually funny because we didn't have a full set of financials from them, so we didn't know literally until the last slide in the presentation in the partner meeting on the day that we were gonna make the decision when Fred was presenting, the very last slide showed that they were generating 20,000,000 of free cash flow. And that was on 25,000,000 of ARR because they were getting paid in advance for two and three year contracts. So they were unbelievably cash generative. Obviously, didn't need to raise any money. The reason that they decided to get into business with us, Doug and I went down to visit Fred in San Diego. We were sitting with him, and Doug has this amazing discovery process where it kinda teases out everything that might not be going so well with the company, which is not the stuff they wanna tell you about. How did he do that? He asked a gazillion questions. I can't tell you exactly how his brain works, but somewhere in there, he is constructing a model of the human being and of the company. And so the questions don't go in logical flow where you can kinda trace them from A to B to C to D. They kind of go all over the place. But by the time he's done, he has this very clear picture of who is this person and what is this company. And anyway, with ServiceNow, he teased out that they were having issues kind of with the back end of the business. And so this is 2009. People weren't building companies on AWS. You were doing managed hosting or you were using some sort of data center colocation, but you were basically responsible for your own technical operations as opposed to effectively outsourcing it to the public cloud. And because the product for ServiceNow was getting pulled into these huge enterprise deployments, it was sort of outpacing the ability of the back end of the business to keep up. And that was showing up in terms of latency and in terms of downtime, and that was kind of the main pain in the business. It was one of these pains caused by success, right? But we were sitting there, and Doug took out his phone, looked up a phone number, and while Fred is telling him this, he says, you need to call Marty Abbott. Marty Abbott was a guy who used to run technical ops for eBay. He's also somebody who helped us when YouTube started taking off. You know, 2005, we got a business with YouTube, and all of sudden the thing starts running. They had the same issue where they had to keep their servers up. So anyway, Fred calls Marty Abbott. Marty Abbott comes in, helps him out, solves a problem, and we had a couple more of those. And eventually, was like, okay. I guess it'd be nice to have you guys around. And so he created an opportunity for us to invest even though there was no need for money in the company. How much ownership did you get then? We invested 52,000,000 for 20%. And for anybody keeping track, that is $2.60 post on 25,000,000 of ARR generating 20,000,000,000 of cash.

**Harry Stebbings** [33:13]:

Do you not try market caps?

**Pat Grady** [33:14]:

I honestly don't look at public stocks, even the ones that I'm responsible for. We still own a bunch of Snowflake. We own a bunch of Amplitude. We actually own a bunch of Datadog. I really don't check day to day.

**Harry Stebbings** [33:24]:

Tortoise, is it such a secret weapon having Doug come in to founders? I remember talking to Christian Hecker at Trade Republic about his meeting with Doug in COVID on a terrace in Germany in the cold, and he just said, like, it was another level. I think about if you've got Marc Andreessen and Ben Horace doing the hard fucking sell, and then you have Doug Leone doing the hard fucking sell. Now, I mean, I'm obviously green. Right? Doug's gonna win all day. But when Doug starts pulling away, how does one think about losing a weapon? Well, I don't think people

**Pat Grady** [33:57]:

have gotten to see what made Doug so effective ten or fifteen years ago because the thing that made him so effective ten or fifteen years ago was he was the tip of the spear. He wasn't the guy who got parachuted in later to play the role of senior big dog and impress upon the founders important they are because, hey, the big dog is here. That's more what he's been asked to do recently. Ten or fifteen years ago, he was the tip of the spear. He was in the first meeting. He was leading the charge. He was asking the questions. He was doing the work. And in that capacity, he was the best there's ever been. Because he would fully, fully, fully commit to being present, understand that person to a degree that nobody else has ever understood them, understood their business to a degree that nobody else could possibly achieve in forty five minutes. And by the time that conversation was over, there was no question that they wanted to be in business with him. It doesn't matter who else comes into the room. It could be anybody. But, like, nobody could be Doug at that point.

**Harry Stebbings** [34:55]:

I remember meeting him for the first time. I met him in a hotel for breakfast at the Connell in London. Yeah. He ordered the most incredibly specific breakfast. It took about five minutes to describe the kind of beauty of this kind of Six egg whites, no butter, no Exactly. And afterwards, I said, oh, he's having he's clearly been here before.

**Unknown** [35:14]:

He's like, good choice. Yeah. It's funny. I actually I actually learned to eat faster because I used to travel with Doug so much, and we would try to squeeze squeeze in food in between meetings, and he'd be done in thirty seconds, and I'd still be sitting there. And so I actually actually trained myself to eat faster so I could keep up with Doug when we're on the road.

**Harry Stebbings** [35:32]:

When we go along the life cycle of, like, fund investing, the next is, like, actually helping companies be great. Yeah. Sequoia has big, big teams now. And then I have the alternative, which is your founders funds of the world to say, the best founders, they make great companies. And so my question is, to what extent does the investor really move the needle in enterprise value creation, do you think?

**Pat Grady** [35:54]:

Well, first off, on big teams, you know, when I joined seventeen years ago, we had 14 investors. Today, we have 27. And so that's less than a two x over, you know, seventeen years. So our team is fairly small relative to our market presence. The thing that has changed a bunch is when I joined, we had two people that I would call kind of front office operators. So not compliance, finance, all that good stuff. But two people, one in marketing and one in talent. That number two has grown to almost 60 today. And so that's where we've really invested. And the reason we've done that is largely a reflection of the market. One of the nice things about technology is kind of this democratizing force. Right? A founder could come from anywhere in the world and focus on any vertical. And so the venture capital market is subject to something that people used to use in relation to the big data world ten years ago, and that was a thing, which is the three v's, volume, variety, and velocity. There is a higher volume of founders coming from more places, coming at us faster than ever before. And we have to react to that as a business. One way to react is to staff up the investment team. Right? We could have a 100 investors. We chose not to do that because what we wanna do is concentrate the experience, concentrate the knowledge in the smallest possible number of people so that when one of those people happens to stumble across the next Fred Luddy, the next Todd McKinnon, the next Brian Halligan, they're gonna give that founder the sort of outlier experience they deserve. So we wanted to keep the team as small as possible. The thing that we can scale is the platform. So those front office operators that I mentioned. And that platform, it amplifies our efforts as investors. It also is an opportunity to build advantages that can compound over time. And the most obvious instantiation of this is the technology platform and the data science system that we've built, which has signals that get better and better over time.

**Harry Stebbings** [37:35]:

How much of your investing role is impacted by the data signals that you get? Had I had Chandra on the show who I think was part of the Yeah. Chandra yeah. People didn't really talk about Sequoia's data platform.

**Pat Grady** [37:45]:

It's not exposed externally. Yeah. It's just something that exists inside the building. Occasionally, we'll use it to help out founders, but for the most part, it is an internal tool that makes us more efficient. We don't wanna get to the point where the technology platform is, like, pumping out buy signals. We don't want it to make the final investment decision. We do want it to get to the point where it can tell us whether or we should meet a company. And it got to that point a year or two ago.

**Harry Stebbings** [38:07]:

To what extent do you think that's reliable? When you think about it can predict which companies we should meet, are the biggest outcomes not purely anomalous? When you look at Daniel Ack at Spotify, in the Series A, he was going around asking Series A investors not only for the round, but also if they knew a good CEO that would like to replace him. Yeah. Yeah. That's so anomalous in every way.

**Pat Grady** [38:26]:

It's a lot better for growth than it is for early. It's a lot harder to get those signals out early, which is why we have the ARC program. We're now getting thousands of applications every time we have a new batch for ARC, which we're now doing a couple times a year. Do you think ARC's been successful? I think ARC has been a wild success. There are only two things that matter. Number one, do founders like it? Number two, does it make money for our limited partners? On point number one, do founders like it? Overwhelming success. The NPS of the last batch was quite literally 100. And so the NPS on this thing has been very good. We're getting a lot of referrals. If we go through and say, okay, well, are they the right kind of founders who are applying to this? There are a lot of great founders. We've run into a lot of companies later at the Series A or the Series B that we're hunting, and then we go back and look, and it turns out applied to ARC two, three years ago. And so we're actually attracting really good founders, and we're getting a lot of value out of the program. So that's huge. The one liner that they've said, which is my favorite way to encapsulate it, is other incubators or other accelerator programs teach us how to raise our Series A. Sequoia teaches us how to build a business. That's the words of our founders, not the words out of our mouths. So that's kind of point number one. Founders like it. Point number two, is it gonna make any money for LPs? The truth matter is time will tell. There are some really good companies that are starting to come out of ARC, and so I'm optimistic that it will also make money for LPs.

**Harry Stebbings** [39:41]:

When I spoke to Danny Roemer a couple of weeks ago, he said the reason that Index has been successful, I'm kind of bastardizing it, but you know, it's kind of my job, is that they've been very, very good at keeping the main thing the main main thing.

**Unknown** [39:54]:

Yeah.

**Harry Stebbings** [39:55]:

And I guess the question that I have for you is when you look at, like, the ecosystem fund, when you look at ARC, when you look at scout funds, when you look at the operated talent platform, there's a question of how do we think about keeping the main thing. Main thing is is that flying in the face of it?

**Pat Grady** [40:09]:

It is absolutely the right question to be asking. I'm a big fan of fewer, better things. It is good to experiment because if you don't experiment, you're not gonna be on the bleeding bleeding edge. Edge. Mhmm. And you're not gonna be the ones defining the future. You're gonna be getting dragged into the future by somebody else who's defined it for you. So I think it is good to experiment. And I think that we've experimented aggressively. And I'm a big fan of that. I also think it's really important that the default for any given experiment is that it gets killed. Verdant proof is on the experiment. Right? Unless it is a wild success, shut it down. Most companies say, well, unless it's an abject failure, we'll just keep going. No. Unless it's a wild success, shut it down. That doesn't mean it's gonna be a home run right out of the gates. None of the experiments that we've done were home runs right out of the gates. But you could find something in there that allowed you to craft your thesis for why it was on the track to being a wild success. What did let run for too

**Harry Stebbings** [41:02]:

long that you should have shut down?

**Pat Grady** [41:04]:

In 2005, when we got into India and China, we did so with the thesis that the world was getting smaller. And when we parted ways in 2023, it was because that thesis, in some ways, had been invalidated. Maybe we could have done that a few years sooner. You don't think the world is getting smaller again? I think what we're seeing is technology ecosystems that are more geographically isolated than we might have expected. And there's a lot of interconnectivity, but it's not just a single global technology market. To be clear, I think our partners in those regions did a fabulous job of building their respective businesses and reaching the conclusion that these are gonna be isolated technology markets. We probably could have reached that conclusion sooner than we did. We just wanted to make sure that for a decision of that magnitude, we were getting it right versus being reactive.

**Harry Stebbings** [41:53]:

I spoke to Andrew and Julien about this in particular. We've mentioned the team, the platform build, but on the investing team build, you're apparently one of the best hires of investing talent there is in the business, they said. But they actually wouldn't do it, wouldn't they? I

**Unknown** [42:11]:

mean, you're talking about people I hired. So slightly biased. She's quite right. What is she still on? Andrew, Pat's so good at finding 23 year old analysts from Goldman Sachs. He's really good at that.

**Harry Stebbings** [42:21]:

But but, you know, Andrew told me about you hiring him and Matt Huang and the panny they hired. Started They That was a good process. Yeah. And, like, both of them obviously have turned into very, very brilliant investors. When you reflect back on your hiring process for hiring investors for the team, what have you learned? What do you do well?

**Pat Grady** [42:36]:

Andrew Reed, Matt Huang both started on our team in February 2014. And so the process that led to them was conducted over the back half of twenty thirteen, and it was about the most rigorous hiring process we've ever had. Top of funnel was 9,000, and what came out the bottom of the funnel was Andrew Reed and Matt Huang, is pretty spectacular, a couple of outputs. So I think one lesson in hiring is it is a process like any other. Yes, there's some art to it in terms of trying to really understand people, but there's also a lot of science process management aspects to it. You know, just set it up to be a very efficient process. If you maximize top of funnel, that is one of the best ways to make sure that you're gonna be happy with whatever comes out the other end of the funnel, right? So I think that's probably one big point. The second big point, which is around the kind of art piece of it, and this goes back to what we were saying earlier about how I've been trying to get better at sort of understanding people. Most of the time when you go into a hiring process, you have this list of things that you want. You know that you're supposed to keep it short, but you end up with 17 things on the list because everybody has their pet rocks that they want to include. And you go into the hiring process, and you come up with a candidate, and you're about to make a final decision on the candidate. And then somebody says, but wait, but wait, they don't have a CS degree. And you go check your list, and it turns out that none of the 17 things says CS degree. But somebody thinks that's really important, you know, and they didn't get to put together the list, and so now they're going block the candidate. So on the art side of it, you need to figure out what are the few things that are absolutely essential and make sure that the person absolutely nails those things, and everything else is a nice to have. Does it change for each role? It depends on whether you are looking for more of a DNA hire or more of an experienced hire. So Andrew Reed is a DNA hire, and then David Cohen is an experienced hire. Both DNA hires. David had more experience than Andrew, but they're both DNA hires. Primarily DNA hires. It's not either or. It's what's sort of primary. So for example, Carl Eschenbach or Brian Halligan for that matter. More experienced hires, but the reason they work is because of their DNA. Both Carl and Brian have resumes that are kind of one on one. Right? Like, Carl ran VMware from 40,000,000 to 7,000,000,000 of revenue. Now he runs Workday. Brian built a company from 0 to 2,000,000,000 of revenue, all the way from PLG up to the enterprise, act one, act two, act three, a lot of good strategic decisions. Those guys are amazing based only on their experience. The thing that separates them from other people who have similarly amazing experience is their DNA. They're just very special human beings. The way that they interact with founders, that is the thing that makes them so effective, which I don't think people necessarily appreciate.

**Harry Stebbings** [45:06]:

How do they interact with founders differently?

**Pat Grady** [45:07]:

You know Brian Long at Attentive?

**Harry Stebbings** [45:09]:

Yeah.

**Pat Grady** [45:09]:

Brian's the founder of Attentive, which is a marketing software company. And I remember one time he was saying, hey. I think there's sort of two types of executives out there who would like to get involved with venture capital backed companies. They're the kind who view it as their job to tell the founder what to do, and they're the kind who view it as their job to be in service to the founder. The thing that makes both Brian and Carl so great is that they view their job as being in service to the founder. And what that means is they don't show up and just pontificate about all the things they did right when they were operators. They show up and they listen. And they ask questions. And they're very direct with their feedback, but they're direct in a loving sort of way. And so it's the unbelievable lack of ego, the humility, the curiosity, the genuine care, and the genuine desire to help the founder, that is the thing that makes him so special and makes him so effective.

**Harry Stebbings** [45:59]:

Honestly, I think the world the most. Also, Halligan is fun.

**Unknown** [46:01]:

Halligan's amazing.

**Harry Stebbings** [46:02]:

He's really fun. He's amazing. Yeah. I really love doing that show. The final element was the harvesting. What have been the biggest lessons in terms of generating value from sales? Because you have the question of when do I sell? Do I hold? What have been some of the biggest lessons there?

**Pat Grady** [46:17]:

It's really hard. There are companies that we sold way too soon. And when I say we, the founders, you know, ultimately, we are in support of the founders, but YouTube is a canonical example. PayPal is a canonical example. You know, so there are companies that have been sold way too soon. There are also companies that we hold onto for too long. There's one in our portfolio now that I'm not gonna name, but we had an offer from somebody to buy the company for almost $5,000,000,000. We own just north of 20%. That would have been a huge home run. Now the company looks like it is kind of not headed in a very good direction. But there are companies you can sell too soon. There are companies you can hold onto for too long. Similarly, in the public markets, you know, we were talking about ServiceNow. If we'd held ServiceNow through to today, it'd be a $30,000,000,000 gain. Right? But we didn't. We distributed it a year or so after the IPO because it was the first billion dollar gain. A little bit. Over time, not all at once, but it was within the first couple of years because it was the first billion dollar gain that we had ever had in the growth business. The growth business for Sequoia was kind of this fledgling, you know, second class citizen. Did you need to do that? You're Sequoia. You don't need to prove yourself. We didn't need to, and nobody was putting pressure on us to do it. But we looked at it and said, okay, this is pretty good. You know, let's go ahead and call it a win. I think today, we'd be a lot more patient. We'd probably hang on to it for a lot longer. It's not always the right decision. We held on to a lot of stuff in 2021 that's worth less today than it was then.

**Harry Stebbings** [47:41]:

My question is, though, like, when you think about that, what is the takeaway? Is the takeaway to be prudent and take 33% off the table in increments over a nine year period, three years at a time? Is there a takeaway from that, Or is it just it's hard?

**Pat Grady** [47:54]:

Yeah. I think there are a couple takeaways. And there's sort of a high level choice to be made. And the choice to be made is how much energy do you wanna put into the harvesting? How much energy is needed? That's it. And so there are some firms that say, look, we are venture capital investors, not public market investors. We are not going to try to outsmart the public markets and figure out exactly when to distribute our positions. We're just gonna do it programmatically. And I think that's a totally viable answer. Maybe say, okay, we're gonna distribute a little bit as soon as the lockup comes off, a little bit more six months later, or a little bit more six months after that. Whatever your algorithm is, I think that's a totally okay way to do it. The way that we have chosen to do it is to try to be really good at it, which doesn't necessarily mean outsmarting the public markets. It does mean having a point of view. So that when a company goes public, it's not just programmatic. You know, there's real work that happens to try to figure out where the company has a chance to go from here. And the result of that, when it works, is companies like Square, where at IPO, it was a, I don't know, maybe a couple $100,000,000 gain. And by the time we distributed five years later, it was a multi billion dollar gain. Or companies like Mongo, which have compounded close to 40% in the public markets that we held onto for many years after the IPO. Or Palo Alto Networks, where we went into that IPO with the exact same ownership position as one of our co investors. We ended up generating more than a billion dollars more than them because we were more patient. And so sometimes, it really pays off. God, Nikesh is a beast. Nikesh is a total beast. Yeah,

**Harry Stebbings** [49:20]:

absolutely. And I did a show with him recently, and it was at the end of a thirty six hour fast. And so I was just incredibly moody. You were

**Unknown** [49:26]:

fasting or he was fasting?

**Harry Stebbings** [49:27]:

No, was fasting. Okay. And I was just incredibly moody. And I just took it out on him. Did he push you in place? Yeah, yeah. And then, no, no, he didn't. This was the point. And then I got loads of matches after. Was like, dude, you're the only person in twenty years who's like, oh, I'll be back with him. And I'm like, oh my god. What did I say? That was an interesting one.

**Pat Grady** [49:45]:

The cash has been incredible. That that Palo Alto Networks has been interesting because Mark McLaughlin was perfect for that like 100,000,000 to billion revenue leg of the journey. And then cash has been perfect for the 6,000,000,000 or whatever it is now leg of the journey. So that's been a great story. When you review the life cycle

**Harry Stebbings** [50:02]:

that we've just gone through, why are you weakest?

**Pat Grady** [50:04]:

You know, it's funny. Ironically, I'm probably weakest now where I was strongest ten or fifteen years ago, which is on the sourcing piece. That was the only way that I could distinguish myself at Sequoia in the early days was to just try to go find interesting stuff, try to find companies worthy of Doug Leone's attention.

**Harry Stebbings** [50:22]:

Is venture a young person's game?

**Pat Grady** [50:24]:

It really depends. I think if you go across the value chain, sourcing in some ways might be a young person's business. Here's the tricky thing. The more experience you have, that experience compounds, the knowledge compounds. Your picking algorithm gets better. You would say, okay, the more experience you have, the better off you're going to be at picking. The problem is, we're in a details business. If you're just trying to separate good from bad, you don't necessarily need to be in the details. If you're trying to separate good from great and great from exceptional, truly exceptional, like the one out of every couple thousand companies that's really gonna matter, you gotta be in the details. Because the 10 or 15 that all look about the same from a distance are gonna look very different when you get up close. And so picking, you need to have the attitude and the work ethic and the tenacity of somebody who's earlier in their career and trying to prove themselves, coupled with the experience and the knowledge of somebody who's actually been around and seen a little bit of that. Which is why I think a lot of times, the sort of mid career investors can be the best because they have both the right attitude and the right experience. One of the things that we try to do, that we try to distinguish ourselves on, is to not have the more experienced people check out and get into administrative management roles. Like, we should be in the field making investments, meeting companies, doing the work, really trying to understand the details. And if we can do that, then hopefully we end up at a better place on the picking.

**Harry Stebbings** [51:43]:

When you think about the benefits of having Sequoia as the line on your cap table as well, I think one of the biggest lies we tell startups is startups die of indigestion, not of starvation. I think anyone who actually has any reality in the real world knows that most companies actually run out of money in the real world, not in a foie gras in venture world, which does happen too, but the proportion is wildly to those that run out of money. Yeah. And speed is everything, and finding product market fit is everything. When you have Sequoia on your cap table, your ability to raise a next round from someone, it may not be a tier one, but from someone, is very, very high. And therefore, you get a far extended amount of time to find said product market fit Yeah. And that ideal customer and that revenue, which means you have an inherently lower mortality rate. Do you agree?

**Pat Grady** [52:30]:

Yeah. I absolutely agree. One of the things that our competitors try to use to sell against us is what they call signaling risk. Oh, no. No. You shouldn't take Sequoia this round because then if they don't need the next round, you're toast. I just use your dodgy choice of shirt. You. You're like, I prefer you on Zoom. But if you look at the data, it's actually not signaling risk. It's signaling advantage. And it's signaling advantage in the sense that if you have Sequoia on your cap table, chances are your life just got a lot easier for the sake of future fundraising. And the dilution that you're gonna get from future fundraising just went down a bunch because it is the easiest algorithm in the world as a venture investor somewhere else to say, okay, I'm gonna hunt the Sequoia seed investments. I'm gonna hunt the Sequoia Series A's. I'm gonna hunt the Sequoia Series B's. And so if you have us in your cap table, chances are your life just got a lot easier. Does Sequoia have pricing power?

**Harry Stebbings** [53:26]:

It's funny. It's something that I find investors don't look for in companies, which is like the best businesses have pricing power.

**Pat Grady** [53:31]:

I think similarly in our business, if you're way up the funnel at the moment of company inception, the difference between starting a company with Sequoia and starting a company without Sequoia can be pretty big. Huge. And so most founders, the very early stages, are willing to, you know, if you think of us as a premium product, you pay something different for a premium product than you pay for a normal product, and they pay for our premium product in the form of their equity. I think seed Series A's, we have pretty decent pricing power, so to speak, there. And then the later stage the company gets, the more the company itself has already been established. And having Sequoia on the cap table is not gonna be a company making moment. It might be nice. You know, hopefully, it can help them more over time. But we're not likely to get any sort of huge discount at the later stages.

**Harry Stebbings** [54:14]:

When you have fund sizes at the sizes you have now and the capital you have with recent fundraisers, billion dollars isn't enough. You need to see a pathway to $10,000,000,000. But sometimes that can impede your decision to invest in what could be a great company, and you have to kind of turn over the next card to see that next flip. How do you think about that, and that inhibiting your ability or decision to invest in a great

**Pat Grady** [54:37]:

You know, if we were talking about this earlier, the tiebreaker always comes down to the founder. Yeah. If I'm not sure about the market, but the founder just seems like dynamite, I'll probably lean in on that. Because to your point, you mentioned this earlier, the best founders are gonna surprise you by finding more TAM. We don't have to see a clear line of sight to 10,000,000,000 or a 100,000,000,000 or some grandiose figure. We do need to see a clear line of sight to good returns with an exceptional founder who could maybe find some upside from there.

**Harry Stebbings** [55:02]:

What do think the hardest thing of your job is today?

**Pat Grady** [55:04]:

I feel like you may not be familiar with this analogy, but did you watch basketball?

**Harry Stebbings** [55:09]:

No. I

**Pat Grady** [55:09]:

Okay. Okay. Great. So so the Bay Area team is the Warriors. And several years ago, the Warriors had two players who were both just a plus superstars, Steph Curry and Kevin Durant. Mhmm. And they managed to keep them together for several years and win championships and all that good stuff. But eventually, Kevin Durant, you know, left to go somewhere else. And so one of the things that I think about inside the building is I feel like we don't just have two superstars. We have a dozen superstars. Like, when I look at our team, any one of our partners could be a total star somewhere else. And so the thing that I always think about is how do we keep so many superstars together in one place and get everybody to work as a team and try to keep egos in balance and all that good stuff?

**Harry Stebbings** [55:57]:

I would say Sequoia is like an iPhone, which is like, once you have an iPhone, it's like, we're not gonna get to an Android, am I? Do you know what I mean? It's like, and there's there's nothing else. That's why I'm almost like, you know, don't peak too soon. I think I said this to Julien, I was like, just so you know, once you get there, it's like, you just have to accept that, like, there's no, like, up. Like Yeah. You're there. Do you know what I mean?

**Pat Grady** [56:18]:

Yeah. Well, that's I I genuinely believe that being a partner at Sequoia has the best job in the world, and we try to make sure that that's true for the very best people so that we can have a team of people who are sort of individually exceptional.

**Harry Stebbings** [56:30]:

We do postmortems on why a company isn't successful ahead of time, trying to predict what could be harmful. Yeah. If you do a postmortem on Sequoia ten years out of what is the reason why it may be challenged,

**Pat Grady** [56:42]:

what would it I do this exercise every year, and we do it as a team. I'll tell you one thing that I've heard Doug say to his kids or about his kids, which is, I can give my children anything in the world except for the one thing that made me who I am, which is my sense of desperation. And I think similarly, being part of Sequoia, we have every advantage in the world except for the one thing that made us who we are, which is a sense of desperation. And so the premortem for Sequoia has nothing to do with the financial markets or technology platform shifts or competitive dynamics out in the market. And it has everything to do with staying hungry, staying humble, and to use the Amazon terminology, behaving as if it is day one every single day. And that the default is if we don't go out there and earn it, tomorrow we are irrelevant. I think that is true. And I think as long as everybody inside the building believes that is true and everybody inside the building behaves accordingly, we'll probably be okay. But I think every premortem begins with arrogance, complacency, you know, taking it for granted that we get to be Sequoia tomorrow because we were Sequoia yesterday.

**Harry Stebbings** [57:50]:

Well, I wanna get a little bit off schedule now. Yes, because everything's been so scripted. Yeah. But I I I do wanna do a quick fire round, and that was a wonderful, like, god, the artistry of that interview, which is like, when irrelevance kind of circles back. Don't think you asked any of these questions. I did. It'd be ridiculous. You just didn't know. It's such an enchanting interview style. On the quick fire round, tell me, what do you believe that most around you disbelieve, Pat?

**Pat Grady** [58:16]:

One area where I'm probably most often different than others is around this concept of fewer, better things. Most of the time, when a company that we're involved with wants to go do a bunch of new things, it seems to me that the better use of resources is to make the thing you already do better. The thing that you already do, unless it is absolutely heads and shoulders above any of the alternatives out there in the market, you're probably gonna get more juice out of making that thing better than you are out of doing more stuff. So that's probably a place where I generally disagree with people.

**Harry Stebbings** [58:47]:

When you review investment decisions internally at Sequoia in terms of, like, the voting process and the process to get it done, are the unanimous ones generally the best outcomes, or are the contrarian ones the best outcomes?

**Pat Grady** [58:59]:

So we have actual data on this going back to 2014, where we started recording the votes numerically on every single investment. So we have about ten years worth, which believe it or not, is not conclusive because there are so few outliers that have emerged even in the last ten years. But best we can tell whether something is consensus or contentious actually doesn't matter. The thing that matters is presence of conviction. So there could be investments where everybody's a six, and the voting is zero to 10, no fives. So six is above the line. Six is lukewarm enthusiasm. There could be an investment where everybody's a six, and then compare that to investment where one person's a nine, two people are eights, and then some people hate it. There's some twos and threes. Do you let people be a six? Yeah. I think numbers that are further away from five are more clear in terms of your point of view, but a lot of times people are commingling bravado with conviction. If you vote a nine just because you feel like you need to vote a nine to, you know, show your conviction, that's probably not a good reason to do it. If you vote a nine because you're actually a nine, and you're probably not a nine more than once in a blue moon, that's great. Do you worry about political voting? I'd always do a

**Harry Stebbings** [60:02]:

six if I wasn't sure, because I'm a yes, but I'm a weak yes. It turns into, you know, a Mongo, I said yes. And if it's a dog, I'm a was a weak yes. Now I like this one. This is from Alfred. Which venture investor do you most respect and learn from outside of Sequoia? Cerebras. Come on. It's an easy one. How did she get Sarah as your wife? Now that that that is that is a good question. Tell me, what's the most memorable first founder meeting you've had?

**Pat Grady** [60:31]:

Two of them come to mind. One was Eric Yuan just because he was in this terrible office, but he was so full of joy and energy and enthusiasm because of this product that he was building. And it just reinforced focusing on the things that actually matter. So that was one that was pretty memorable. The other one was in the summer of two thousand seven. So I joined Sequoia in March 2007. Jim Goetz and I come over here to London to look investment that we were contemplating at the time. And I convinced him to take a day trip with me to Sweden. So we flew into Copenhagen, then we drove across the bridge to Malmo or whatever's over there. And there's this thing called the Lund Or Lund Technology Park that had a whole bunch of startups in it. Guess was very skeptical about this trip to Southern Sweden. And that was reinforced when we got lost on the way to this technology park. We took the wrong exit off the freeway, and we're just lost in the middle of farmland, stuck behind a tractor. Literally, there's a tractor in front of us taking up the whole Road, and Jim and I are sitting there behind the tractor. And he turns to me, and he's like, there's a technology company around here? It was this company called Click Tech run by this guy named, and it actually turned out to be a great business. It ended up going public. It was worth several billion dollars. But when we were lost in a farm field in Southern Sweden, I was sweating bullets.

**Harry Stebbings** [61:47]:

What's your biggest lesson from Jim?

**Pat Grady** [61:49]:

I think Jim's two superpowers. One is his ability to see the future, and two is his ability to figure out people and what motivates them and how to put people together into teams and how to motivate those teams. I learned a bunch of lessons from him. The one that probably sticks out the most is on that first part, which is seeing the future. Because I remember back in 2007 when I first joined Sequoia, and we were using we just started using salesforce.com. And prior to that, I was using an on prem SQL system at Summit Partners. And salesforce.com circa 2007 was garbage compared to on prem SQL system. And so I was not particularly positive on the whole idea of SaaS in 2007. And I've, fortunately, I I learned. But but at that point, I wasn't. And I remember Jim, with just full conviction, conviction, was was explaining explaining to to me me one day, we were looking at some cloud company, and I was poo pooing it, and Jim was telling me why he liked it. And he just, with 100% conviction, was like, Grady. He's like, don't you get it? Everything is going to the cloud. I was like, Jim, what are you talking about? Like, this software is crap, and, you know, like, why is everything going to crap? He's like, no, no, no. Trust me. Everything is going to the cloud. And he had that point of view in 2007 way before, way before that was at all obvious. And so the lesson for me from that was a little bit of, like, trust your instincts or maybe a little bit of dare to dream. Because I think Jim had picked up enough clues to have a real point of view on the direction the world was going, even if the data at that time didn't necessarily support it.

**Harry Stebbings** [63:19]:

Which futuristic point of view do you have which the data does not support today that you can share with me?

**Pat Grady** [63:25]:

I think that even if you were to freeze the capability set of the current foundation models and turn all of your attention to optimization and tuning and developer ecosystem, it would revolutionize trillions of dollars worth of industries and create trillions, if not tens of trillions, of dollars worth of market cap. The race is still on for advancing the capabilities of these foundation models. I think the current capabilities are powerful beyond anything people have figured out how to do with them yet.

**Harry Stebbings** [63:55]:

Final one. One of the kindest things that anyone has ever done to me is is give me their support and mentorship. You met me so many years ago when I did this. You was, like, a 19 year old. And you have family. You are now head of Sequoia. You have so much constraints on your time. Why were you so kind to me? I've never asked you that, but I've often thought it, and we still have regular calls. And I know how busy you are. Why why did you do it? Well, that's a

**Pat Grady** [64:23]:

nice question. You're gonna give me a choke up here. So Ravi, who you know, was sharing this concept one time of there are a lot of people who are sort of like auditioning for their lives versus just living their lives. Meaning, they are doing the things that they think they're supposed to do and jumping through the hoops that people have told them to jump through, but they haven't really figured out what it is they want to be, what it is they want to do, and what it is they want out of life. And so, I mention this in relation to your question because most of the people I encounter who are earlier in their career are sort of auditioning for their lives. They haven't really figured out what it is they want, how they want to get there, and they might be working hard, but they're kind of going through the motions. And I think when I first met you, it was very different. And it was clear that you were not auditioning for your life, you were living your life. And you had decided what you wanted, and you had come up with a way to go get it. And you were very genuine, very earnest. Not very earnest anymore. You were very earnest then. You were very genuine, very extremely hardworking, very curious, all of the attributes He's that you would want out of somebody that you could be friends with or be partners with or have a long term relationship with. And so you made it very easy for me to be kind to you because you're the sort of person that I wanted to be in business with.

**Harry Stebbings** [65:53]:

Honestly, our relationship means so much to me. I have loved doing this. I'm so glad that we had this very detailed schedule we could work off of. And above everything, thank you for being my friend. Thank you. My word, that was a special one. I mean, it's rare that both of us choke up at the end of an episode, but Pat has been such a dear friend and mentor to me over the last decade. I wanna say a huge thank you to him for for giving me the time, mentorship, and advice that he has done. If you wanna watch the full episode, then of course you can on YouTube by searching for 20 VC. That's two zero VC. I always love to hear your thoughts on episodes. But before we leave you today,

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