Roelof Botha, Partner of Sequoia Capital, elaborated on the thinking behind the previous investment model changes, and talked about DeFi and Metaverse

Roelof Botha is a partner of Sequoia Capital, one of the oldest and most successful venture capital companies in the world. Not long ago, he announced that Sequoia Capital will carry out the most daring innovation since its establishment in 1972-breaking the traditional VC ten-year cycle investment model, and creating a permanent open structure around the name of "Sequoia Fund."

The conversation started from the details of Sequoia Capital’s change, and the content extended to Roelof Botha’s entire career: including his changes in the past 20 years, his days at PayPal, the common ground of legendary investor partners, and his comments on Square and YouTube. And Udemy and other companies' investment resumption. The content of the article comes from Patrick’s dialogue podcast audio, compiled by TechFlow Friends member 0xtree.

*TechFlow Friends is a volunteer organization of the Deep Wave TechFlow community.

TL; DR: (too long, didn’t read)

1. Today's venture capital operation model was invented in the 1970s and has not changed for 50 years.

2. The traditional ten-year cycle system will end the relationship between investors and investment targets prematurely.

3. It took five years for a start-up company to realize the value from 0 to 3. After five years, as a listed company, its accumulated value will be even higher.

4. There is a situation that may make me lose interest in investing: the founder is a mercenary rather than a missionary. Mercenaries will languish in adversity.

5. Take Square as an example. Many companies have the possibility of creating again, but most organizations are their own worst enemies, and many good ideas are often stifled in the organization.

6. The beauty of payment is that it helps lubricate the wheels of business. Although it is an overused term. But things of real value do make business easier.

7. I like the promise of smart contracts, where you can embed cryptocurrencies with payment activities to make transactions more seamless.

8. The promise of certain DeFi technologies in enabling smart contracts and reducing transaction costs is absolutely fascinating.

9. The real risk of Metaverse is being controlled by large companies.

10. I will think about the three most important things that will happen to each company I work with in the next six months? This will free you from the troubles caused by the little things in front of you.

11. When I was recruited to Sequoia Capital, I had a feeling that if I succeed, I will be able to play an important role in the future partnership. I don't just join in working for others, become their servant or lackey.

12. Genius is more about inspiration, and talent is more about sweat. You can have a talented supervisor in a particular category that can help you get from N to N+1. But you need genius to go from 0 to 1.
Rewrite the VC rule book

Patrick: How do you think about this change? What problems is the new structure trying to solve?

Roelof: Today's venture capital operation model was invented in the 1970s. It was mainly driven by the historical background at that time. It has not changed for 50 years. This is a step backwards for disruptors who reshape the industry through investment.

The problem with the traditional model lies in closed-end 10-year funds. Traditional venture capital institutions must strictly abide by the 10-year fund duration, that is, fund managers must sell their shares when the 10- to 12-year period (the longest period) expires.

When we look at the existing business, we will find that the longevity of the cycle does not match Sequoia's original intention to find a special founder who can build a legendary company and stand the test of time.

For example, in seed investment, we help the founder find a market for his business model when he has only a rough idea, recruit a suitable executive team, and then help them overcome the difficulties on the road to success. We have all the background, the relationship with the founders, and the ability to help them continue to thrive.

However, the default setting of the traditional ten-year cycle system is to withdraw from the board of directors and allocate shares shortly after the IPO. This will prematurely end the relationship between investors and investment targets, forcing inconsistent goals between startups and investment partners.

Why should an IPO be a destination for investors? I have now worked for the growth of several companies for ten years or more. Why does an IPO mean that venture capitalists must withdraw from the board of directors?

And we realize that for these great companies, they will continue to compound interest, and most of the value will accumulate after the IPO. So, if you think about it from the perspective of LP, at Sequoia, we work for the so-called great cause. Most of our LPs are endowment funds, foundations and non-profit organizations. Our job is to create returns for them. So many returns occurred after the company went public, why should we sell stocks so quickly? Therefore, the design of Sequoia Fund is really designed to meet two goals: to help founders have a more lasting capital base, and at the same time to help LP obtain better returns.

Patrick: Maybe you can review the Square investment process and use it as an example to illustrate the importance of the new structure. After all, from the real numbers, Square is undoubtedly a very successful case.

Roelof: We talked to the company in 2010 and made investment commitments. The real investment was closed in January 2011, when the price per share was 95 cents, and I was still a member of the company's board of directors. By the time Square went public, the IPO price was $9, which is about 9 times the return. But we chose to distribute it patiently during the three to four years of the IPO, so the final average selling price per share was between $80 and $90, and the rate of return was about 90 times. This kind of patience has a huge impact on LP's earnings.

Under the review, Square's total market capitalization at the time of IPO was 2.95 billion. Five years after the IPO, the total value is 86 billion, and today it is worth 115 to 12 billion.

In a sense, a start-up company took five years to realize the value from 0 to 3. After five years, as a listed company, its accumulated value will be even higher.

Patrick: Maybe you can talk specifically about how the new structure will work? Suppose I am a large LP of Sequoia. I have made some investments in every new group of funds or every fund launched by Sequoia. What will happen in the future?