

Sequoia’s Leone: In Venture, Big is the Enemy of Great - dkasper
http://blogs.wsj.com/venturecapital/2012/12/10/sequoia-capitals-leone-in-venture-big-is-the-enemy-of-great/?mod=WSJBlog

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1123581321
_“We have co-opted seed funds. You know, Y Combinator, that was completely our
money. We have secret handshakes with a whole bunch of people. Very dangerous,
because word gets out that so-and-so’s money is Sequoia’s money, that would
not be a good thing._

Do I correctly understand that Paul, Jessica et al are investing Sequoia
money, or that they are somehow a large partner? Would someone please explain
this paragraph from the article?

Update: Is this what he was referring to?
[http://m.techcrunch.com/2010/05/21/y-combinator-closes-
new-8...](http://m.techcrunch.com/2010/05/21/y-combinator-closes-
new-8-25-million-fund-sequoia-is-lead-investor/)

I wouldn't exactly call it a "co-opt"; I am still interested in whatever
insight someone shares.

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dougleone
Oops. Co-opt was an incredibly poor choice of words in a live presentation.
What I meant to say is that we've been partnering with YC startups since 2005
and between 2009 and 2012 we were the biggest LP in two of their funds. We’ve
had a terrific relationship with Paul and Jessica and are thrilled to be
associated with them.

My handshakes comment referred to our now well-documented Scouts program. It
started out stealthy because it needed time to develop and the scouts didn't
want the attention. Scouts regularly disclose our relationship to founders and
the wire transfer always comes from Sequoia. These two efforts represent some
of our attempts to work with very talented entrepreneurs (like Brian and Drew)
as early as possible so that we may help them build enduring companies.

~~~
1123581321
Much appreciated and thanks for joining to answer.

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josh2600
Yeah I understand the viewpoint here. I'd argue that the costs of building a
startup have been driven down so dramatically that companies that are hard
tech organizations need to raise ever-smaller rounds to get started but,
quixotically, ever-larger rounds to scale.

Something like LivingSocial costs next to nothing to start, but costs millions
to scale. Those kinds of wars can't be fought with 1M Series A rounds, but
burning that much cash on a mistake is also quite rough. Now LivingSocial
isn't hard tech, but most DB startups don't have massive initial capital
expenditures, and with things like KickStarter market validation is much
simpler.

Is the incubator approach better? With the exception of YCombinator and MAYBE
techstars, I'd say no. It's hard to say.

As always, we'll look back in 10 years and pick the winners and losers by fund
growth, but the fact remains, companies can afford to put off raising until
much later in their life cycle.

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jbyers
I misinterpreted the title of the article and this post. I thought Leone was
making this point about startups. He's not.

tl;dr: VC is warfare; venture firms themselves need to be aggressive, nimble,
and revolve around small teams to thrive. Don't give up too much equity,
beware overcommitted angels, and sometimes high growth companies need tons of
funding.

~~~
jdcryans
I found one nugget: “You want very small, tight teams, same thing with running
an engineering department.”

I can think of reasons why you'd want that, but yeah the article wasn't about
making that point.

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gavanwoolery
"...growing faster than Facebook."

Please stop using growth as a metric -- just say, flat out, how many (legit)
user accounts you have. If you grow from 1 user to 2 users in a day, you are
growing at 200 percent, way faster than Facebook is...but you only have 2
users. If you grow from 10k to 20k, its only slightly less meaningless. Also,
the 10,000 fake user accounts you are seeding your startup with do not count
as legitimate growth.

Also, Facebook is probably plateauing. It is unlikely your growth match's
Facebook's peak growth rate.

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jessaustin
If you'll forgive my pedantry, I think doubling is traditionally described as
"100%" growth, not "200%".

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inmygarage
Leone mentions the angel scouts briefly. Curious:

\--how do these angels structure the relationship? is it just that they invest
out of an angel fund with a single LP?

\--what is the real downside of taking an investment from a scout that is
backed by a larger VC? he mentions that people get upset about it, but it's
unclear why it's such a negative thing.

~~~
panabee
the downside comes when you need to raise money from VCs. if the larger VC --
which made a proxy investment via the angel scout -- does not invest in you
again, it becomes a red flag for other investors. this grants the larger VC
more leverage during negotiations because you effectively need the VC to
participate, or else risk scaring away other VCs. this assumes the other VCs
know the angel scout is a proxy for the larger VC.

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dreamdu5t
Who is the real entrepreneur? The investor who makes a decision to risk his
capital to capture a market's demand, or the founder who asks for money but
doesn't make the decision? Ultimately it's the investor that evaluates and
takes a risk on the model, not the founder.

I associate entrepreneurship with risking your own capital, and with risk in
general. Investors seem far more entrepreneurial than founders when evaluated
in that context. I think investors should be considered the real entrepreneurs
- it's ultimately their decision.

Founders seem more like managers, not entrepreneurs. I'm talking about
founders who don't risk their own capital and take investment, of course.

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heyadayo
I see, so you really think that the LPs are the true entrepreneurs -- Harvard,
Stanford, various state pensions/treasury departments and the like -- the ones
who invest money in VC funds.

Risking your life, status, health, happiness, and wealth in order to realize a
huge, positive change in the world -- that's what it's about in my book.

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zupreme
I think that growth, as a metric for gauging success will soon fall out of
favor. Soon stodgy old concepts like "revenue" and "profit" will begin to take
hold again.

The assumption that eyeballs will eventually equal dollars has been proven
false again and again. Eventually Angel Investors and VC's will have to return
to the same types of fundamentals that banks have been following all along
(the recent financial...hiccup...aside).

~~~
rmah
It's dangerous because it limits your options. Say you take money from an
angel that is _strongly_ associated with a single VC fund. Assuming you do
well, when you need to raise your series A, if that VC fund declines, then
it's less likely another VC will fund you. And they know this. Essentially,
you have given them a lot of power over your future financing.

