Finding the Next Silicon Valley with Doug Leone (Sequoia) - Disrupt SF

Is my mic working? Oh, yeah. Everyone knows Sequoia Capital is a giant in the United States. But fewer of you may know that more than 50% of every dollar that Sequoia now returns to its investors comes from an overseas strategy and from China primarily. And today we have one of the masterminds of that global strategy with us, Doug Leone. Thank you so much for coming.

It's a pleasure to be here. And one small thing, it's 50% of the money we invest, not 50% of the money we return to the investors.

Oh, is that right? Yes. So most of your returns are still coming from the US?

A great majority comes from the US, but China's coming up very, very, very fast.

Okay, well, important distinction. Well, so the thing is, you were not the only ones to go into China. You headed there in 2005. A lot of other venture firms went as well, but they got out. You stayed. How did it work so well? And I guess at what point did you know that it was working?

Well, the first thing to keep in mind in business is the thing that appears really risky, if you think things through, it's the least risky of them all. And one of the insights we had was that if we went to China and we made the decisions from the US, we were certainly going to fail. And so what we decided to do is look for local teams and then cut a deal with them that says, 'You've got to make all the decisions.' Imagine a local team being told that. It was the exact opposite of what everybody else was saying. And the reason we did that and the reason we went to China is because we sensed that by 2020, 2025, it was going to be a globalized world. And so we looked for places that we thought were going to grow very rapidly and were going to be very large.

So we didn't go to Europe because it was large but not growing. We didn't go to Vietnam because it was growing but not large. So we went to China first, then India, then Southeast Asia.

And this has sort of been a topic of conversation throughout the conference. I talked with some Silicon Valley investors about this yesterday. This Economist cover story saying Silicon Valley is sort of on the wane, other parts are rising. Do you agree that that's the case?

Well, look, it's become very expensive to recruit in Silicon Valley. Now, we can recruit engineers in Silicon Valley, and this is how I recruit engineers in Silicon Valley. I tell an engineer, I said, oh, it's us or Google. It's little company A or Google. And I tell him, you know, It's great working for Google. The sun always shines on the campus. The bicycles are great colors. You can take nine months off when you've got a baby. But there's not a thing you can do in your life that's going to change the price of that stock by a 16th of an inch. You come to our little company. The food stinks. It rains maybe in our company. But you have an idea by 10 o'clock. And it's going to be implemented by 11.

And you can make or break a company. That gets you to recruit. But at the end of the day, if someone is willing to pay a million dollars and you're willing to pay $200,000—our startups don't usually go like this. They're not rocket ships from day one. They go through bumps. All your engineers are vulnerable. And so where three or four years ago, we told companies, 'Recruit your engineering department in Silicon Valley,' now we say, 'Start in Silicon Valley, have core engineering, but move the balance of engineering someplace around the globe.'

In terms of the differences maybe in founders in Silicon Valley versus China, can you sort of tell us a little bit, knowing both markets as well as you do, what are some of the biggest differences?

Well, first I want to tell you how they're the same. They both dream about changing the world. That's how they're similar. They want to be the dent-makers. It's not about money. It's about building a product that people will want. China is a little bit different, that the generation in China now is the first generation that has an opportunity. In the US, it's the third generation that has an opportunity. And if you just think back to raw logic, if it's a first generation, you should assume that their edge is a little sharper because, you know, the edge tends to dilute through the years. I tell my kids, for example, 'I can't give you what I had—great competitive advantage: desperation.' Because that clears your mind.

And so the Chinese founders, in some ways, are a little more desperate. And you see it in the crazy work ethic that I'm not endorsing, nor condoning, nor disapproving of. But I've had dinner in China until 10 PM. And people go to work after 10 PM. And we don't see that in the US. I'm not saying the US founders ought to do that, but those are the difference. They're similar in character. They're similar in dreams. They're similar in how they want to change the world. They're ultra driven. And the Chinese founders have a half of the gear because I think they're a little more desperate.

So you're, I think, referring to a sort of famous Financial Times piece this year that suggested that China has a growing edge. Founders there, you know, sleep in their offices. They don't see their families as much. You're not endorsing that. You're not saying that US founders can emulate that model.

I'm absolutely not endorsing that, in the same way that I'm not endorsing work-life balance. Because when you start a company, you have to do something that other people are not willing to do. It's a different way to live. And I think we should just accept it. We should learn from it. And we should decide in the US what we want to do. But by no means a stamp of approval, nor am I going against it. I'm just pointing out what the differences are.

So again, knowing both markets, and you even have a sort of a cross-border fund, I think that you raised maybe like a year and a half ago. That helps American investors head into China, is that correct?

It helps American companies that want to enter a very difficult Chinese market where the laws are opaque, the market is not fully open, enter China. And we've done it with LinkedIn, we've done it with Evernote, we've done it with Airbnb, and we have a fund—out of the funds we have in China, we have Venture, Growth, Seed—but we also have a cross-border fund. Because at some point, when a company gets large enough, they have global aspirations.

So, I mean, you know, on the one hand, I think if anybody can figure it out, it's Sequoia. But on the other hand, I think there's this growing feeling that it doesn't really make sense for American companies to try to go to China. You know, Airbnb has struggled. LinkedIn has made it, but it's made a lot of concessions. You know, its members can't join certain groups. It's agreed to sort of censor content, sold part of its company to local officials. We had an investor here, Kai-Fu Lee, who I'm sure you know, the AI expert. And he was also sort of underscoring that, you know, to your point, Chinese founders are—I think he called them gladiators in their sort of own coliseum. And he said it's not sort of a government issue, it's a competitive issue, a competitiveness issue.

And it's—I mean, he seemed to think it's not sort of workable.

Well, look, it all depends if you want to go where the puck is or where the puck is going to be. And it's our belief that four or five years from now, things are going to be different. Markets are going to be more open. Yes, we're seeing a little bit of a trade war right now, but there's a lot of pressure in China to open markets if they want to be part of the global community. And so it's our view that China is going to be more open through time.

Can we talk about the trade war? How is that impacting your business? I mean, every week, I think Trump was going to sort of announce more billions of dollars of tariffs this week, China's responding, no negotiations planned.

It really hasn't affected us yet here in the U.S. It's affected China more. I can tell you that the mood in China in 2018 is a lot different than the mood in China in 2016. China, and we've been in China since 2005, had never seen a market downturn, a prolonged downturn. And one of the reasons the founders want to go, go, go, go, spend, spend, spend, spend because all they've seen is up and to the right. Well, I can tell you the mood is a little bit different in China. So while I don't think it's affected us very much in the U.S., it's affected China and you see it in the mood change.

Tell me a little bit about your strategy there and I guess how it works. You know, for example, can you invest in a company that has sort of a direct counterpart in the U.S. or is that a conflict of interest? I mean, given that these are...

No, we have very, very local funds and then decisions are made locally. And so it used to be five, six years ago that Chinese investments were lookalike companies to U.S. companies. Well, I can tell you that's not the case anymore, whether it's AI or health care, biotech or even mobile. They're very different business models. They're very local Chinese business models. If you look at companies like Toutiao, you may or may not have heard of them. It's a video company. We do not have a similar company here in the U.S. And when I attend the weekly, I attend a weekly meeting every Thursday in China where we review all the companies. It used to be that I had a lot to say because I've seen those businesses in the U.S. and India.

Now I'm learning as much as I'm providing input because they're very Chinese type of businesses.

What's interesting, too, is so many of them are trying to go public here in the U.S. You have a couple, probably more than a couple, but X Financial, a fintech company that's filed to go public here, Nio, an electric car company. Why are they doing that?

Well, look, it's a global market. Whenever we have a company, we decide whether is it going to be well received by U.S. investors? U.S. investors want to see growth. Is it more received by the A-share market? The A-share market doesn't want to see growth. They want to see profitability. A terrific A-share IPO is a company growing from 30 million to 40 million to 50 million, 20% EBITDA. That company would not be a U.S. IPO or the Hong Kong market. And so what we try to do is aim the companies where we think they'll be receptive public market investors. But the other the other thing to keep in mind is the IPO is just a moment in time. It's a day in a company's life. And so what we also think about is where are the best long-term shareholders for this company that's going to have many, many years after the IPO.

I guess, do you see that changing over time? I know one sort of issue is it sort of takes much longer to kind of queue up a company to go public there versus here. I'm just wondering, I mean, I think we're lucky that we have so many offerings here. Do you see a shift?

Well, in the US, it's purely a market-driven type of environment. In China, the IPO licenses are managed by the government and they're managed by the government in a way so there's a balance of supply and demand. The Chinese government, they don't want to see an IPO that goes up and comes down. If it comes down, it means that Chinese retail investors are losing money. And so getting that license is very difficult. And if you get that license in some ways, that license alone is worth 500 million to a billion dollars, because that's going to be the starting value of your company. So very different market. In the Chinese market, much more managed, much more to please local investors. In the U.S., purely Darwinistic.

Is there interest from local investors? If there is, they'll go public. But there is no government supervisory agency in the U.S. that says, 'You're now blessed.'

Right. Obviously, the regulatory environment is very different in both countries. One thing that I wish I understood better, though, is this new national standard that Chinese regulators announced earlier this year that, I understand, is sort of around personal information that's sort of more onerous than GDPR in the EU. I'm wondering how that impacts.

It is. I wish the standard was so clear. I wish the laws were so clear. China is a very tough place to do business. It's a very tough place to go and do business. You not only have national laws that are not clear, you have provinces that have their own laws. And so you've got to navigate, and you always have to stay very, very clear on making sure you don't upset the government. And sometimes you get it wrong, and you get spanked, and you get shut down for a day or two or three. And you have to have the right connections. The connections don't help you in anything but going to talk to an official and make sure he or she understands that you're going to make the changes that they want done. So the message really is, it's a tough place, and you've got to be ultra-sensitive

to not upsetting the government, especially in the last 24 months as the president has really just consolidated his power.

Right, right, right. I wanted to talk to you, too, about, you know, a big story for Sequoia this year, whether or not you wanted it to be, was just your fundraising efforts. I understand that they're pretty much at a close at this point. You've raised six funds in the last 18 to 24 months, and they're pretty much closed.

Well, look, it sounds like we raised a lot, a lot of funds. We raised U.S. seed, U.S. venture, U.S. growth. It's coincidental that they all ran out of money at the same time.

But it's a lot of money, is the point, too.

Yeah, we also raised China seed, but they're all very small. China seed, U.S. seed, $150 million, $180 million. Venture business hasn't changed much. The growth business hasn't changed much. The thing that's new is that we raised a large, later-stage fund called Global Growth. And the reason we raised it is the large companies want to stay private longer. They want to fight the global fight as private companies, not as public companies. And they require a lot more money in the private markets. In fact, we have seen the valuations in the private markets, whether it's Uber at $40 billion to $50 billion, or whether it's Airbnb at $30 billion. Those would be public market valuations. For those of you that are younger than 35 to 40 years of age, Cisco Systems went public at $300 million pre.

Just keep that in mind. And now we're raising money at $30 billion pre in the private markets. So what we wanted to do is have a pool of capital so our founders knew they could have friendly capital to support them through the journey, through the IPO and post the IPO. Said quite in a different way, there are investors that are now approaching our companies saying, 'Either you take a billion dollars from us, or we'll invest in your nearest competitor.' And we wanted to make sure that Sequoia companies, that Sequoia partner companies, didn't face that stick-up. We wanted to make sure they had an option and that they had friendly capital around. And so we raised an $8 billion fund. That's global in nature.

It backs up the US companies, the Chinese companies, and the Indian companies just to serve the founders throughout their whole journey. As soon as I say that, I also want to remind everybody that we do seed investments: Airbnb, Dropbox, Stripe, Nubank, ActionIQ. We have a very, very active seed fund where we want to be. We want to be the very first capital that a terrific risk-taker founder goes and raises, so we can be there from day one. We have very small teams in the US, China, and India. We have very small teams, but we have the capital that's available to support a founder through the journey.

Which is amazing that you can keep your eye on the ball. And I know that you do, but you didn't mention by name SoftBank.

I did not.

No.

Yes.

But SoftBank is obviously investing a $93 billion fund. Its CEO, Masayoshi Son, has said to expect more of these. It changes the playing field a bit. Do you think SoftBank knows what it's doing?

Look, Masa is a very smart man, and I've sat down with Masa a number of times. He read in the press that Sequoia is against SoftBank, or SoftBank saying it's against Sequoia. None of that is true. They have $100 billion. We have co-invested with Masa in a number of companies. We competed with Masa in a number of companies. We co-invested without them. They co-invested without us. To us, it's important, though, that founders have an option. And so one thing is for sure, if you've got a player with $100 billion, prices are going to go up all throughout. And our job as investors is to make sure that we pick them right. It's no more complicated than that.

Were you losing deals to SoftBank before?

No, because keep in mind that our big growth fund, the one you were talking about, is aimed at our own companies. It's aimed at companies in which we already have a relationship. And so I'll be very clear. We have never lost a single company in this large fund to anybody because we have a pre-existing relationship. Having said that, we're not going to get a discount on price. We have to pay the market price. But where we want to invest, we've had a seven-year relationship. We've served on that board for seven years. We've helped the founders out of a few pickles. We've helped recruit some VPs. So we typically don't lose. And Masa is very welcome in some of those deals, especially those that require large amounts of cash.

How big a check are you willing to write from that new fund?

Look, we theoretically could write a billion-dollar size, but a billion dollars, you know, I don't have a pacemaker in my heart yet. So I'd rather not go to a billion. We have written $500 million in a single—we have written $400 million in a single company. 400 is the largest check we've written.

Who received that check?

I'd rather not say. It's happened twice.

Here in the U.S. or in China?

I'd rather not say.

Doug, we're running out of time. I know that you're sort of an inspiration to a lot of the founders in the audience because you are an immigrant. Your family came from Italy when you were young and nothing was handed to you. Of course, today you are on the Forbes list of billionaires. What would your advice be to founders in the audience?

To start a company, if you have a burning need, if you can't go to sleep at night because you want to do something, if you happen to have some domain expertise, if you happen to be a customer. You know, so many of our great companies were founded where the founder was the customer. What the founder didn't know, though, is that he or she was the proxy for the next billion people. The Zappos founders couldn't find a pair of shoes. The Airbnb founders, they needed some extra money. The Yahoo founders couldn't find anything on the internet. The list goes on and on and on. Do not start a company because you're a little bored and you think it's cool to start a company and you're going to talk to a few customers to see what problems they have because...

The customers cannot tell you the problems that are three steps down. They can only tell you the problems right in front of them. But if you've got that burning need, go do it and go do it very smart. Protect your equity like gold. Choose your partners very carefully. Do not listen to these things: 'Raise as much money as you can.' No. Raise as little money as you can early on because your company has no value. Raise a little money to get to the next step, then raise a little more money. At some point, you're going to be awash with cash. That's when you want to raise a lot of capital. Be shrewd. Don't listen to conventional-type wisdom out there and use your noodle. Listen to common sense and choose your partners extremely carefully.

One more thing. Choose your co-founders very carefully. We see a lot of founders that are kumbaya, 'Three of us, we split it three ways.' And three months into the company, they realize one person is doing 80% of the work. Figure that out upfront, have the real tough conversation with your co-founders, do something fair and reasonable so that you two or three can work together for the next 10 years.

Doug, thank you so much for coming. You have to come back again.

Thank you. Thank you for having me. It's a real pleasure.