Finding the Next Silicon Valley with Doug Leone (Sequoia) | Disrupt SF (Day 2)
5:02PM Sep 6, 2018
Okay yes we are very pleased to have for the very first time Sequoias global co Managing Director please welcome to the stage Doug Leone and our moderator Connie Loizos.
Mike working. Everyone knows Sequoia Capital as a as a excuse me 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 the sort of one of the masterminds 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 money, we return to the investor.
Oh, is that right? Yes. So where is it? Some most of your returns are still coming from the US
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 had it 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,
you know, 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 a decision from the US, we were certainly going to fail. And so 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 sense that by 2020-25, it was going to be a globalized world. And so we look for places that we thought were going to grow very rapidly, and we're going to be very large. So we didn't go to Europe because it was large, we're 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, you know, this is sort of been a topic of conversation throughout the conference, I talked with some Silicon Valley investors about this yesterday, the economist cover story saying Silicon Valley's 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 to Silicon Valley, I tell an engineer, I said, Oh, it's such a Google it's little company or Google, I tell him, you know, it's great working for Google, the sun always shines, and 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, and 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's willing to pay a million dollars, and you're willing to pay $200,000, or 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, started Silicon Valley have core engineering, but move the balance of engineering someplace around the globe.
In terms of, you know, the, the differences maybe, and founders, you know, in Silicon Valley versus China, can you sort of tell us a little bit of 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 this similar there, they want to be the den makers, they it's not about money, it's about building a product that people will want. China's 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 roll 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 give you what I had great competitive advantage, desperation, because that clears your mind. And so the Chinese founders in some ways, 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 10pm. And people go to work after 10pm. And we don't see that in us. I'm not saying the US founders or to do that. But those are the difference. They're similar in character. They're similar in dreams a similar and how they want to change the world. They're ultra driven. And the Chinese founders have a half other gear, because I think they're a little more desperate.
So you're, you're 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
I'm absolutely not endorsing that. On the same way that I'm not endorsing true, happy balance. Because when you start a company, you have to do something that other people not willing to do. It's a different way to live. And I think we, you just accept it, we should learn from it. And we should decide in the US what we want to do. But by no means stamp of approval, nor am I going against that 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 that helps American investors had into China, is that correct?
It helps American companies that want to enter a very difficult Chinese markers with 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 with other 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 the 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 Sequoias. 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 is 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 sensor content, it's 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. And they're 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 seems to think it's, it's not 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 goal 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 is gonna sort of announce more billions of dollars or tariffs. This week, China's responding, no negotiations planned,
it really hasn't effect that us yet here in the US it's affected China more, I can tell you that the mood in China in 2018 is a lot different than 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 that founders want to go go, go, go spend, spend, spend, spend, because all they've seen is up into 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 US, it's affected China, and you see it in the mood change.
Tell me a little bit about your strategy there and actually how it worked, you know, for example, can you invest in a company that has sort of a direct counterparts in the US or is that a conflict of interest? I mean, given that these are,
No, we have very, very local funds, and then decisions made locally. And so it used to be five, six years ago that Chinese investments were look alike companies to US companies. Well, I can tell you, that's not the case anymore, whether it's AI or healthcare, biotech, or even mobile, they're very different business models. They're very local Chinese business model. 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 the similar company here in the US. And when I attend the weekly I attend a weekly meeting every Thursday, and 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 China 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 US. You have a couple, probably more than a couple of Siena, a FinTech company that's filed to go public here, Neo and 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 us investors, US investors want to see growth, is it more received by the Asia market, the market doesn't want to see growth, they want to see profitability. a terrific Asia IPO is a company growing from 30 million to 40 million to 50 million 20% EBITDA, that company would not be a US IPO or the Hong Kong market. And so what we try to do is aim the companies where we think there'll be receptive public market investors. But the other thing, 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 we also think about is we 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, one sort of issue is it's sort of takes much longer to kind of cue up a company to go public or 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 a US purely Darwinistic, is their interest on local investors. If there is they'll go public, but there is no government supervisory agency in the US that says, You are now blessed,
right? Obviously, the regulatory environment is very different in both countries. I one thing that I wish I understood better, but is this new national charter that Chinese regulators announced earlier this year that they understand this sort of around personal information that's sort of more onerous than GDPR and the EU I'm wondering how that impacts
Look, it is, I wish the charter was so clear, I wish the laws were so clear, China has a very tough way to do this. 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 are have their own laws. And so you've got to navigate and you always have to stay very, very clear. And making sure you don't upset the government. And, you know, sometimes you get it wrong, and you get spanked and you get shut down for a day or two, three. And if 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 as really just consolidate it as power
I wanted to talk to you to about, you know, a big story for Sequoia this year whether or not you wanted it to me, it was just your fundraising efforts. I understand that they're pretty much at a close at this point. You've raised six funds and you know, the last 18-24 months and they're pretty much closed.
Well, look, it sounds like we raised a lot of a lot of funds, we raise us seed us venture us grow very coincidental that they all ran out of money at the same time.
It a lot of money is the point too
Yeah, we also raise China Seed but they're all very small China seed US seed $150, $180 million venture business hasn't changed much growth business hasn't changed much. The thing that's new is that we raised a large latest 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've seen the valuations in the private markets, whether it's Uber at 40-50 billion, or whether it's, it's Airbnb, a 30 billion, those would be public market valuation, for those of you that are younger than 35-40 years of age, Cisco system when public at 300 million pre just keep that in mind, and how we're raising money a 30 billion pre in the private markets. So why 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 set quite in a different way. Their investors that are now approaching a company say either you take a billion dollar from us, so 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 that an option and that and that they have friendly capital around and so we raised an $8 billion fund that's global in nature. It backs up the US companies, a Chinese company and the India 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, new bank, and action IQ. We have a very, very active c fund where we want to be, we want to be the very first capital that are terrific debt maker, founder goes and raise so we can be there from day one. We are very small teams in the US and China and India. We are 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 in $93 billion, fund its CEO, Masa Yoshi-san has said to expect more of these changes the playing field a bit Do you think SoftBank knows what it's doing?
Look Masa, very smart man. And I've sat down with Masa a number of time he read in the press that Sequoia as against SoftBank. We read SoftBank saying it's acquired none of that is true. They have 100 billion dollars. We have co investor when my sign a number of companies, we compete with my sign a number of companies we call investor without them, they co invested without us. To us. It's important though the founders of an option. And so one thing is for sure, if you've got a player with 100 billion dollars, 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.
Where 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 a man companies in which we read every relationship. And so I'll be very clear, we have never lost a single company this large fun to anybody, because we have a pre existing relationship. Having said that, we're not going to get a discounted price, we have to pay the market price. But where we want to invest. We've had a seven year relationship. We've served them that boards for seven years, we've helped that founders out of out of our few pickles, we've helped recruit some VPs. So we typically don't lose and Masa very well 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 we have written $500 million in the same we have written $400 million in the same company, 400 is the largest check we've written
who received that check.
I'd rather not say it, but it's happened twice
Here in the US 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, you know, on the Forbes list of billionaires, what would your advice be to founders, audiences
to start a company if you have a burning need, if you can go to sleep at night, because you want to do something, if you happen to have some dull 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. Where 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 beer founders, they needed some extra money they our 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 have 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 a 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 know 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 a wash 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 a 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 up front, 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.