Source: Lessons from 20 Years of Venture Capital: Roelof Botha (Managing Partner at Sequoia Capital)
Compiled by: Daisy, ChainCatcher
Editor’s Note:
Against the backdrop of the rapid development of artificial intelligence technology, AI investment continues to heat up, and the decision-making logic of venture capital is also constantly changing. In an exclusive interview with The Generalist podcast, Roelof Botha, managing partner of Sequoia Capital, shared his judgment on the current market stage, his views on AI investment risks, and how Sequoia internally deals with decision-making biases.
He reviewed his experience in crisis management at PayPal, pointing out that in an environment with abundant capital, companies are prone to strategic laxity. At the same time, he also discussed how to evaluate the long-term potential and market cap of early-stage high-growth companies, and the importance of adhering to investment discipline in specific situations.
This conversation provides an entry point for examining the AI startup cycle from a venture capital perspective, covering practical experience in risk control, psychological biases, and investment strategies.
The following content is a compilation and editing of the interview.
TL;DR: (too long, didnt read)
1. From the perspective of the overall market, there is no systemic bubble. Of course, some local areas, such as artificial intelligence, are indeed overheated.
2. The companys accelerated growth is part of a larger trend, not an isolated phenomenon.
3. The rapid growth of a startup project in the early stages does not mean that it has the foundation for long-term success. It is necessary to pay attention to market ceiling and sustainability.
4. When investing, if you only look at the early growth curve, it is easy to misjudge the future ceiling. Early investors must think: Can this model really become a mass behavior?
5. Rapid growth does not equal success.
6. Excess capital can easily lead to lax corporate strategy, but when resources are limited, it can stimulate maximum innovation and execution.
7. People are easily influenced by the initial information they are exposed to.
8. Sequoia reduces the impact of cognitive biases on decision-making through institutionalized processes (such as horizontal comparison of investment projects and public identification of psychological biases).
9. Long-termism and collective judgment are Sequoia’s core principles for remaining rational in volatile markets.
Current Market and Investment Rationality
Mario: Do you think there is a bubble in the current market?
Roelof: By my standards, I dont think this is a bubble. To me, a bubble means that prices of all kinds of assets are generally inflated across all sectors, and thats not the case now. For example, the U.S. real estate market, both residential and commercial real estate, is still weak overall. We have an internal tracker at Sequoia that is updated every Monday, tracking the enterprise value to revenue multiples of about 690 public technology companies. Based on this statistics, the overall level is currently in the 60th percentile of the past 20 years. In other words, from the perspective of the overall market, there is no systemic bubble. Of course, there is indeed overheating in some areas, such as artificial intelligence, but this is not the case across the board.
Mario: In addition to weekly tracking reports, what other ways do you stay rational when evaluating investments?
Roelof: In addition to market multiple tracking, we also have a tool that records all completed investment cases of the current fund. This allows us to constantly review the projects we have invested in recently and compare them with the projects we have invested in in the past. Because humans naturally tend to make relative comparisons in decision-making. If you only look at the projects you have encountered in the past month today, the standard can easily be lowered or raised by the current environment. But if you broaden your horizons to the entire fund investment cycle, or even longer, you can more accurately judge the absolute quality of a project-whether the company has the potential to become a legendary company. Sequoia has been established for more than 50 years, and the companies it supports account for more than 30% of the Nasdaq market value today. This fact also requires us to always hold ourselves to the highest standards.
Mario: With the rapid development of artificial intelligence, are more and more companies standing out?
Roelof: Indeed, today, the time required for companies to grow to a considerable scale is shorter than ever before. But this is not a new phenomenon that suddenly appeared, but the result of continuous evolution over the past few decades. From semiconductors to computer systems, to the Internet, to mobile Internet, and to todays artificial intelligence, each technological leap is lowering the threshold for companies to reach users and speeding up product promotion. Especially today, more than 5 billion people in the world are connected to the Internet, and most of them have smartphones, which means that new services can reach the global market almost instantly. Coupled with the accumulation of massive amounts of data, it provides rich fuel for the development of AI. Therefore, the acceleration of company growth is part of a major trend, not an accidental phenomenon.
Mario: In the current context of rapid development, is the biggest challenge for investors to judge the ceiling of opportunities?
Roelof: Indeed. The first thing is to judge the upper limit of the market size. For example, fifteen years ago, the flash sales e-commerce (such as Gilt and Rue La La) was very popular. At that time, the growth curve was extremely steep and impressive. But it turned out that the flash sales model did not become a mainstream consumption method, but was limited to a niche market. When investing, if you only look at the early growth curve, it is easy to misjudge the future upper limit. Therefore, early investors must think about a question: Can this model really become a mass behavior? The second is the issue of competitive barriers. The leader may not win in the end. For example, Google is not the first search engine, and Facebook is not the first social network. In many technology fields, it is often the second or third entrants who summarize the lessons learned by their predecessors and eventually surpass them. Therefore, when investing, we must not only judge the market size, but also evaluate whether the companys moat is deep enough and whether it can continue to lead.
Mario: You mentioned that there have been phenomena such as SPV (special purpose entity) investment, small amount of self-investment, and large amount of external fundraising in the AI field. Is this a sign of a bubble?
Roelof: This phenomenon is mainly concentrated in the field of AI. My point is: even if the overall market is not a bubble, some areas may be overheated. In addition, I am worried that this reckless investment approach will undermine the health of the market, especially for the startups themselves. Looking back on my personal experience, PayPal faced huge financial pressure in 2000. It was precisely because of the restrictions on burning money that the team focused on innovation, optimizing business models, and reducing costs. Excessive financing will make the company lose this sense of crisis and become lax, which is not conducive to building a healthy long-term business.
Risks and Misjudgments Behind High Growth
Mario: In reality, can founders still maintain self-discipline and rationality after receiving huge amounts of financing?
Roelof: Very rare. Those who can really do it are often founders who have experienced major crises and life-and-death moments. For example, Brian Chesky of Airbnb experienced a crisis in which the company almost collapsed during the 2020 epidemic. This experience gave him a deep understanding of capital and risk. I believe that people like him will be able to remain cautious and disciplined even if they get sufficient funds in the future. But for the vast majority of founders who have not experienced similar hardships, it is difficult to resist the temptation of slackness brought by sufficient capital with rational self-discipline alone.
Mario: It seems that only by experiencing pain can one truly understand the lesson.
Roelof: Yes, I did. When I was at PayPal in 2000, we were losing $14 million a month and had only seven months of cash left. We initially spent a lot of money on expansion, but when the market crashed and funding sources closed, we were forced to move quickly. During that time, we cut costs, solved online payment fraud, and adjusted our revenue model. Since then, we have had three consecutive years of rapid revenue growth. This experience taught me that the greatest innovation and execution can be achieved when resources are constrained. Therefore, I often advise entrepreneurs to ask themselves, what decisions would you make today if you only had 12 months of cash flow left? This assumption can greatly clarify what is really important and avoid wasting resources.
Psychological biases and coping mechanisms in decision making
Mario: When did your interest in the psychology of decision making begin?
Roelof: My interest comes from many aspects. First of all, my father is an economics professor, and I have been influenced by him since I was a child. In college, I majored in actuarial science, which requires forecasts for decades, and trained me to think about problems on a very long time scale. Most people, such as accountants, are used to only looking at data from the past year. When I arrived at Stanford Business School, I took an organizational behavior course and systematically studied cognitive biases (heuristics and biases). Since then, I have begun to read a lot of books on this subject. Later at Sequoia, we not only introduced the identification of biases in team discussions, but also required that every investment memo actively list possible psychological biases, such as: Am I too anxious because I havent invested for too long? Am I too close to the founder because I know him? In this way, making the bias explicit can greatly reduce their implicit impact on decision-making.
Mario: This method of proactively identifying biases is equivalent to adding a layer of protection to decision-making.
Roelof: Exactly. If you can discuss bias openly within the team, such as someone admitting, I think I may be a little biased on this case, then the rest of the team can participate in the judgment more rationally, thereby collectively reducing the impact of bias. We always believe that the team is better than the individual, and the rationality of the group can make up for the blind spots caused by individual emotions.
Mario: What do you think are the most common decision-making biases that we should be wary of?
Roelof: There are two that are particularly important. The first is the anchoring effect. People are easily influenced by the information they are initially exposed to. For example, you looked at a company six months ago and it was cheap at the time, and now it has tripled, so you instinctively resist investing. But the right question should be: Is this a good time to enter under todays conditions? Instead of dwelling on past prices. The second is loss aversion. People tend to exit too early when they already have gains, fearing that they will lose their existing profits, rather than continuing to hold assets that have the potential to continue to grow. This mentality will make people miss the opportunity for true long-term compounding. To combat this tendency, we set up the Sequoia Capital Fund, which allows us to hold shares of excellent companies after they go public for a long time, rather than distributing them to LPs immediately at IPO.
Mario: Sequoia established a long-term fund, which, to a certain extent, is to use systems to correct the shortcomings of human nature.
Roelof: Thats right. Setting up mechanisms is a way for us to fight against instinctive weaknesses. It is not enough to rely on individual will, and we must improve the rationality of collective decision-making through structural design.
Investment review and long-term mentality
Mario: In your investment experience, what cognitive biases or wrong decisions have impressed you?
Roelof: Yes. For example, we had the opportunity to invest in Twitters early rounds, but we ultimately chose to give up. One of the reasons was that we questioned the companys growth data at the time and did not have enough foresight to understand its network effect potential. In retrospect, this was actually a mistake of over-reliance on short-term quantifiable indicators and ignoring the possibility of long-term non-linear growth. This is why we later emphasized the importance of both quantitative data and qualitative trends in internal education.
Mario: Companies that truly change the world often do not have impressive data in the early stages.
Roelof: Exactly. Legendary companies are often full of uncertainty in the early stages. Their growth paths are not linear and even seem a bit chaotic. If you only use traditional financial indicators, you will often miss them. Therefore, identifying early potential requires a combination of data, trends, founder traits, and more macro market insights.
Mario: Amid the current AI investment boom, what do you think of the rapid growth of startups? What are the risks behind this?
Roelof: The growth rate of companies today is truly amazing. Some companies have earned hundreds of millions of dollars in revenue in just a few months. But the question is whether this explosive growth is sustainable. First, we need to evaluate the market capacity. Some fields themselves have a low ceiling, and growth will slow down rapidly after reaching a certain scale. If you enter when the valuation is already extremely high, the risk is huge. Secondly, it is the competitive landscape. Leading in the early stage does not mean that you can maintain the lead in the long run. Competitors continue to emerge, and user stickiness and network effects are the real moats that can withstand shocks.
Mario: That is to say, rapid growth does not equal success.
Roelof: Absolutely right. Fast growth is a signal, but it must be comprehensively evaluated in combination with multiple factors such as market size, moat, profit model, team execution, etc. Otherwise, it is easy to fall into the trap of blindly pursuing high growth.
Mario: In such an environment, how does Sequoia remain calm and rational in decision-making?
Roelof: We have several internal principles. First, we always adhere to discounting future value rather than retroactively looking back at past prices. Even if a project was cheap in the past and has tripled now, if it is still reasonable based on long-term value, we will not miss the opportunity due to psychological barriers. Second, make extensive comparisons. Every time a new investment decision is made, it is not only compared with the current case, but also compared horizontally with all investments throughout the fund life to ensure that the standards do not decline. Third, openly discuss potential biases. Each investment memorandum requires the person in charge to list possible psychological biases, such as whether they are too eager because they have not taken action for too long. Through collective discussion, these biases can be made explicit, thereby reducing their implicit influence on decision-making.
Mario: There seems to be a lot of emphasis on self-reflection within Sequoia.
Roelof: That’s right. We believe that only by constantly examining ourselves can we maintain excellent decision-making in the long run. The market environment changes very quickly, and any carelessness at any time will lead to disastrous consequences. For fifty years, Sequoia has been able to continue to succeed because of this culture of continuous self-iteration.
Mario: What advice would you give to young investors or entrepreneurs?
Roelof: Stay curious and stay humble. Curiosity drives you to keep learning new things, while humility reminds you to always be aware of your limited knowledge. Dont be complacent because of short-term success, and dont be discouraged by short-term setbacks. Truly great careers are all built through continuous trial and error and correction.
