Sequoia, KPCB, and YC: Comparing Three Approaches to Venture Investing

On the investment principles of venture capital: below are the principles of two of the world’s leading venture capital firms, Sequoia and KPCB, along with the world’s best-known incubator, YC. Sequoia Sequoia invests in private companies at every stage of development, from startups to companies about to go public. Internally, Sequoia divides these companies into three categories by stage. First: Seed Stage companies. Such a company usually consists of a few founders and some inventions. What it wants to make has not yet been built; sometimes the company itself has not even been established. This is the stage at which angel investors invest. Cisco was at this stage when Sequoia invested in it: its product had not yet been developed. Second: Early Stage companies. These companies have generally demonstrated their concept and technology and built a product, but have not yet achieved commercial success. Google was at this stage when Sequoia first invested. Google.com already had considerable traffic, but was not making money. Third: Growth Stage companies. These companies have revenue and may even be profitable, but need more capital to grow. Sequoia likes to invest in fast-growing companies, despite the risk. Apple, Google, and Yahoo all shared this characteristic. How, then, does it judge whether a company has growth potential? Sequoia has roughly two criteria. 1. The company’s technology must represent a leap: a qualitative change or a revolution. 2. Ideally, the company should be in an industry that no one else has tried. Before Apple, for example, the personal-computer industry was a blank slate; before Yahoo, the internet had no portals. This approach is highly risky, because no one has yet demonstrated that the new field has commercial potential. Of course, the payoff is high if it succeeds. For entrepreneurs seeking an investment, Sequoia has a basic requirement: explain the business clearly in a few sentences. What does that mean? Sequoia gives you a business card to see whether you can explain it in the blank space on the back. Someone who cannot do so is either a poor communicator, unclear in their own thinking, or trying to pull the wool over people’s eyes. Sequoia will not invest in any of those cases. Sequoia partner Bill Coughran was previously a senior vice president at Google. Here is Sequoia’s view of promising ventures and companies: The benefits that a company’s venture—its invention or product—brings customers must be immediately clear, rather than requiring a long story. It must have a distinctive technical capability: a core competitive advantage. A good business can always be built into something substantial with little money. Cisco was an investment, for example, because it could design routers without hiring many people; the investments in Apple and Google were similar. Sequoia will never take on a business that can survive only by burning cash. Bill adds two points about founders: The company and its founders need good DNA: entrepreneurial DNA. Sequoia believes a company’s DNA forms within its first three months. Excellent founders attract an excellent team, and an excellent team lays a strong foundation for the company. They must be able to beat large companies through agility and speed. Achieving those two things requires founders to be more than smart and capable. They must also know what they should do and what they do not need to do. ----- KPCB KPCB’s investing has three characteristics: 1. The founders’ motivation for starting the company. Doerr and his colleagues place great weight on whether a new company can bring positive progress to the world. KPCB is less interested if it merely lowers costs to make money, or does something differently for the sake of being different. Its past investments—including Apple, Cisco, Google, Facebook, and even some that failed—shared this characteristic. 2. The fund becomes deeply involved after investing and uses companies it has previously backed to help new companies, or helps new companies support one another. In simple terms, this creates network effects. Some entrepreneurs, of course, dislike what they see as excessive intervention. At times, KPCB even likes to bring in a CEO to replace the founder. Whatever one thinks of that practice, it is a characteristic of its approach. 3. Unlike Sequoia, which does not emphasize focus or make judgments about the future, KPCB is more focused and likes to predict the future. This has sometimes brought greater success, but has also led it to miss many opportunities. After 2000, for example, KPCB bet on new energy and lost across the board, while missing the opportunity in social networks. KPCB was the last of the funds to invest in Facebook, when its valuation was already extremely high. In fact, Facebook approached KPCB early on, but the firm’s attention was not on social networks. It later publicly acknowledged this as one of its greatest regrets. On the other hand, KPCB’s bet on the iPhone ecosystem in the iPhone’s early days was a tremendous success. ---- Y Combinator, or YC YC was founded by Paul Graham, Silicon Valley’s godfather of entrepreneurship. Graham himself embodies the combination of art and technology. Early on, he studied art at the renowned Rhode Island School of Design (RIDS), North America’s best independent art school, while also earning a bachelor’s degree in the arts at Cornell. He later switched to science and engineering and earned a PhD in computer science. Graham sees similarities between technological invention and artistic creation and is dedicated to discovering creative young people. Graham’s approach to running an incubator—or an incubation–investment hybrid—is different from that of earlier investors. He places little weight on physical conditions such as premises, emphasizing instead the importance of human potential and experience to entrepreneurial success. In Graham’s view, finding promising young people is the first step toward success. These young people may lack experience, however, so the greatest help an investor can offer is that experience. Knowing the limits of his own experience, Graham gathered a group of experienced people to help mentor young entrepreneurs. He also shares some of the equity from his investments with these experts. Although YC calls itself an incubator, it has little physical space, most of which consists of small meeting rooms. There, it provides comprehensive training to the founders of its portfolio companies. You can therefore think of Graham’s philosophy of incubation in terms of former Tsinghua president Mei Yiqi’s philosophy of running a university: a great university is defined not by its grand buildings, but by its great scholars. ----- #得到 #吳軍矽谷來信 #Dedao #WuJunLettersFromSiliconValley