#81 - Doug Leone - Lessons from a Titan
Notes from the Colossus podcast with Doug Leone - Partner at Sequoia Capital
Doug Leone led one of the world's most successful venture firms, Sequoia, for over 25 years after he was given responsibility for the firm by its founder, Don Valentine, in 1996. Alongside Mike Moritz, the pair managed its expansion from a single $150 million early-stage fund to an $85 billion global powerhouse.
As I inch closer to 5 years in the industry, although I see progress, I keep asking myself the same questions:
How best to work with founders & things done without being an ass?
What should I do to level up my investing game?
Am I joining the herd or avoiding FOMO as an investor?
How to write memos that people will actually read and not delete?
Is there any way an investor can really ‘add value’?
Can I really ‘coach’ founders while having less than a tenth of their experience and knowledge?
Listening to this podcast helped gain some perspective which I am sure many other venture investors will appreciate gaining.
Formative years of the career
You always ask yourself, how do you turn a negative into a positive?
…learning to use the "we" pronoun. Here's what being smart and not greedy. Whenever I sold something and somebody helped, I insisted on commission splits and those things, and I understood management took an eye that, well, not only is this kid selling, but look, everybody loves him. He's taking care of other people and next thing you know, they had an eye on me. And boy, I took note of that, right? Okay, that's how you do things.
the mistakes that you make when you're too aggressive, when you're too hard core and you say, boy, I don't want to do that. And the people that you meet. You meet 2 kinds of people that teach you, the one that teach you what to do and the ones that teach you what not to do.
I tell people, we are high-performance and pick your noun. We're a performance team. If you don't believe in sports, production, a movie and maybe the investors are the actors, maybe the investors are the goal scorers. But you know what we need, we need trainers. We need coaches.
Formative years as an investor
I remember attending a meeting with a Founder. And as we walk out of the meeting, Don (founder of Sequoia Capital) only wrote in green ink, yellow pads and green ink. And in green ink, he left a note on the table, said, "Doug, not fit to listen to founders." And he just left it there for me to see.
And in this new day and age, everybody wants weekly feedback, why should I do better, this and that. Let me tell you, you read that note from Don Valentine. That's all the feedback you need for the next 12 months. You have to break the feedback down. Why does he say that? And you certainly don't go in his office and say, "Hey, Don, what do you mean by that?" You know what you mean and you understand maybe you were too aggressive, the wrong style.
(As a young investor) immaturity plays a role, lack of experience plays a role. And quite frankly, lack of track record. So you are a no track record, abrasive "pain in the ass" young man with a New York accent, and clearly a kid from the street. Well, that doesn't play, that's really not the best marketing message.
Understanding core motivations
…what we look for founders, we also look for Sequoia partners, investors, young people. The same set of traits use the word insufferable, use the word he doesn't listen, she doesn't listen or he's belligerent, she's belligerent. Those that other people may view as a negative, we actually view as a positive because in order to get something done in life, you can't just walk down Main Street and be a sweetie pie.
I've actually met some people that I'm now convinced they were just wired that way. And I try to look for that for the simple reason that I view that to be the greatest advantage, but could be the greatest weakness, if not channelled appropriately. So want to look for it to see if it's there because I like to be it there, then I look to see what it is and whether it's on the right side of this good versus bad trait.
And thirdly, because once we understand it and then that's a good side, then how do we channel it, complement and make sure this incredibly wonderful insecure, scared because that's what we all are when we're coming up, how do we help them as if we were their brothers to achieve the maximum type of success.
I just really want to understand what makes this person tick. And to me, the greatest question is why?
I love asking the setup question of where would you get your best reference. And they're eager to tell you that complete set of question because the next question is, where would you get your worst reference and why?
I think it probably takes 2 to 3 hours, including a dinner when people do relax and start showing you things and you want to see how people place orders and you want to see what things they're saying.
Four decades at Sequoia
It's gone from a high-margin cottage industry to a lower-margin mainstream business. And when you see that, you see all types of people coming in, you start having all these cycles, momentum, cycles, down cycle, in a momentum cycle, you hear things from people that have never made a dime, don't know what they're doing, raises us money as you can, screw the venture guys, give them as little equity as you can. And without being self-serving, I think those are the wrong types of messages.
The messages are raise as little money as you can to get to the next milestone, find an investor in the same way you find an engineer.
What we have right now is a bit of a s*** show, a whole bunch of companies.
There's companies with $500 million in the bank, $1 billion in the bank. I heard of one with maybe an $80 million run rate and no growth perspective. They don't know what to do. Bad habits all over the place. And that's what happens during "wonderful time." All these lousy habits are built.
Tough times, healthier times, some of the greatest companies got created during times like this, whether it was Cisco, whether it was PayPal and Google, whether it was Stripe and Square. Those companies with terrific DNAs got built during very difficult times.
FOMO as an investor
You have to have a good head on your shoulder, where you don't practice FOMO, where you don't chase every company and you make the investments that you think are appropriate where if it doesn't make sense to you, a lot of things don't make sense and you see every 5 venture firms wanting to invest. And the thought process, if your young investors said, "Well, I don't really get it, but they get it must be great. Let me go in." And there's a lot of that, believe it or not.
Picking venture as a career
I'll go to venture if I had a passion or if I didn't know how to start a company because if you think about venturing capital, it's a large supply side. The scarcity side is talented founders. So if I have a choice and if I thought I was a talented founder, a venture versus be a founder, in fact, I always laugh when the super smart great people say, "I want to go into venture." I said, "Why do you want to go on the commodity side? Stay where you are and do something great." But at the end of the day, it's a preference as to whether you're a builder, if you will, a player or if you are a coach.
Now I want to use that coach term because coach implies, I know more than a builder. I don't mean it that way. I mean coach is not being in the field on a day-to-day basis. It's not a heart-given knowledge, okay? Whether you want to be on the sidelines, maybe it's a better way to say it. You want to be on the field than being on sidelines. And that's a personal choice that are people that are inherent builders.
Go to market & product positioning
It starts with product management. What exactly are we building? If truth be known, it starts with vision. But if the vision is wrong, we're all going home, assuming we're some place in a ballpark.
It's not some product management, what are we building? To product marketing, how do we position it? How do we tell the story? How do we have the 3 words for describing what we do? How do we have the 30 seconds, 2 minutes? And everybody can do with 10 minutes. Very few people can do the 3 words. And then how do we do the demand gen? How do we do the sales? And wherever that cycle is broken, it looks like a bad salesperson. This guy can't sell.
The truth of the matter is if you've got product market fit, even shady salespeople can sell.
The thing I can't do is the black magic. If you don't have the right vision, if you'd -- I'm not close to product market fit, I will tell you, Doug Leone or any other people in venture, I'm not going to help you. Black magic is reserved for founders. Everything else is mere mortal stuff. That's what we (investors) can do.
Components of great positioning
Simplicity, crystal clearness, something a mere mortal can understand. If you can describe it and you can understand it you're out to lunch. Singularity of purpose. When I go to the store, I buy a pencil because I want to write. I don't want a pencil because I want to write, I scratch my back with the tip. It doesn't work like that.
Singularity of vertical market early on because you want to be narrow. You have no resources. You've got to be narrow. Oh, we are chasing these 4 vertical markets. It sounds good. But in order to do that, you have to have marketing that talks for different languages for 4 markets. And maybe you have to have engineering that develops different features for me. A little company can't do that. So be it the bull's eye as sharp as you can and then starts to expand in concentric circles when you get your legs under you in that vertical market. That's what I look for in position.
As an investor, show don’t tell
what I try to do instead of telling I like showing. So let me give you an example. Your VP of Marketing stinks. If I say that, it means nothing to a founder. But if I say, I'd like you to meet these 3 VP marketing from other companies. Let me tell you what happens 9 times out of 10, they come back and they say, "Holy s***, the guy we have or the gal we have is nothing like this guy." So try to show, not tell. Build trust, which doesn't get built on day 1. It really gets built with the first time to see founders in a pension. He understands you're there to help them out.
So once you have trust, which is really the foundational layer, it's the grease that makes all business run. And once in a while, you have to tell because maybe you don't have the time to show, but you better do that once a year.
Great components of lead generation
If you have a widget, you do less account-based management because you've got 10,000 accounts that you can call. So that becomes a volume play.
You build something a little more complex with a little more of a solution cell versus a widget cell, a pencil is a widget. Or a solution as you've got to tell a story, your accounts, you better have your story right per account.
You also have to understand for each product you sell, how much drag is it on the back of the company. If I sell you pencil, there's no drag in the back of the company. If I sell you a solution that everyone requires 6 months implementation plan, 3 features for each one, then you can go as far as you can because your bottleneck is no longer at the front end. It's the back end, which sometimes goes back to cash because now it's a lot of people.
Shift in mindset
If you do a marketing strategy, don't just talk to me about a marketing trend. Talk to me about the dynamics in the market first. That's the reality you can't change and then you apply the strategy based on those.
How to estimate the killer gene in someone
You look what they've done? Have they taken risks in life early on? Have they put their guts on the line? I tell candidates with children that it's okay if you choose a parallel track life, i.e., when you become a bank, a consultant. And it's okay if you want to take risks. What's not okay is do one and always spend your life thinking you did the other. And the killer gene for me is stay away from the parallel tracks. Just put yourself out there with no net. And usually people that are a little desperate in life, that only have one way to go and that's up or forward, they tend to have the killer gene.
Good vs Bad investors
The careers of investors, let's say the founders have no idea of that. And they do certain things that are contrary to the founder's best interest. They are wonderful analysts but can't seem to make an investment. They get enthralled by the technology, never asking where is the beef, where is the business, who's the buyer. It has to be a simple solution. It's so wonderful I can't really explain it. Then you run the other way. It comes down to a human being issuing a purchase order for something that he or she understands to which I have to convince their managers and their peers to go buy, with single use. "Oh, that is really cool." Cool is the enemy of reality.
Those are the failure modes, fibbing, lack of business sense. When one of our partners or associates, they describe a company or the issues facing the company, and the founder comes in the next Monday. And what we heard the week before, it has nothing to do with what the founder says, that's a huge warning sign.
I would say (pick) long-term thinkers with business sense. The thing we don't want to do is get a call of an LP, I hired a new analyst. "Please give us sole investments you've done in odd year every Tuesday of the month." We're not going to give you that. The other thing I tell LPs, ask the tough questions. Because I've learned from sales, a customer who's talking, a customer who's asking the tough question is an engaged customers. Sometimes, they're a little more pissed, sometimes less bit of talking. It's a customer that doesn't talk that you have to be terrified. You don't know what they're thinking.
Any Sequoia pitch is returns on Slide 1. Not Slide 28, where you bury it. Slide 1, welcome here's returns and they're net returns, not gross returns before fees. No, it's the money you get back. Slide 2 is probably the low lights, not the highlight, the low lights.
Let me tell you everything that's screwed up. So once you have that conversation, first of all, they blow it away. The newbies are little scared, "Oh, my god, I didn't know all these problems." But that builds trust because then they go to all the other meetings and they've sold a pile of s***. Here's our returns before marketing expenses. Like what does that mean? So to me, the questions are the drill-down questions. Are you doing too many things? When we went into China, "Oh, what do you guys do in China? " Of course, they made a ton of money in China.
appreciate that we are in the latency business. If you're in a hedge fund, you mark everything mark-to-market at the end of the day. We're in a business, where cancers can grow, and you may not see them for 3 years. Just think about that. So how do you drill down so you don't have to wait for 2, 3 years. To me, is establishing very clear norms of our performances for someone who just joined us. Performance is for someone for 2 or 3 years. Someone just joins us, they have to figure out where the bathroom is. It's a metaphor. But you know what I mean. 2 or 3 years, can they source anything? Can they hold a meeting. Partner, someone a little older? Are they at the right side of an argument.
Do they have the courage to have an opposing point of view when 6 people have another point of view? You're about to be a partner. Do you have a history of being right? When you're on 5 Boards, can you point to 2 that we are going to generate? No, we all made the investments, but you were the one that pushed it. That's how we measured it. Are you a good human being? Do you use the we pronoun a lot? Are you likable to founders? Can you win situations? Do you have the smarts that has to help because we don't care if you win and ask for help. That's a win. That's an everybody win.
Complete clarity. Here's the thesis, here's 1 or 2 reasons why one of it, not 17 reasons. Here's the supporting data. Here's the opposing data. an intellectual honest memo that gives you both sides, but then argues at the end that in spite of both sides, you think side A is more important for the following 3 reasons. Therefore, we recommend an investment. With an appendix, with the reference checks that either are the full reference or summary, 2 lines on top. Because not everybody is going to read the whole reference.
And you do that in 3 pages, not in 32 pages, not in these investment banking, let me show you how hard I work, 35 pages that nobody reads, nobody reads. A 2- to 3-page memo, we all read.