“I just think change unfairly favors the startup, the nimble small company,” says Roelof Botha.
The Sequoia partner, whose portfolio includes Unity, 23andMe, Instagram, Instacart, Xoom and YouTube, says he’s hopeful about the opportunities this pandemic has created for companies across a variety of sectors, including healthcare, cloud computing, social and others.
We spoke for an hour with Botha about several topics, including how user behavior is rapidly evolving, trends he’s seeing, his outlook on economic recovery, how he’s evaluating new investments and how fundraising itself is changing. Fun fact: Sequoia has made 10 investments over Zoom since the coronavirus pandemic forced us to stay at home.
The full conversation was broadcast on YouTube, and the embed appears below.
Side note: Extra Crunch Live is our new virtual speaker series for Extra Crunch members. Folks can ask their own questions live during the chat, with guests that include Aileen Lee, Kirsten Green, Mark Cuban and many, many more. You can check out the schedule here.
Below, you’ll find a lightly edited transcript of our recent chat with Botha. Enjoy!
The differences in fundraising based on stage
When you’re listening to a seed-stage company, it’s often about the story. The founders paint a vision of the future. That’s part of what I love about my job, by the way. You’re sitting there and you’re trying to imagine what the world is going to look like one day and whether this company is on the right side of history. Or is it implausible that this will happen? It’s so much fun to sit there and think about that. At the seed stage, it’s about the story.
As you get to a Series A or Series B stage, the company will definitely start to have some metrics: usage numbers, early adoption numbers. If it’s an enterprise company, what are people willing to pay for your product? You start to get a sense of the metrics that back up the story. If the metrics don’t support the story, then you start to wonder if that company makes sense. In the long run, you need to have financials that flow from the metrics. But that’s typically at a Series C or later stage. And clearly, by the time a company goes public, you need to have connected story to metrics to financials.
What he’s most excited about for the future
I’m probably most excited about the opportunity to rethink healthcare. There are so many things in the U.S. healthcare system that we look at and people scratch their heads and go, “this doesn’t really make sense, but it’s the way it is. It’s an accident of history, so let’s just keep going with it.” I think this creates an opportunity for us to revisit that. The ability for us to have telemedicine, for example, something that has been stymied by regulations. “How do you reimburse a physician if they give you a remote visit? Is that permissible if they weren’t in the office?” All these silly things that have held back innovation in these areas. My biggest hope is that we use this opportunity to really revamp whether healthcare works in the U.S.
The best frameworks for making business decisions under pressure
We have this COVID matrix. It was actually developed by one of our portfolio company CFOs. With his blessing, we repurposed it and shared it with everybody else. It was about laying out various scenarios and how the world may play out over the next 12-18 months. It looked at the actions the company would take if you did plan A, B or C, and where would that put you from a cash position.
Because at the end of the day, the thing that matters most is cash flow, and can you survive? This framework is a very helpful tool for people to look at a matrix of outcomes under these various scenarios. If we did A, B or C, where do we end up? And what do we need to make sure we survive? Can we wait on this decision for three months? And then maybe that’s a gate to make another decision? And so I thought that was a really helpful framework for people and a lot of our companies have embraced that.
Evaluating companies during coronavirus as long-term wins versus trends
We’re not gonna make perfect predictions. But we try to think about: Is it more plausible that this is the way the future looks than not?
So when we think about something like Instacart, there are some people who discovered online grocery and delivery and for them, it’s fabulously convenient to not have to go to the store. Most of the country had not yet embraced Instacart. COVID has accelerated Instacart use, obviously, dramatically. It’s wonderfully convenient for many people to have access to that. To me, that feels like something that was inevitable. What’s happened is Instacart’s 2023 arrived early. It arrived in 2020. It’s on the right side of history. Will the exact shopping baskets be the same? Probably not, because people may be stocking up now, and they won’t be stocking up in the same sense post-COVID. But now that you’ve been introduced to this idea around the convenience of online grocery delivery, is that likely to stick? That feels like something that’s likely to stick.
Our data science team actually looked at usage across different apps. You see that for some of them, the new users that they’re gaining are really casual. They’re not intensifying the use of the existing user base. So there are certain gaming categories — for example, a lot of the casual games — that are drawing in new users that don’t play like old users used to play. To me, that feels like something that’s probably fleeting. But then you see things like how Instacart is doing, you see things like Zoom, and we see usage of productivity software in general exploding. That feels like something that will endure.
On the acceleration of change in user behavior
The thing we’ve been thinking through is which behaviors stick and which are fleeting. As humans, we’ve evolved to enjoy being in each other’s company, for the most part. I think people will go back to wanting to go to restaurants and wanting to go to real events. There’s something wonderful about that live experience. I don’t think that goes away. I do think that there’s a new category of experiences online that have been opened up, and we’ve been forced into habituation.
That’s part of the silver lining in this unfortunate episode, this behavior change has been accelerated. Because often we look at the sort of things we build in Silicon Valley, and we think this is the way the world should work. This product, or this service is on the right side of history, so why does it take so long for the rest of the world to eventually catch up? And this is just compressed that adoption cycle enormously for many businesses. That’s part of why I think it’s interesting for a lot of the startups, companies in the audience today, this is an incredible opportunity for you actually to accelerate your business and to gain adoption that might otherwise have taken years.
I’m more optimistic about startups today than I was a year ago. I just think change unfairly favors the startup, the nimble small company.
Small companies have an unfair advantage
Change favors the startup. A lot of the press articles are focused on the strength of what I call the formidable five — the big five tech companies — and they’re incredibly successful and will continue to be so. I think this rate of change is favoring the startup company. An analogy I often use is that the startup companies are like little sailing boats. They tack very quickly as they [try] to navigate and figure out their way.
The big companies are like an oil tanker because they know where they’re going and they know how to exploit their route. But if you try to turn that oil tanker too quickly, you’ll break the hull. And so it’s precisely at this moment that the little startup, the little sailboat that tacks so quickly and can navigate all these changes, are the ones that I’m very, very excited about. I’m more optimistic about startups today than I was a year ago. I just think change unfairly favors the startup, the nimble small company.
On the geographic democratization of tech success
The truth is that talent is more evenly distributed than opportunities. It’s really unfortunate that there are people that are super-talented in other parts of the U.S. or other parts of the world that don’t get to work on really interesting things, just by virtue of their location or their inability to move geographies.
It’s far harder to move across the world than it was in the past. From that point of view, this change is actually really cool. You can think about the future with a lot of excitement and enthusiasm, that people will be able to start companies anywhere far more easily, and they’ll be able to recruit talent from anywhere else in the world to work with them more easily than ever before. It doesn’t mean that Silicon Valley is at risk of imminent demise. I just think that you will see many more Silicon Valley companies recruiting people outside Silicon Valley. It’s a little unfortunate at some level and it’s a trend that we’ve already seen probably because San Francisco has become a little bit less hospitable to startups in general. One of the metrics that many companies now track is what percentage of the company is outside San Francisco. There’s an imperative to try to get offices opened in other geographies, or to hire people who work from home. This is going to accelerate that even more. The more that that happens, the more people acquire talent in these other areas that then can spawn their own startups in due course.
You’ve got to remember that part of what we experience here in Silicon Valley harkens back to what happened with Stanford and HP, which spun out of Stanford, and that then led to a series of companies and wave after wave of companies benefited from the history of Silicon Valley. A bunch of the people from PayPal left and then subsequently brought us all these other fantastic companies, YouTube and LinkedIn and Yelp. You’ll see the same cascading effects start to take place in other parts of the world. You’re really starting to see that in Europe. A decade ago, Europe didn’t have as many startup owners that they do now. There’s a second wave of entrepreneurs, people who grew up in those companies who now have role models, who are taking that as inspiration to start their own businesses.
Cloud computing services are positioned to benefit
The truth is that most enterprise applications still don’t run on cloud infrastructure. Part of what you’ve seen through this COVID crisis is that a lot of the teams or companies that still have their own infrastructure have been caught napping. They’ve been exposed. It really shows the power of having cloud computing where you can scale up and down gracefully as demand changes.
Cloud infrastructure spending, whether it’s companies like Confluent, or MongoDB, or Snowflake, some of the companies in our portfolio, I think all of those are going to see variation and rapid acceleration of the business.
At the end of the day, if there’s a macroeconomic crisis and we have a recession, it ultimately affects every single business. I don’t think anybody can escape the gravity pool of a recession. But I think, in general, those companies benefit from this change because it’s just accelerating the future that they were building anyway. In terms of the metrics that they track, I think that the companies that have a bottom-up, organic adoption approach — a self-serve approach — are benefiting from the current situation.
Companies that are very dependent on direct sales force, those efforts are being hampered because travel has been curtailed so much. But those salespeople are embracing tools like Zoom very, very quickly. You’re seeing a very rapid change of people realizing that you can close multi-million-dollar enterprise software deals over video conferencing, which then leads to some interesting long-term questions about business travel. We may just permanently see a big reduction in the amount of business travel. It’s not needed and it’s expensive.
At the end of the day, if there’s a macroeconomic crisis and we have a recession, it ultimately affects every single business. I don’t think anybody can escape the gravity pool of a recession.
How to build trust without face-to-face interactions
We’ve evolved for a very long time to understand the nuances of body language, the nuances of facial expressions. One of the reasons it’s so draining to spend a whole day on Zoom is that your brain is actually working very hard to try to figure out what’s going on. You’re not picking up quite the same fidelity signals as you would if you were there in person. I do think it’s a challenge. But, once you understand this challenge, you can figure out solutions to it. On the trust question, in particular, which is a fantastic question, trust comes from showing vulnerability.
One of the things we brought up in our partnership meeting was: I was worried that if we get a breakdown in trust that we’re going to make poor investment decisions. Maybe we’ll be too tentative over video or worry about hurting somebody’s feelings. In the real world, you can quickly have a conversation with the person in the coffee or break room after a tough conversation.
To counteract that, one of the things you can do is to show vulnerabilities. People should talk about their own insecurities and their own challenges. In some of the meetings we’ve had, we’ll talk about the struggles we’re having with working from home. What are the things that have been difficult? What does it mean for your family? Do you have a family member who’s ill? It’s incredible how much trust you can build by showing vulnerability because people want to help. The other solution I found is that we’re doubling down even more than ever on referencing. For many of the companies here that are probably still recruiting, and thinking about onboarding their first employee remotely, referencing is more important than ever. You just find these other ways to fill in the information you might have gotten pre-COVID.
Opportunities abound in social
Clearly the big social platforms have enormous weight around them and phenomenal engineering teams, great product people, and they iterate very fast. They’re formidable competitors. But part of what you get with a shock like this… I was thinking that it’s similar to what happened when the meteor struck Earth and rearranged the order of species on the planet. In some sense, COVID is like that. It’s a massive shock to the system. When a shock like that comes, it rearranges the natural order of companies.
That creates opportunities for upstarts. I don’t think social is done. It’s hard for me to imagine that what we have today is what we will have 10 years from now. New problems are cropping up because of what we’re experiencing and people are coming up with cool solutions. So, after social has been kind of slow for a few years, I’m actually excited to look at new opportunities.
When you think about the future, is it realistic that two decades from now, you’re still gonna have most of all the heads down walking in streets, looking at little screens? It’s hard for me to imagine that that’s the end state.
If/when AR/VR will ever be truly mainstream
I think it’s very close. I’m on the board of a company called Unity, which is a 3D content creation platform. One of the use cases for them is to build AR and VR experiences. So I get to see some of what people are building right now. I feel like we’re on the cusp of something interesting.
Unfortunately, it still depends on hardware distribution, because if you don’t have enough of these headsets for a VR experience… A developer is going to build for a platform where they can address a billion users, not 10 million or 20 million users. We still need to go through a hardware cycle.
I, for one, am still very optimistic about augmented reality. Google Glass was a great idea, but maybe a little bit too early. I sense that that’s going to come back. When you think about the future, is it realistic that two decades from now, you’re still gonna have most of all the heads down walking in streets, looking at little screens? It’s hard for me to imagine that that’s the end state. It feels like something else is going to happen down the road. To me, AR feels like a very natural way to be able to interact with additional information.
How he evaluates businesses built on top of other platforms
The thing that we typically think about is: How many participants are there at that layer? If you go back to when I was at PayPal, there were a lot of companies that were thinking about building around the auction ecosystem. But at the end of the day, there was only one auction winner, which was eBay. You were beholden to eBay introducing a feature or building your startup’s product into their main product. Then, you were done because there was only one. That’s the thing that you have to think about.
With video, for example, Zoom is the leader, but Google is getting serious about Meet, and you’ve got Microsoft with a Teams product. You have at least three providers. So that creates a bit of a balance. If you’re going to build your business on top of those three platforms, at least there are multiple platforms. It’s the same as what you see with the cloud dynamics. AWS is clearly the leader, but Azure is making a lot of progress. GCP, under Thomas Kurian is doing really well. That creates a much more level playing field for companies to be able to use cloud infrastructure and not be dependent on a sole provider. We look at the market structure and what the points of dependency are. If you have a single point of failure, I think that’s very tricky.
Worrisome timeline for broad economic recovery
On this, I’m less sanguine. I’m genuinely worried. The book I have decided to read in the last week is “The Plague” by Albert Camus, which is interesting. I thought it would be relevant to the sort of crisis we’re facing now. Something from the book is playing out in our world right now, which is it dragged out longer than people anticipated. I think when we went into shelter-in-place earlier in March, if somebody had told you that in California we would still be sheltering in place by the end of May, that would have seemed a little bit far-fetched. And yet, that’s what we now face. In some sense, we’re all optimists and we hope that it blows over quickly. But I think the truth is that until we have a vaccine, I think it’s going to be slow going. Once shelter-in-place is repealed, I think there’ll be a little bit of a bounce-back economically.
There are obviously a lot of people who can’t work right now, by virtue of what they do, that will be able to return to work. If there was a sharp “v” down, there will be a little “v” back up. We’ve lost 20 million jobs in America. We’re sitting at 16% unemployment. This is unheralded, to see this much economic disruption. Some of that comes back, but the rest of it is going to take a very long time to recover. The scar that’s left by this recession is going to be deep. Something like 10 million small businesses are going to go bankrupt.
They’re going to be many millions of people who go bankrupt personally and probably can’t afford their mortgage anymore. They’re going to foreclose on their homes. What are the ripple effects that that causes? If you’ve lost equity in your house, you don’t just immediately bounce back and have enough money for a deposit on the next one. If you’ve lost your restaurant, you don’t have savings so that the next week, you can go open up the next new restaurant. Those things are going to take time to recover. That’s what I’m very worried about.
How will coronavirus affect the movement from globalization to nationalism?
I think this accelerates nationalism everywhere, because every country feels exposed.
Part of the beauty of the economic system we built was that you could be very lean when you could depend on partners for distribution and for supplies, including an international supply chain. Unfortunately, a shock like this exposes precisely that dependency. You can’t run as lean as you used to. You can’t have a thin provision, with so few masks in storage in the U.S. You need to have more of a buffer.
So, inventory is going to build up and people are going to feel exposed and say, “I can’t depend on importing something from this country or that country. We probably need to have independent supply here in the U.S.” And, by the way, other countries are going to behave the same way. I think you’re going to see a rise of nationalism everywhere, and a real regression and a lowering of international trade as a fraction of global GDP.
