The Trump administration has begun directly acquiring stocks in American companies, not as a temporary crisis measure like in 2008, but as a permanent measure of industrial policy.
This move raises some interesting questions, including what happens if Whitehouse appears on the cap table.
At TechCrunch Disrupt in San Francisco last week, Sequoia Capital Global Steward Roelof Botha answered just that question, and his response drew knowing laughs from the packed room. “One of the most dangerous words in the world is: 'I'm a government employee and I'm here to help.'”
Botha described himself as “essentially a liberal, free-market thinker'' and acknowledged that industrial policy has a role to play when the national interest is called for. “The only reason the United States resorts to such measures is because other nations with which we compete are promoting their industries with industrial policies that may be detrimental to the United States in their strategic, long-term interests.” In other words, since China is in the game, the United States must be in the game, too.
Still, his discomfort with the government as a co-investor was unmistakable during his appearances. And that sense of alarm extends beyond Washington. Indeed, although Botha has stopped using the word “bubble” on stage, he sees worrying echoes of the pandemic-era fundraising circus in today's markets. “I think we're in a period of incredible acceleration,” he suggested more diplomatically, while also warning about valuation inflation.
He told the audience that on the very morning that Mr. Sequoia appeared, he was reporting on a portfolio company whose valuation soared from $150 million to $6 billion in the 12 months of 2021, then crashed back down. “Issues faced by founders and their teams within the company, [is] It feels like you're on this trajectory and you'll eventually succeed, but at some point it won't be as good as you expected. ”
It's tempting to keep raising money to maintain momentum, he continued, but the faster valuations rise, the harder they fall, and nothing is more demoralizing to a team than watching paper money evaporate.
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His advice to founders navigating these frothy waters was two-pronged. If you don't need to raise money for at least 12 months, don't raise money. “Twelve months from now your company will be worth a lot more, so it’s probably better to start a company,” he said. On the other hand, he added, markets like the one we're in can deteriorate quickly, so if you need the money within six months of needing it, you should raise it now while the money is flowing.
The kind of guy (his word) who studied Latin in high school, Botha turned to classical mythology to get the point across. “I read the story of Daedalus and Icarus in Latin, and that stuck with me: the idea that if you fly too hard and too fast, your wings might melt.”
Founders pay attention when they hear Botha's opinions on the market, and rightly so. The company's portfolio includes early investments in Nvidia, Apple, Google, and Palo Alto Networks. Botha also began his appearance on Disrupt with news about Sequoia's two latest investment vehicles. It's a new seed and venture fund that will give the company an additional $950 million in investment capital and is “essentially the same size as the fund we launched six or seven years ago,” Botha said on stage.
Although Sequoia changed its fund structure in 2021 to hold publicly traded shares for the long term, Botha said the company is still essentially an early-stage shop. He said that in the past 12 months, Sequoia has invested in 20 seed-stage companies, nine of which are at start-up. “There's nothing more thrilling than partnering with a founder from the beginning,” he continued. Sequoia is “more like a mammal than a reptile.” “We don't lay 100 eggs and see what happens. Just like mammals, we produce only a small number of offspring, so we have to pay close attention to them.”
This is an empirical strategy, he said. “It's humbling to me that over the past 20 to 25 years, 50% of my seed and venture investments have not resulted in a full return on capital,” said Botha, who cried in a meeting with his partners after being completely laid off for the first time. “But unfortunately, that's part of what we have to do to achieve outliers.”
What accounts for Sequoia's success? After all, many companies invest in seed-stage companies. Botha partly credits that to a decision-making process that surprised him even when he joined the company 20 years ago. All investments require partnership agreement, and each partner's vote carries equal weight, regardless of tenure or position.
He said the company begins partner meetings every Monday and conducts anonymous surveys to uncover different opinions on the material partners are asked to understand over the weekend. Side conversations are prohibited. “The last thing we want to do is form an alliance,” Botha said. “Our goal is to make good investment decisions.”
The process can test patience, and Botha, who once spent six months lobbying partners for one growth investment, believes it is essential. “No one, not even me, can force anyone to invest through our partnership.”
Despite Sequoia's success, or perhaps because of it, Bota's most provocative position is that venture capital is not really an asset class, or at least shouldn't be treated as one. “If you look at the top 20 venture companies based on their industry performance, [as an industry] “Investing in index funds is actually underperforming,” he said flatly on stage. “There are 3,000 venture companies operating in the U.S. alone today, three times as many as when Mr. Botha joined Sequoia. Putting more money into Silicon Valley doesn't create more great companies,” he said. “It actually dilutes its value.” It actually makes it difficult for a few specialized companies to prosper. ”
The solution, he sees, is to stay small, stay focused, and remember that “only a few companies matter.” It's a philosophy that has served Sequoia well for decades. And at a time when Uncle Sam wants to be on the cap table and VCs are putting money into everything that moves, this might be the most contrarian advice out there.