A peek inside Sequoia Capital’s low-flying, wide-reaching scout program

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Ten years in the past, Sequoia Capital started quietly encouraging founders of its portfolio corporations to think about which of their founder buddies they could wish to get behind financially. Sequoia would allow them to write checks to these corporations, and it might share with them any later rewards.

It was an excellent concept. It allowed Sequoia to maintain tabs on entrepreneurs — and nascent applied sciences — not but in its universe. It cemented the agency’s ties to the founders who have been already in its household. Not final, it grew Sequoia’s already appreciable affect in Silicon Valley.

Quick ahead, and the ripple results of this system haven't solely been wide-reaching, however they’ve quietly reshaped the business in ways in which solely these closest to Sequoia have been capable of absolutely respect — till now.

To study extra on the tenth anniversary of Sequoia’s “scouts” initiative — which has since been extensively copied by different enterprise companies — we reached out to Sequoia’s Mike Vernal, the associate who as we speak oversees the seed-stage program, in addition to 4 scouts whose names you'll acknowledge. What we discovered within the course of is that their experiences, whereas pretty totally different, have had an outsize influence on the best way they lead as nicely, in addition to on the founders whose paths have crossed with their very own.

This system started working virtually instantly, too. Amongst these first scouts — certainly one of now a whole lot to work with Sequoia — was Jason Calacanis, a serial entrepreneur whose then startup, a search engine referred to as Mahalo, shortly raised $20 million from Sequoia and others after its 2007 founding.

Prepared, set . . .

Mahalo didn’t wind up placing Google or Yahoo out of enterprise, however even again then, Calacanis, who’d earlier bought a weblog community to AOL, had a longtime community that Sequoia realized was useful. As Calacanis tells it, he’d advised Sequoia about Zynga when its founder, Mark Pincus, was nonetheless determining the corporate in 2007. He’d additionally informed Sequoia a few challenge that his pal Ev Williams was twiddling with. Each occasions, it handed.

These selections appeared to sensible. At the least, not lengthy after, Sequoia’s Roelof Botha reached out to Calacanis and requested him, “‘What if we’d simply given you some cash to make these investments?'”

In line with Calacanis, Botha defined that if he might flip up different fascinating offers, Sequoia would give him cash to take a position, then cut up a few of the income with him and different Sequoia-backed founders who it was additionally inviting to scout offers on its behalf. (One in every of them was Sam Altman, then the founding father of one other Sequoia-backed startup referred to as Loopt. Different early scouts included Airbnb CEO Brian Chesky, and Dropbox founders Arash Ferdowsi and Drew Houston.)

Calacanis beloved the proposal, although he chafed at Botha’s insistence that he write an funding memo. As pushback, Calacanis says his first deal memo as a scout included two phrases, “Cabs suck.”

Calacanis laughs about it now. “I used to be protesting the truth that Roelof was making me do homework.” Because it seems, his brief memo was spot on. The corporate Calacanis needed to again was Uber. Sequoia accepted it, and the small stake finally grew to be valued at “over 9 figures,” in accordance with Calacanis, who has collectively plugged $600,000 into 20 startups through the years as a part of Sequoia’s scouts program.

From scout to VC . . .

As business watchers might know, Calacanis has since gone on to boost his personal funds, together with two $10 million automobiles, and, extra just lately, a $30 million fund. But he’s removed from the one individual to learn the ropes with Sequoia’s assist.

Altman, in fact, went on to advise Y Combinator corporations, then to turn out to be the group’s president, before resigning earlier this yr.  Different former scouts who've joined the world of enterprise capital full-time embrace Lee Linden of Quiet Capital, David Ulevitch of Andreessen Horowitz, Jana Messerschmidt of Lightspeed Enterprise Companions, Cat Lee of Maveron, and Deep Nishar of SoftBank Funding Advisors.

Three different former scouts have landed inside Sequoia itself: Vernal, who earlier than becoming a member of Sequoia spent greater than eight years at Fb, together with as a vice chairman of engineering and product; Jess Lee, who beforehand cofounded the purchasing website Polyvore and oversaw its sale to Yahoo; and Alfred Lin, the previous COO and chairman of Zappos.

Not each scout has been plucked from Sequoia’s portfolio, as Mike Vernal himself makes plain. Although Vernal declines to delve into sure specifics about this system, together with precisely what number of scouts have labored with Sequoia, he says that whereas “early on, in that first batch, this system was biased towards Sequoia corporations,” it’s not the case that Sequoia faucets solely the founders it has already backed.

We additionally know that Sequoia is now in the midst of its fifth batch of scouts, that it chooses two “courses” of scouts for every separate scout fund, and there have been three so far, together with a $180 million fund it closed final yr.

As for a way a lot they need to spend, scouts are given as much as $100,000. Some make investments somewhat bit in loads of corporations; others make investments extra in a number of. Their checks are likely to result in extra checks, too, unsurprisingly. Greater than 230 corporations which have acquired checks written by Sequoia scouts have gone on to boost greater than $6 billion in follow-on financing, excluding Uber. Many of those have acquired additional funding from Sequoia itself, together with Faire, GenEdit, Guardant Health, Stripe, Thumbtack, and Vector.

Definitely, it’s well worth the scouts’ time, given how profitable this specific aspect gig can show. In accordance with Calacanis, for instance, Altman wrote a verify to Stripe as a scout, a place that’s now value $25 million. As with Uber, Calacanis says, “It’s doubtless that everybody in that class will get a style of that, too.”

No clean checks . . .

Nonetheless, being a scout doesn't imply having carte blanche to do no matter one chooses. When PlanGrid cofounder and CEO Tracy Young was requested by one of many companions to develop into a scout for Sequoia, she says she had “no concept what that meant. However they principally give us $100,000 to do no matter we would like, assuming it passes a stringent approval course of. [Sequoia] needs to know: how massive can this get? What’s the market?”

It could take “hours of dialog” with a founder earlier than Younger — whose Sequoia-backed development software program firm lately sold to Autodesk for a whopping $875 million — is ready to “write up this entire factor. It’s virtually like a marketing strategy” to pitch Sequoia, she says.

It might sound inconvenient, however she has discovered a lot from this back-and-forth, she says. “A lot of what we do as founders facilities on our personal issues inside our personal corporations in our personal industries. I’m within the development software program world day by day, and [being a scout] has enabled me to see different corporations’ issues in a deeper approach.”

Clara Shih, a scout and the founder and CEO of Hearsay Systems, a Sequoia-backed digital advertising platform for monetary providers, echoes the sentiment, including that the “collection of diligence gadgets that we undergo” additionally helps her to sharpen her occupied with her personal firm.

“Once you’re the CEO of an organization, that’s your child and also you’re biased in favor of your personal startup,” says Shih. Scouting on behalf of Sequoia — alongside together with her position as a director on the board of Starbucks —  “helps me assume what would somebody from the surface may [prioritize as part of] their technique for Rumour. It helps me to assume extra objectively and will get me out of the trivia” that may occupy a founder’s ideas and time in any other case.

Altogether, Younger says she has made “six of seven” investments up to now on behalf of Sequoia, and “in all probability talked with 50 corporations” altogether; Shih has made an analogous variety of bets.

Each say their main duties are operating their corporations however that they're typically contacted by founders who wish to them for recommendation, and that it’s throughout these conferences that they often put on the hat of investor, too.

“I’m not on the market prospecting,” says Shih, “however numerous ladies entrepreneurs attain out to me, as a result of there are nonetheless too few of us and it’s my mission to vary that.” Younger in the meantime says she hears from founders in areas “adjoining” to her personal.

Each recommend that turning into a VC is a path to which they’re open — although not but. “I've a really busy full-time job,” says Shih.

Younger additionally says she’s “full time at Autodesk proper now, integrating PlanGrid into the corporate.” Nonetheless, she continues, “We’ll see. I’m fairly positive loads of [people in the scout program] are going to turn into future VCs as a result of plenty of them are actually good at investing in and valuing corporations.”

A whole lot of them are additionally ladies and minorities, she notes. “I’m biased,” says Younger, “however having pitched to a number of white males at totally different enterprise companies, together with at Sequoia in 2014, whenever you stroll right into a room of scouts, it’s tremendous numerous. It simply feels totally different.”

Calacanis tells us the identical. “They’ll by no means get sufficient credit score for this, however one factor Sequoia did was use scouts to radically improve the quantity of variety within the business,” he says. “Ten years in the past, it was a bunch of Stanford individuals of a sure gender and [skin] shade. However they opened the aperture to get extra ladies and underrepresented buyers” into their community, and he says it’s now among the many most numerous teams in Silicon Valley — even when it’s additionally one of many lowest-flying.

Down the street . . .

One excellent query is what occurs when a scout sells his or her firm, or takes it public, or in any other case turns into rich sufficient to take a position on their very own. In any case, Sequoia tends to work with founders who've the contacts and the business know-how however who additionally want its monetary help in the event that they need to spend money on new startups.

Calacanis falls into this class, but says he nonetheless does the occasional scout deal and fortunately. “Sequoia is the best enterprise agency on the earth. No matter they ask me to do, it’s like ‘Sure.’ It’s a no brainer.”

One other member of this specific membership is Matt Macinnis, the founding father of Sequoia-backed Inkling Techniques, which bought for an undisclosed quantity to the personal fairness agency Marlin Fairness Companions final yr. Macinnis is at present the COO of Rippling, the web payroll and HR startup based by Zenefits cofounder Parker Conrad, and he says that he has written 24 checks for Sequoia during the last 5 years. Among the many recipients: the note-taking app Notion (founder Ivan Zhao spent a yr engaged on product at Inkling), and the schooling purposes firm Clever, whose founder was a Harvard classmate of Macinnis.

Macinnis means that as he has begun investing extra actively as an angel investor, deciding how a lot of his personal cash to pour into an organization has develop into a extra difficult affair. But like Calacanis, he solely sings Sequoia’s praises.

He factors to a brand new funding in Memfault, a startup that was among the many hottest to graduate from the Y Combinator’s accelerator program this previous winter. He says he was “tremendous excited concerning the firm as a result of they’re doing firmware deployment to web of issues units — doorknobs, automobiles, temperature sensors.” He additionally appreciated that the startup’s CTO got here out of Fitbit.

In reality, he excitedly advised Sequoia concerning the firm. The excellent news: Sequoia companion Invoice Coughran — a former SVP of engineering at Google who nicely understands hardware — grew excited, too. The dangerous information: Coughran made Memfault a suggestion earlier than Macinnis had closed his personal funding.  (Says Macinnis, the corporate was “shock, shock, oversubscribed immediately.”)

Given totally different circumstances, Macinnis may need been out of luck. As an alternative, he says. “It was not drawback in any respect. Invoice adjusted the allocation in order that each [I] and the scout program and the founder have been capable of get the specified end result. He made room.”

There’s allegiance for good cause, suggests Macinnis, who implies that scouts get as a lot if no more than Sequoia from their relationship. To underscore his level, he factors to DoorDash founder and former scout Tony Xu, whose firm is presently valued at $7.1 billion,  then to Weebly cofounder David Rusenko, whose Sequoia-backed firm bought final yr to Sq. for $365 million. “I’m not Tony or David,” he says, “however these guys wouldn’t hesitate for a millisecond to pitch in and assist a scouts firm nevertheless they might.”

Says Calacanis individually, “I assumed angel investing was silly” earlier than turning into a scout, which he credit with altering his profession trajectory. “I assumed I ought to spend money on myself, that I used to be the neatest entrepreneur I do know.”

Sequoia, he says, knew higher. “They know For those who’re sensible, your folks are in all probability fairly sensible, too.”

Pictured above: Mike Vernal and Tracy Younger. 

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