Finding the Next Silicon Valley with Doug Leone (Sequoia Capital) | Disrupt SF

Doug Leone of Sequoia discusses the differences between the US and China for investors and founders.

Everyone knows Sequoia Capital is a is a Excuse me a giant in the United States But fewer of you may know that more than 50% of every dollar that Sequoia now Returned to those investors comes from An overseas strategy and from China Primarily and today we have the sort of One of the masterminds of that global Strategy with us Doug Leone thank you so Much for coming it’s a pleasure to be Here and one small thing it’s 50% of the Money we invest now 50% some money we Return to the investor oh is that right Yes so where is most of you returns are Still coming from the US a great Majority comes from the US but China’s Coming up very very very fast Okay well important distinction well so The thing is you were not the only ones To go into China you headed there in 2005 a lot of other venture firms went As well but they got out you stayed How did it work so well and I guess at What point did you know that it was Working well you know the first thing to Keep in mind in business is the thing That appears really risky if you think Things through it’s at least risky of Them all and one of the insights we had Was that if we went to China and we made The decisions from the US we were Certainly going to fail and so what we Decided to do is look for local teams And then kind of deal with them that

Says you’ve got to make all the Decisions Imagine a local team being told that it Was the exact opposite or what everybody Else was saying and the reason we did That and the reason we went to China is Because we sensed that by 2020 25 it was Going to be a globalized world and so we Looked for places that we thought were Gonna grow very rapidly and we’re gonna Be very large so we didn’t go to Europe Because it was large we’re not growing We didn’t go to Vietnam because it was Growing but not large so we went to China first then enya then Southeast Asia and you know this is sort of been a Top of conversation throughout the Conference I talked with some Silicon Valley investors about this yesterday This Economist cover story saying Silicon Valley’s sort of On the wane other parts are rising do You agree that that’s the case well look It’s become very expensive to recruit in Silicon Valley now we can recruit Engineers in Silicon Valley and this is How I recruit engineers the Silicon Valley I tell an engineer I said oh it’s Us or Google it’s little company or Google and I tell them you know it’s Great working for Google the Sun always Shines on the campus the bicycles are Great colors you can take nine months Off when you’ve got a baby but there’s

Not a thing you can do in your life That’s gonna change the price of that Stock by a sixteenth of an inch you come To our little company the food stinks it Rains maybe in our company and but you Have an idea by 10 o’clock and it’s Gonna be implemented by 11:00 and you Can make a break a company that gets you To recruit but at the end of the day if Someone is willing to pay a million Dollars and you’re willing to pay $200,000 or startups don’t usually go Like this they’re not rocket ship Someday one they go through bumps all Your engineers are vulnerable and so We’re three or four years ago we told Companies recruit your engineering Department in Silicon Valley now we say Start at Silicon Valley have core Engineering but move the balance of Engineering someplace around the globe You know the difference is maybe and Founders you know in Silicon Valley Versus China can you sort of tell us a Little bit knowing both markets as well As you do what are some of the biggest Differences well first I want to tell You how they’re the same they both dream About changing the world that’s how this Similar there they want to be the dent Makers they it’s not about money it’s About building a product that people Will want China’s a little bit different That the generation in China now is the

First generation that has an opportunity In the u.s. it’s a third generation that Has an opportunity and if you just think Back to role logic if it’s a first Generation you should assume that their Edge is a little sharper because you Know the edge Tends to dilute through the years I tell My kids for example I can’t give you What I had great competitive advantage Desperation because that clears your Mind and so the Chinese founders in some Ways are a little more desperate and you See it in the crazy work ethic that I’m Not endorsing nor condoning nor Disapproving of but I’ve had dinner in China until 10 p.m. and people go to Work after 10 p.m. And we don’t see that in us I’m not Saying the u.s. founders Oh to do them But those are the difference they’re Similar in character they’re similar in Dreams are similar and how they want to Change your world they’re ultra driven And the Chinese founders of a half other Gear because I think they’re a little More desperate so you’re you’re I think Referring to a sort of famous Financial Times piece this year that suggested That China has a growing edge founders They’re you know sleep in their offices They don’t see their families as much You’re not endorsing that you’re not Saying that you a song I’m absolutely

Not endorsing that I’m the same way that I’m not endorsing true happy balance Because when you start a company you Have to do something that other people Not willing to do it’s a different way To live and I think we should just Accept it we should learn from it and we Should decide in the u.s. what we want To do but by no means stamp of approval Nor am i going against that I’m just Pointing out what the differences are so Again knowing both markets and you even Have a sort of a cross-border fund I Think that you raised maybe like a year And a half ago that that helps American Investors head into China is that Correct It helps American companies that want to Enter a very difficult Chinese markers Where the laws are opaque the market Isn’t a fully open enter China and we’ve Done it with LinkedIn we’ve done it with Evernote with it with Airbnb and we have A fund out of the funds we have in China We adventure growth see but we also have A cross-border fund because at some Point when the company gets large enough They have global aspirations so I mean You know on the one hand I think if Anybody can figure it out its Sequoia But on the other hand I think there’s This growing feeling that it doesn’t Really make sense for American companies to try to go to China

You know Arab B&B is struggled LinkedIn Has made it but it’s made a lot of Concessions you know it’s members can’t Join certain groups it’s agreed to sort Of censor content it’s sold part of its Company to local officials we had an Investor here kai Fuli who I’m sure you Know the AI expert and he was also sort Of underscoring that you know to your Point Chinese founders are I think he called Them gladiators and they’re sort of own Coliseum and he said it’s not sort of a Government issue it’s a competitive Issue a competitiveness issue and it’s I Mean he seems think it’s it’s not it’s Not sort of workable well look it all Depends if you want to go where the puck Is or where the puck is gonna be and It’s our belief that four or five years From now things are going to be Different markets are going to be more Open Yes we’re seeing a little bit of a trade War right now but there’s a lot of Pressure in China to open markets if They want to be part of the global Community and so it’s our view that China is going to be more open through Time how is that impacting your business I mean every week I think Trump was Gonna sort of announce more billions of Dollars or tariffs this week China’s Responding no negotiations planned it

Really has an effect at us yet here in The US it’s affected China more I can Tell you that the mood in China in 2018 Is a lot different than mood in China in 2016 China and we’ve been in China since 2005 had never seen an market downturn a Prolonged downturn and one of the Reasons that founders want to go go go Go spend spend spend spend because all They’ve seen is up and to the right well I can tell you the mood is a little bit Different in China so while I don’t Think it’s affected us very much in the U.s. it’s affected China and you see it In the mood change your strategy there And and I guess how it works you know For example can you invest in a company That has sort of a direct counterpart in The US or is that a conflict of interest I mean given that these are no we have Like very Very local funds and then decisions are Made locally and so it used to be five Six years ago that Chinese investments Were look-alike companies to US Companies well I can tell you that’s not The case anymore whether it’s AI or a Health care biotech or even mobile They’re very different business models They’re very local Chinese business Model if you look at companies like Tokyo you may or may not have heard of Them it’s a video company we do not have The similar company here in the US and

When I attend the weekly I attend a Weekly meeting every Thursday in China Where we review all the companies it Used to be that I had a lot to say Because I’ve seen those businesses in China and India now I’m learning as much As I’m providing input because they’re Very Chinese type of businesses what’s Interesting too is so many of them are Trying to go public here in the u.s. you Have a couple probably more than a Couple but Sina a FinTech company that’s Filed to go public here neo an electric Car company why are they doing that well Look it’s a global market whenever we Have a company we decide whether is There gonna be well received by US Investors US investors want to see Growth is it more received by the a Share market the issuer market doesn’t Want to see growth they want to see Profitability a terrific a share IPO is A company growing from 30 million to 40 Million to 50 million twenty percent EBay da that company would not be a US IPO or the Hong Kong market and so what We try to do is aim the companies where We think they’ll be receptive public Market investors but the other the other Thing to keep in mind is the IPO is just A moment in time it’s a day in a Company’s life and so what we also think About is where are the best long-term Shareholders for this company that’s

Gonna have many many years after the IPO I guess do you see that changing over Time I know one one sort of issue is it Sort of takes much longer to kind of Queue up a company to go public there Versus here I’m just wondering I mean I Think we’re lucky that we have so many Offerings here do you see a shift well In the u.s. it’s purely a market driven Type of environment in China The IPO licenses are managed by the Government and they’re managed by the Government in a way so there’s a balance Of supply and demand the Chinese Government they don’t want to see an IPO That goes up and comes down if it comes Down it means that Chinese retail Investors are losing money and so Getting that license is very difficult And if you get that license in some ways That license alone is worth five hundred Million to a billion dollars because That’s gonna be the starting value of Your company so very different market in The Chinese market much more managed Much more to please local investors in a US purely Darwinistic is there into some Local investors if there is they’ll go Public but there is no government Supervisory agency in the u.s. it says You’re now blessed right obviously the Regulatory environment is very different In both countries a one thing that I Wish I understood better but is this new

National charter that Chinese regulators Announced earlier this year that might They understand is sort of around Personal information that’s sort of more Onerous than gdpr and the EU I’m Wondering how that impacts look it is I wish the Charter was so clear I wish The laws were so clear China is a very Tough way to do it’s a very tough place To go and do business you not only have National laws that are not clear you Have provinces that are their own laws And so you’ve got to navigate and you Always have to stay very very clear or Making sure you don’t upset the Government and you know sometimes you Get it wrong and you get spanked and you Get shut down for a day or two or three And if you have to have the right Connections the connections don’t help You in anything but going to talk to an Official and make sure he or she Understands that you’re going to make The changes that they want done so the Message really is it’s a tough place and You’ve got to be ultra sensitive to not Upsetting the government especially in The last 24 months as the president is Really just consolidated his power I Wanted to talk to you about you know a Big Story for Sequoia this year whether or Not you wanted it to meet was just your Fundraising efforts I understand that

They’re pretty much at a close at this Point you’ve raised six funds and you Know the last 18 24 months and they’re Pretty much closed well look it sounds Like we raise a lot a lot of funds we’d Raise us seed us venture us growth is Coincidental that they all run out of Money at the same time yeah we also Raised China see but they’re all very Small China seed us seed a hundred and Fifty one hundred eighty million dollars Venture business hasn’t changed much the Growth business doesn’t change much the Thing that’s new is that we raised a Large latest age fund called global Growth and the reason we raised it is The large companies want to stay private Longer they want to fight the global Fight US private companies not as public Companies and they require a lot more Money in the private markets in fact We’ve seen the valuations in a private Markets whether it’s uber at 40 50 Billion or whether it’s it’s Airbnb a Thirty billion those would be public Market valuation for those of you that Are younger than 35 40 years of age Cisco system went public at 300 million Pre just keep that in mind and how we’re Raising money a thirty billion tree in The private markets so what we wanted to Do is have a pool of capital so our Founders knew they could have friendly Capital to support them through the

Journey through the IPO and post the IPO Set quite in a different way there are Investors that are now approaching a Company say either you take a billion Dollar from us so we’ll invest in your Nearest competitor and we wanted to make Sure that Sequoia companies the Sequoia Partner companies didn’t face that stick Up we wanted to make sure that an option And that and that they have friendly Capital around and so we raised an eight Billion dollar fund that’s global in Nature it backs up the US companies a Chinese company in the India companies Just to serve the founders throughout Their whole journey as soon as I say That I also want to remind everybody That we do seed investments Airbnb Dropbox stripe new bank and Action IQ we have a very very active sea Fund where we want to be we want to be The very first capital that a terrific Debt maker founder goes and raise so we Can be there from day one we have very Small teams in the US and China and India we have very small teams but we Have the capital that’s available to Support a founder through the journey Which is amazing that you can keep your Eye on the ball and I know that you do But you didn’t mention by name South Bank I did not know yes but soft Bank is Obviously investing a ninety three Billion dollar fund its CEO Masayoshi

Son has said to expect more of these it Changes the playing field a bit do you Think soft make knows what it’s doing Look mas a very smart man and I’ve sat Down with masa a number of time he read In the press that Sequoia is against Soft bank we read soft things thing it’s A coin oh that is true they have a Hundred billion dollars we have Co Investor when masa in a number of Companies we competed with Marcel a Number of companies weak invested Without them that Co invest it without Us to us it’s important though the Founders of an option and so one thing Is for sure if you’ve got a player with A hundred billion dollars prices are Gonna go up all throughout and our job As investors is to make sure that we Pick them right it’s no more complicated Men were you losing deals to Softbank Before no because keep in mind that our Big Growth Fund the one you were talking About it is aimed at our own companies It’s aiming companies in which we’re Read every relationship and so I’ll be Very clear we have never lost a single Company in this large fund to anybody Because we have a pre-existing Relationship having said that we’re not Going to get a discounted price we have To pay the market price but where we Want to invest we’ve had a seven-year Relationship we’ve served them that

Boards for seven years we’ve helped that Founders out or out of a few pickles We’ve helped recruit some VPS So we typically don’t lose and masa is Very welcome in some of those deals Especially those that require Large amounts of cash how big a check Are you willing to write from that new Fund look we theoretically could write a Billion dollar size but a billion Dollars you know I don’t have a Pacemaker in my heart yet so I’d rather Not go to a billion we we have written 500 million dollars in this thing that We have written 400 million dollars in a Single company 400 is the largest cheque We receive that cheque I’d rather not Say it’s happened twice here in the US Or in China I’d rather not say Doug We’re running out of time I know that You’re sort of an inspiration to a lot Of the founders in the audience because You are an immigrant your family came From Italy when you were young and Nothing was handed to you of course Today you are you know on the Forbes List of billionaires what would your Advice be to founders Nancy’s to start a Company if you have a burning need if You can go to sleep at night because you Want to do something if you happen to Have some dough domion expertise if you Happen to be a customer you know so many Of our great companies were founded

Where the founder was the customer where The founder didn’t know though is that He or she was the proxy for the next Billion people the Zappos founders Couldn’t find a pair of shoes the Airbnb Our founders they needed some extra Money there Yahoo founders couldn’t find Anything on the Internet The list goes on and on and on do not Start a company because you’re a little Bored and you think it’s cool to start a Company and you’re gonna talk to a few Customers to see what problems they have Because the customers cannot tell you The problems that have three steps down They can only tell you the problems Right in front of them but if you’ve got That burning need go do it and go do it Very smart protect your equity like gold Choose your partners very carefully do Not listen to these things raise as much Money as you can no raise as little Money as you can Early on because your company has no Value raise a little money to get to the Next step then raise a little more money At some point you’re gonna be awash with Cash that’s when you want to raise a lot Of capital be shrewd don’t listen to Conventional type wisdom out there And use your noodle listen to common Sense and choose your partners extremely Carefully one more thing Choose your co-founders very carefully

We see a lot of founders that are Kumbaya three of us we split it three Ways and three months into the company They realize one person is doing 80% of The work figure that out upfront have The real tough conversation with your Co-founders do something fair and Reasonable so that you two or three can Work together for the next ten years Thank you so much for coming you have to Come back again thank you thank you for Having me it’s a real pleasure

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