Please enjoy this transcript of my interview with current Sequoia Capital partner and former PayPal CFO Roelof Botha (@roelofbotha). Roelof has spent over 20 years building companies in Silicon Valley. He began within the walls of nascent PayPal, which he joined in March of 2000 while completing his MBA at Stanford. He became CFO in 2001 and led the company through both its IPO in early 2002 and subsequent acquisition by eBay. Roelof joined Sequoia Capital in 2003 to help founders build enduring businesses. He leads the US/Europe business as Managing Partner and serves as Senior Steward of the global Sequoia Partnership. Roelof is a director of 23andMe, Bird, Ethos, Evernote, Inside.com, Landis, mmhmm, MongoDB, Natera, Pendulum Therapeutics, Block, and Unity Technologies. Previously, he was a director of companies that include YouTube, Tumblr, Xoom, Assurex, and Eventbrite. He also led Sequoia’s investment in Instagram.
Transcripts may contain a few typos. With many episodes lasting 2+ hours, it can be difficult to catch minor errors. Enjoy!
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Tim Ferriss: All right. So for those who are wondering why I’m laughing, I forgot to press the record button. And I’m glad that we were able to catch it. Roelof, so nice to see you again, it’s been quite a few years and I’m so thrilled that you’ve been able to make time and then both of us have been able to make time to have this conversation. So thanks for being here.
Roelof Botha: Thank you for hosting, Tim, and I look forward to the conversation.
Tim Ferriss: So I thought we would start with a question that I asked before we pressed record on our backup and not the primary, and that is how do you pronounce your full name properly? If you were in your homeland?
Roelof Botha: My parents would call me Roelof Botha.
Tim Ferriss: Roelof Botha. Pretty close. I’m not going to pass for an Afrikaner, but.
Roelof Botha: Yeah, pronunciation’s excellent. I’ll respond to that.
Tim Ferriss: I have heard a number of fireside songs in, is it Afrikaans? I suppose it would be. Having spent some time in South Africa in the last year, but we are not going to spend a lot of time on that. I want to though spend time on note taking and also different visual cues that you’ve used, different points in your life. And so here it goes. The first question. The first question is I have, and you can’t believe everything that you read on the internet, but something in front of me that says you used to have 10 to the ninth power written in the corner of your notepad, I guess every week when you started at Sequoia, is that accurate? And if so, could you explain why that’s the case?
Roelof Botha: That is accurate. When I joined Sequoia, it was clear that if I wanted to make it as a partner, you needed to produce meaningful gains and I’d set myself the goal of producing a billion dollars in gains for the partnership, because that would mean that I’d made it at some level. And so 10 to the nine, which is a billion, was my shorthand of reminding myself what I was striving for.
Tim Ferriss: Now what was the notepad used for otherwise? And was this on the top of every page or something you saw on a weekly basis? I’m wondering on the frequency with which you saw this and also what the notepad was used for otherwise.
Roelof Botha: This notepad was used generally for note taking, but it was really on Mondays in particular, when we had a partner meeting. Where we would review all the decisions for a particular day and that would be the notepad where I’d make notes about the companies that we were listening to my own views on companies. What did I worry about? What did I think was interesting? And so that was the most important day at some level. We referred to it as the Olympic finals at Sequoia was the Monday partner meeting and the importance of getting those decisions right. And so that was the day where I needed to remember very acutely what was I striving for? So I’d done this when I was younger
Tim Ferriss: Yeah, I had. And we’re going to get to that. But let me ask you, before we flash back and do the sort of the wavy Austin Powers flashback to childhood which I will do in a minute, with the 10 to the ninth, did you have in your mind a particular timeframe for that? Or was it just a reminder of the magnitude of the goal before if you wanted to move the needle?
Roelof Botha: I didn’t really have a time to mention at the time, things have changed a lot in the venture business. Technology has infused so much more of the world. I mean, I keep reminding myself when I was at PayPal in 2000, there were about 200 million people on the planet that had internet. 200 million.
Tim Ferriss: That’s wild.
Roelof Botha: And the vast majority of them were on dial-up. So by the time I joined Sequoia in 2003, we didn’t even have broadband reaching 50 percent of the US population yet. So the numbers were still much smaller in technology, didn’t have the scale that it does have today. And so I just thought eventually get to a billion. Now, honestly, I feel like it’s 10 to the 10 that you need to strive for. Because technology has infused so much of what we do.
Tim Ferriss: So let’s do as promised, the rewind to childhood and I’ll let you take this ball and run with it wherever you want to go. But I did read a bit about your high school system of having your goals visible to you while you were studying, at least based on a bit of reading. I think this is actually from — it should be accurate because it’s from sequoiacap.com or the articles thereof. So could you please elaborate on what you did back during that era of your life?
Roelof Botha: I thought I needed — there’s a concept in psychology called the Ulysses pact, which is this idea that in the method of Ulysses, he wanted to hear the sirens. So he had all his soldiers, all these sailors, wax up their ears, tie them to a mast, and that way they could sail past and he could hear the sirens and they wouldn’t succumb to them. And so in psychology, the Ulysses pact is this idea that you make a pact with your future self, knowing that your future self is going to be weak.
And so my technique for doing this, not having read about psychology yet was to put notes in front of my desk, on the door, leaving my room and candidly all over my room, reminding me of what I was aiming for. And in high school, it was to be the top 10 in my state at the end of high school. At college, it was to be number one and I would just put all these reminders of what my goals were. So if I was tempted to get up to go make a cup of tea or watch television or take a break, I would just see what I’d written to myself. And I’m reminded of what I need to do if I want to achieve what I want to achieve in life.
Tim Ferriss: Do you still use reminders like that, of any type or do you feel like you’ve hit a certain escape velocity where that’s no longer necessary?
Roelof Botha: I still use some of those. I mean, when I was at Sequoia, as you pointed out earlier, I had the 10 to the nine. I try to keep track of how I spend my time. When I was in college, I would literally write down the time that I started studying down to the minute. And then I’d write down the time that I got up so that I would have an accurate tally at the end of the day of exactly how much time I actually spent studying instead of just thinking that I was studying and just loafing around the house, doing nothing. And so I use Evernote to do that. I organize key things that I want to accomplish for Sequoia and for each of the companies that I work with. So I always have this running list of what are the key things you need to focus on the most important, the three most important things you need to accomplish for a given company over the next, say six months, as a reminder of the most important things.
Tim Ferriss: I want to jump next to a headline. And this is I believe a headline in a local newspaper when you graduated from high school. You can correct me if I get any of these details wrong. And again, I’m not going to pronounce this correctly because I will play it safe and use my Long Island accent. So “Botha’s grandson is number one,” I believe, was the headline. Could you use that as a segue into explaining who your grandfather was, but also I’d love to just know how that headline landed for you and what it felt like.
Roelof Botha: So my grandfather was the equivalent of the foreign secretary for South Africa, and I think he served for close to 20 years in that capacity. He was ambassador for South Africa to Germany to Denmark and to the United Nations. In his time he’d met Reagan and Thatcher and Kissinger, and these are the sort of people he interacted with. And he was a part of the National Party of the government that ran South Africa until the first democratic elections in 1994. And my father was, my grandfather was an agent for change, even though he worked in the party that was the ruling party that had enforced the apartheid. He wanted a galvanized change from within. So he was part of the group that announced the UN banning of the ANC in 1990. And he actually served in Nelson Mandela’s first demographically elected government from 1994 till 1996 when he retired.
So he was a very well known, very prominent politician by some measure when I was a child growing up, he was probably the second most powerful politician in the country. I was named after him. It was literally the convention in the Afrikaner culture was that the firstborn son gets the father’s father’s name. And so that’s why I was named after him. But because he was so well known, it meant that I also lived in his shadow and I was often referred to as so-and-so’s grandson, Pik Botha’s grandson, and to the headline referred to him. And I was proud of my achievement and I was proud of my grandfather, but at some level I also wanted to be myself and to prove myself and not be always referred to as in reference to somebody else.
Tim Ferriss: So we may come back to that, but you seem like someone who is repeatedly not taken the path of least resistance, which I mean is a compliment for sure. Let’s talk about actuarial science. Now I must say one of the funniest things that has happened to me in the last few days is in the process of doing research for this, you may know this, but if you throw your name into Google, the first thing that pops up is Roelof Botha, the South African actuary, which I love. I just think that’s fantastic. So could you please explain why you chose actuarial science as your degree and also by way of doing that, just explain what actuarial science is?
Roelof Botha: Sure. So I finished high school in 1990. The year that ANC was unbanded. And honestly, at the time it was unclear whether South Africa would have a peaceful transition to democracy. If you’d looked at the history of most other African nations that had gone through this kind of a change from sort of a “colonial” past, the picture wasn’t pretty. And so when I chose what to study part of the dimension was would it give me an ability to work and live abroad. And actuarial science was something where after you got your undergraduate degree, you’d study professional exams and become a British-qualified actuary. So technically I became a UK actuary. Which meant that I could work in the UK and Canada and Australia and a couple of other Commonwealth countries. And so the portability of my qualification was a really important decision point.
The other one was the most difficult degree to get into. You could get a bursary to study for it. My family couldn’t afford college, so I got an insurance company to actually pay for my tuition and it was challenging. So what they actually do by the way is they run insurance companies, pension funds, so whether that’s life insurance or general insurance and are involved with the investment management for those companies as well. So think of it as a financial engineering degree. So technically I majored in actuary science, economics, and statistics. So there’s a heavy emphasis on mathematical statistics as part of the degree.
Tim Ferriss: So in addition to the math and I don’t have the full context here in front of me, but does UCT stand for the University of Cape Town? Am I getting that right? I may not be.
Roelof Botha: Yes. Not the university that most people know of, right?
Tim Ferriss: Well, right, exactly. Yeah. So I wanted to just confirm that. And build off of what you said to add, this is I guess an indirect quote the way that I’m going to read it, but professor Robert Dorrington at UCT has said, “Actuaries are trained to think 30 years into the future and accountants are trained to think a year in arrears.” Do you feel like your training or maybe the attributes that led to you choosing actuarial science poured well to entrepreneurship and venture capital? Or do you think that’s too much of a reach?
Roelof Botha: I think it did honestly, as I said earlier, the actuary degree is about financial engineering, sort of the mathematics of finance, if you will. And so in a very practical sense when I was at PayPal, the techniques I’d learned were useful in understanding the fraud problem that was latent at PayPal. And we were able to catch our fraud challenges months before others did. And as part of the reason that PayPal survived. So a bit of a twist of history that training actually was very specifically helpful in that situation. But this idea of thinking long term, there’s a great article or a concept about the time span of discretion, what’s the horizon over which somebody thinks and plans. And I think part of what we try to focus on, it’s a part of what I think has made me a decent investor is just trying to think much longer term, not just thinking quarter to quarter or a year out, but thinking about the possibility of what might happen with companies down the road.
And we’ve had a chance to go read the original YouTube investment memo for example, but there were three founders, friends of mine from PayPal days when we invested, I was the fourth person really to join the company when we invested. And there was a way of imagining what might happen if this actually works, what if it goes right? Because it’s so easy to worry about all the things that can go wrong with every company. So I do think the training helped, but in the classic nature, nurture debate, how much was I pre-wired to think that way or not? I don’t know. These things feed on each other.
Tim Ferriss: Yeah. I’m not going to even make an attempt to separate those. I don’t think I can do it in my own life, so I won’t even presume to be able to do it for anybody else. I would love to ask you, and we’re going to bounce around a lot because I don’t want to do this chronologically. I wouldn’t do that if we were just having wine over dinner. So I’m just going to follow my interest here and then perhaps we’ll jump back to PayPal. So the first question I suppose is somewhat chronological, under what circumstances would you recommend to a young, would-be entrepreneur that they go into consulting, or would you generally advise against that path?
Roelof Botha: I would generally advise against that as a career choice. I chose to work at McKinsey. I don’t regret the decision I made, but for me it was again, an opportunity to work with an international firm. Remember I worked at McKinsey from ’96 to ’98. So South Africa just opened up from sanctions. We’d had sanctions from 1985 till 1994. And so the company, the country was starved for international talent. And so this international firm shows up. I could learn from people from all over the world and they would give me an opportunity to either study or to work abroad.
So that was a lot of the magnetism for me to join McKinsey at that time. I think if you’re already in the US, go do something a little bit more direct. It would be my advice. I mean, there the best business school is actually being in business. Actually going to join a company and actually experiencing what it’s like. So if that’s your ambition and if you want to be a consultant, there’s nothing wrong with that. But I think as a way of delaying difficult decisions about what might happen in your career, it’s a play it safe decision. It’s not a risk seeking decision.
Tim Ferriss: So I have a number of friends, including fantastic meticulous doctor named Peter Attia who spent time at McKinsey. And Peter, as one example, loves matrices. And specifically, he loves two-by-two matrices. And I’d love for you to explain who Don Valentine is and we’re going to explore that a bit, but could you also explain what his two by two matrix was?
Roelof Botha: So Don Valentine is one of the fathers of Silicon Valley. One of the fathers of venture capital. Don grew up in the semiconductor business. He was a national and Fairchild semiconductor back in the 1960s. And he started Sequoia capital in 1972. And we should get back to this later, but he made a very important decision calling it Sequoia Capital and not Valentine Capital.
Don had an amazing career as an investor. He backed Apple when a lot of people were unsure about backing a barefooted, not well-dressed, Steve Jobs. He backed Atari. He backed EA. He backed Oracle, Cisco, and the list goes on. He had a remarkable track record as an investor. And when I joined Sequoia, he was still around, still alive. He passed away two years ago and very early on, he pulled me aside and he said, “There’s a two-by-two matrix of people we get to invest in. Exceptional, not exceptional, easy to get along with, not so easy to get along with. Your job today, Roelof, is to figure out in which of those four quadrants we normally make money.”
Tim Ferriss: I have not heard this story. I don’t know the answer. I could hazard a guess, but why don’t you tell us, number one, did you figure it out? And what is the answer?
Roelof Botha: Well, I think you have an intuition for it. It’s exceptional, not so easy to get along with. The reason it’s — when you think about the founder prototype or personality type, most of us encounter challenges in the world and we just let it go. “This is difficult. This doesn’t work. This frustrates me,” and you just go, “Ah, whatever.” And you move on to the next thing. Founders are these people who don’t accept the way the world is. They want to change it. They encounter a frustration and they do something about it. Going back to the Cisco example, the founders of Cisco were the heads of the computer departments for computer science and the business school at Stanford. And they were on different networks. So they could send primitive electronic mail within departments, but not across campus. And the two of them were romantically involved and were getting tired of walking across campus to see each other. They wanted to — I’m not kidding you! This is the first internet love story.
Tim Ferriss: I haven’t heard this story. It’s great. This is fantastic.
Roelof Botha: And so the founding inspiration for Cisco was connecting the networks of the computer science and business schools at Stanford. And that’s the founding story instead of just accepting the status quo. And so there’s so many other companies we are backed with, this is the example, right? Jack and Jim started Square because there was a lost sale. I mean, these personal frustrations are just incredibly powerful. So when you think about a person who wants to take on the world and doesn’t just accept it, that tells you a lot about what the founder is like.
Tim Ferriss: Right. And they’re highly likely to push back on anything that I would imagine that they don’t feel is fully aligned with the change that they want to leave in the world or impart to the world. So if you want to continue. Actually, I would love to hear you continue. So what are some other characteristics that could be related to the exceptional, not so easy to get along with, or they could be separate that you have identified within the data set of hits from Sequoia, where you’ve made money and by you, I mean, Sequoia?
Roelof Botha: Well, first it starts with an authentic identification with a problem. I think when that founding inspiration, because if you’re under start a business for the sake of starting a business it’s so hard. There are so many challenges on the way to building a successful company. If you’re doing it for the wrong reasons, you’re going to wilt. You simply won’t persevere. But if you’re deeply motivated by what you’re doing, you’ll keep going and you’ll overcome obstacle after obstacle. And so that to me is one of the key starting conditions is founder-market fit, founder-problem fit. I love asking a founder when I meet them, “How did you come up with this idea? What was the eureka moment where something snapped and you wanted to address this problem? And what is it about the current solutions that you must have evaluated that frustrated you, that you didn’t think was good enough?”
And then the next one is “What’s your unique and compelling value proposition? So, having evaluated alternatives and deciding to build something, why do you think what you’re building is so distinct that it has a chance of flourishing and becoming a real business?” So I can tell you one specific story. There’s a founder, Matt Rabinowitz. He and I met in high school in South Africa in 1987 at a nerd camp. It was actually called an academic vacation school. But I mean, that’s just a very nice way of saying nerd camp.
And he’s absolutely brilliant. He was gold medalist in our national science Olympiad. He came to Stanford, he studied physics, electrical engineering. And in 2002, his sister had a baby that died within a week of birth. And he was shocked at the state of prenatal testing. And he went back to Stanford and he learned everything he could about biology and genetics and started this company, Natera, where I’m still on the board 15 years later, we made a million dollar seed investment in him in 2006, just an idea. And today they deliver millions of tests to help people have healthy families, but it started with an incredibly authentic inspiration for him, which is seeing what his sister had to deal with.
Tim Ferriss: I’ve never heard the elegance of this phrase you used before, the founder-problem fit. And I am just a tourist in the startup world compared to your immersion as an entrepreneur, operator, and investor. But if I look back at all of the angel investments I’ve made, the founder-problem fit is the defining feature of any of the hits. Not product-market fit, which may also exist, but in terms of the hierarchy of weighted importance, it’s this founder-problem fit. That’s a fantastic phrase. What else have you learned or did you learn rather from Don Valentine? And it could just be anything that you observed in him, attribute, behavior, habit, or otherwise, but what are some of the takeaways from having spent time with him?
Roelof Botha: Incredibly good listener. If you think about the stereotype, maybe, of an investor who’s fast talking and needs to be heard? Don was very comfortable sitting for an hour and just listening and absorbing. And then he was very precise with his questions, precise with his notes. I remember receiving a note in my inbox from Don. I was confused initially because there was no to or from, so I didn’t know who it was who’d written me this note. So I walked around the office saying “Who left this for me?” And people looked at it and said, “It’s written in green ink; it’s Don.”
So Don had exclusive use of green ink in the office. No one else was allowed to use a green pen. He loved the color of money. But he would take a full page and there’d maybe be 10 words on the page. And they were just so incredibly concise in describing the feedback that he wanted to give about a company or when he interviewed people. I saw some of his interview notes about people. Instead of writing two pages of notes about the interview, it was just so crisp and on the point. And so his ability to distill things very concisely is incredible.
Tim Ferriss: You mentioned earlier the question of “What happens if this goes right?” And I’m paraphrasing, but what does this look like, say five, 10 years down the line, even more, if this goes right. Could you speak to the practice of pre-mortems and pre-parades, if I’m getting the term correct?
Roelof Botha: Correct. It was actually a technique that I picked up from Larry Summers. Former treasury secretary Summers is on the board with me at Square and he actually joined pretty early. He’s been on the board for almost a decade with me now. And he posed this as a challenge to the management team at Square.
“Imagine things go incredibly well over the next three or five years.Actually, write it down. Don’t just think about it, write down. What does that look like? What does success really look like? What does the company look like? What have you achieved? Which markets do we operate in? Which products have we shipped? Then go write a pre-mortem. Things didn’t go the way you wanted to, what does that look like?” And so we’ve taken that concept. We actually use it in our investment memos. So for every investment we contemplate, we write a pre-mortem and a pre-parade.
And when we’ve had strategy offsites for ourselves, for the Sequoia capital investment team, we did this too. We had a pre-mortem, we literally said 20, 30 autopsy of Sequoia capital and what went wrong. What are all the things are going to cause us to not be a great firm in the future. And the value of this exercise again, back to the insights from Don, it really crystallizes first order issues. Because you can spend all your time scurring around doing all the busy work, if you’re not focused on the things that’ll really compound and matter over the next five to 10 years, you’re missing the boat and it’s the urgent important trade off. It’s all those things woven into a very practical exercise.
Tim Ferriss: How often would you do the pre-mortems at the Sequoia, I suppose, team offsites?
Roelof Botha: Every two years.
Tim Ferriss: Every two years.
Roelof Botha: I think every year is too frequent because things just don’t change that often. I mean, we may revisit something if there’s something that’s really changed. There’s “Why now?” “Why now?” is one of the questions we love to ask. Obviously it’s like “Why now?” So we made an off cycle decision to open up in Europe for example. Something we hadn’t done for a decade. We kept on thinking about, should we open up an office in Europe? Should we be on the ground? Instead we kept on flying into Europe and we made some great investments. We were early investors in Unity and Plorna, and several other companies on the continent. And at some point we realized there’s just so much company formation happening in Europe. And especially after the global financial crisis, that there’s a whole crop of young people in Europe that now aspire to building companies when that wasn’t the case before. So we revisited our assumptions and changed and that was an off-cycle decision.
Tim Ferriss: So let’s dig a little bit deeper on the pre-mortems, specifically as supply specifically is applied to Sequoia. So let’s just say you’re at an offsite and you can pull a real one to mind, and you’re asking yourselves, “Imagine the venture business in 10 years’ time. Sequoia is gone. What happened?” Are there any answers that you can brainstorm that you can share that proved to be very valuable in decision making for the firm? Because I will say for people who don’t know the venture capital ecosystem, one thing of many that has impressed me forever for as long as I’ve known about Sequoia is the longevity of Sequoia. Are there any examples that you could give of pre-mortem answers that have proven very important in decision making?
Roelof Botha: For sure, by the way, the long lived — that the Sequoia tree is the longest lived tree in California
Tim Ferriss: I do.
Roelof Botha: Right. And that’s the reason that Don chose to name Sequoia Sequoia. It wasn’t an accident. He wanted the partnership to outlive him with a lot of consequent behavior and actions. And he also wanted us to invest in companies that stand the taste of time, which I think we’ve done disproportionately. So a couple of things from the offsites, I think one of the most important ones is hubris. The downfall of every Greek tragedy and the extent to which we rest on yesterday’s success. One of my favorite quotes is, “No wreath wilts as fast as one that’s rested on.”
We cannot rest on the past. And it’s part of what motivated me when I joined Sequoia, by the way, the motto we have inside our building is “You’re only as good as your next investment.” And I saw that hunger and determination from people like Michael Moritz and Doug Leone who clearly made it in life and yet they were relentless in the pursuit. So it’s very important for us as a team to think about hubris. We need to make sure that we continue to meet companies at the earliest stages of formation. So when you go back, when we made, if you think about the history of Sequoia’s investments, when we invested in Atari or Apple or Cisco, we were the first investors.
They were often single digit numbers of people around the company when we first invested. We invested in YouTube, there were three people, LinkedIn there were seven people, Palo Alto Networks, one founder in our office, incubating him. If we start losing grip of that early stage of being in touch with entrepreneurs right at inception, that’s very dangerous for us. There’s this temptation to then drift downstream and become a late-stage investor. And so that’s probably one of the most important things we talked about in the offsite is we’ve got to make sure that we stay at the fountainhead of company formation.
Tim Ferriss: So let me ask a follow up related to that last point. And this may be getting too into the weeds, but I’m curious, early stage investing has become so I would say competitive or at least the field is flooded with players, compared to say 2007 when I first started paying attention to the startup investing world. It’s almost nothing like it was today in terms of competition and the number of just sheer — the sheer number of people willing to write checks in different forms in different fashions. I would imagine with a famous firm with multiple funds, as you get to larger funds sizes, in order to invest at the earliest stages and have those offers be accepted without overdiluting the founders, it seems like you would have to amass an army of people to maybe handle that, to have sufficient capital outflows to make the entire operation work. How did you guys think about solving for still investing at the very early stages as the firm and the funds grew?
Roelof Botha: We don’t want to hire an army of people. Our investment team candidly is about unchanged over the last decade. We only have about two dozen or so investors in our US and Europe business. Because if you want to make good investment decisions, you need to have small decision making groups. Committees don’t make great decisions because then you have average to the mean and great investments depend on outlier instincts. And we are looking for the outlier of founders, the founders who dare to build really exceptional companies, not just investible companies. So we’ve tried to keep the team small.
We’ve also kept our funds separate. So we have a seed fund that’s distinct from a venture fund that’s distinct from our growth fund. And the teams are lined up against each of those. Because I think what you point out is a real risk. That if you have — I’m just going to make it up. Let’s just suppose you have one pool of capital. You have one $10 billion fund making a $500,000 seed investment and something promising seems kind of irrelevant. It’s a rounding error. And then the whole team starts chasing what they think are bigger investments. And so that’s one of the dangers that we’ve guarded again. So we have separate teams focused on different areas and the key is to look at the multiples. It’s not about the input.
Many of these small investments we’ve made have turned into very large gains. It’s not about how much you invest. It’s about the impact it can have. In terms of the competition, by the way, I actually think it’s fantastic that there’s this much competition, because what used to be a cottage industry in the 1980s and 90s, because it wasn’t a big market — I’m not saying that dismissively — it was just that it was a smallish industry — the industry has had to professionalize. The beneficiary of that, ultimately, are the founders, and we’ve had to up our game.
We had a talent team. When I was still at PayPal, Sequoia had a talent team, but it was one or two people. Now we have 15, and we’re just delivering many more services to startups to help these companies succeed, to give them an unfair edge and a chance of outside success. So, I think it’s really in service of founders. It’s fantastic with businesses that are like this. It makes it more competitive, but it’s all right.
Tim Ferriss: I think you guys are going to be fine. I mean, it’s also, I think, incredibly advantageous to build a winning streak, and to have the track record that, say, a firm such as Sequoia has, because you also have a selection bias with inbound, with respect to very good deals, so I suppose that helps, in part, with maintaining a smaller team as opposed to a larger scouting team that’s going out and canvasing sort of every corner of the landscape. Is that a fair comment, or do you think that’s — is there more to the story that you’d like to flesh out?
Roelof Botha: I think it’s true. I mean, we’re blessed by having the history we do. So the companies that we backed when they were private today account for over 25 percent of the total value of the NASDAQ.
Tim Ferriss: That’s wild.
Roelof Botha: Over a quarter of the NASDAQ were companies that we backed when they were private. No other venture firm comes close. So that is an incredible achievement, and it means that we’re a magnet for other opportunities, often because of sector expertise, or experience. So, because I’m on the board of Unity, I might disproportionately get people who work in VR and AR, because they’re developing on the Unity ecosystem. And so that gives us access to this. So, there is a way in which the industry — success begets success, for sure, but it can also be a curse, because if you have a lot of inbound, are you spending enough time thinking critically about where you want to spend time, with opportunities for tomorrow might lie? And so there’s a danger there that you may spend all of your time just taking inbound opportunities instead of pursuing the best founders and the best companies. So there’s a balance there.
Tim Ferriss: Roelof, what books, if any, come to mind as books that you have recommended or gifted the most to other people?
Roelof Botha: Well, there are two different ones. There’s Man’s Search for Meaning by Viktor Frankl, which invariably shows up on these lists of 100 books you should read before you die, which really had a big impact on me, and I’ve spoken about it at Sequoia founder events. I’ve given it to many people. I just think the book is amazing in terms of helping clarify what it is that motivates you and what drives you, “What is your purpose,” because we are not really driven by monetary rewards or pleasure by itself. So, that, to me, is a fantastic book. The other one is an annual series called America’s Best Science and Nature Writing, and it’s this collection of about two dozen articles from American publications, written for a lay audience across a range of topics. It could be, “What’s the latest insights from physics and astronomy,” to, “What’s happening in genetics,” “What’s happening with anthropology,” or things like that. I mean, it’s absolutely fascinating.
Tim Ferriss: Could you give us — and it doesn’t have to be short, certainly, but I wouldn’t expect you to redeliver any of your presentations — why has Viktor Frankl’s book had such an impact on you? And it is an exceptional book, to be clear, but I’d just love to hear how it resonated with you, or impacted you.
Roelof Botha: I think it reduced, very clearly, the need to think about what motivates you. I mean, the fact that he — I mean, he was in a concentration camp. You’ve obviously read the book, and it’s not a story about the life in the concentration camp, which is horrific, but the fact that he wanted to live. He wanted to survive, because he wanted to recreate his work. His manuscript was taken from him when he was sent to Auschwitz in the first place. And part of what he learned when he was in the concentration camp was that some people gave up. And that even though the population in the prison was Jewish, the mortality rate actually increased around Christmas and New Year, because it was the marking of time, and a reminder for people that they maybe had no more hope, or if they knew that their family members had died, they gave up.
And so this idea that “whatever it is that motivates you…” your purpose might be your company. It might be your family. It might be your hobby or whatever it is, but identifying what it is that really motivates you, and leaning into that, and not pretending that you’re actually motivated by fame or fortune or some other superficial motivator, I think, is just incredibly clarifying.
Tim Ferriss: I’d like to ask you about a term you used earlier with reference to some of the other general partners at Sequoia, the “relentless in pursuit” piece, and I’d like to ask about this, because one thing I’ve observed in some of my friends who are serial entrepreneurs who have had massive accidents — I mean, they have become wealthy beyond their wildest dreams — is that this “relentless in pursuit,” or a “relentless pursuit,” can produce incredibly good outputs, in terms of objective wealth creation, job creation, solving problems in the world, but it doesn’t always translate. And in fact, it seems sometimes to be inversely correlated to contentedness, or a feeling of peace or happiness. How do you think about — if you do, and maybe the question is just the wrong question — but balancing the relentless pursuit, or counterbalancing it so that you don’t always feel discontent?
Roelof Botha: That’s difficult, because if you’re not a little discontent, I don’t think you’re alive.
Tim Ferriss: That’s probably true.
Roelof Botha: I mean, it is why people say, “Silicon Valley is dead. Innovation is dead.” Really? There’re so many problems to be solved. As long as there are problems, there are opportunities. So —
Tim Ferriss: I don’t think Silicon Valley is dead or tech is dead.
Roelof Botha: No, absolutely. So, then for me, I think the people that I found who ended up getting unhappy, it wasn’t because they were still in pursuit of something. It’s actually that the pursuit was over, because it’s the getting, not the having that makes you happy. And so, unfortunately, I’ve seen founders where they’ve had a big exit, and maybe the company was acquired, and what do you do then? And maybe you can borrow from analogies of athletes, often at the peak of their careers when they’re 28 or 32, whatever the case is, but they peak relatively early in their life and then you’re the person who once was that as opposed to what you are now.
And I think that’s very hard to deal with, but I’ve seen — the Instagram founders who I worked with, got involved with them very early, and they’re just incredibly well adjusted. Company was acquired. It’s been a huge success, massive impact on the world, and the two of them are just building and having fun, and they’ve found all sorts of other pursuits to keep them engaged, and they clearly haven’t suffered from what I described, because they found another outlet for meaning for themselves.
Tim Ferriss: Do you remember when you hit your 10 to the ninth, and if you do, could you tell us about that experience?
Roelof Botha: I probably can’t get you the precise year, but it was probably about five, six years ago when I’d reached that. I think it was after the IPOs of MongoDB and Square, now called Block. I think, after those two IPOs and Natera’s IPO, I had achieved that milestone. And, sorry, what was the other question?
Tim Ferriss: Well, what did you do? How did it feel? Did you pause to celebrate, or were you just like, “All right. Now it’s 10 to the 12th. Let’s get moving, folks.”
Roelof Botha: I definitely celebrated a little bit, but it’s not over, because there are other interesting companies to be built. And even more importantly for those companies, I’m still on the boards of those companies, because they’re still so early in their own innings that there’s so much more to be done at these companies. I think it’s one of the — I don’t know if we have time to talk about the Sequioa Capital Fund, but this is part of the thing that I’ve —
Tim Ferriss: Sure, we have all the time in the world.
Roelof Botha: — realized in our industry.
Tim Ferriss: Go for it.
Roelof Botha: Last year, we conceived of and launched this thing called the Sequoia Capital Fund, and for a long time, I’d been frustrated that the venture capital model was built on this idea of a 10 year, closed end fund cycle. And it was first invented in the late ’60s, early ’70s, and no one had questioned it. And there’s this presumption that, because you have such a short lived fund life, that when the company goes public, you should distribute and move onto the next thing. But the truth is that many of the great companies endure, and they keep compounding.
And so with most of our companies that have gone public, the majority of their market cap accrued after the IPO, not before the IPO. Square today is worth 10 times what it was worth at the IPO. So, almost definitionally, 90 percent of its market cap was created after the IPO. So, why sell after the IPO? Why leave the board? What about all the other fun company building to be done? I mean, that’s the thing that really floats my boat is working with entrepreneurs to help them build businesses. And for me to have the founder call me and say, “Listen, I’m wrestling with this issue. Can you please help me?” That’s one of the most gratifying things that I have in my job is being able to help on that journey.
Tim Ferriss: So what is the structure of the Sequoia Capital Fund?
Roelof Botha: So the structure we created is essentially an open-ended fund that’ll become the sole investor in all our future private funds. So, we’ll keep organizing private funds, and part of the reason is what we described earlier. If we have a single pool of capital, it dilutes attention and focus. So, we’ll still organize a seed fund, a venture fund, and a Roth fund, and those will be time-bound, have dedicated teams, a certain amount of money, and it’s accountable for the returns that it generates in a given vintage, but all the capital comes from a main Sequoia Capital Fund, where we have cash, but we also have some of the longstanding positions of our enduring businesses, where we believe the companies have an ability to compound for many years after the IPO. So, that’s the spirit of the investment structure.
Tim Ferriss: I’d love to ask some probably naive questions, and feel free to give me a wrist slap if they’re stupid questions, but this is deeply interesting to me. So, the first question — actually, I’ll just give you two questions, and you can tackle them in whichever word you’d like. The first is understanding — and I have seen — it might have been published by Sequoia. It may have been Benchmark, or someone else — but looking at the financial outcomes, if you had held their private investments and sold as soon as lockup expired when these companies went public, or if you had invested the first day you could invest in those companies, and held for X number of years — and you would’ve made more, or just as much by investing as a public market investor, which blew my mind. I can’t recall the source. But my question, I guess, is with the assumption that a lot of this value will accrue post IPO, why not just distribute in kind and then let other people, the LPs, decide if they want to hold or sell?
And then the second question is, the Sequoia Capital Fund — and presumably, there are limited partners, entities, institutions, and maybe individuals who invest in the Sequoia Capital Fund — how do you pitch an open-ended fund to a pension fund or an endowment?
Roelof Botha: Maybe I should spend a second just on who our clients are. So, at Sequoia, we work for what we call “great causes.” So if you come to visit our office, our conference rooms are actually named after our longstanding limited partners. So, the Ford Foundation, the Wellcome Trust, Stanford University, MIT, Harvard, Dana-Farber Cancer Institute, Boston Children’s Hospital, these are the people we work for.
Tim Ferriss: Got it.
Roelof Botha: We put their names in the door as a constant reminder that when we generate returns, they’re the ones who benefit. And there was a period, actually, as a short digression, a couple of years of ago, we thought about whether we had the right fee structure for our business, because we’re capitalists. We teach our companies that they should figure out the right price for their product, and we have excess demand for people wanting to invest in our funds. So why don’t we raise the prices? Why don’t we charge you even more?
Tim Ferriss: Could you just explain for people who are not familiar with venture capital, just the typical fee structure or your fee structure at the time, so they understand how venture capital firms make money?
Roelof Botha: Sure. The typical structure is to charge a management fee as a function of the fund size. So, typically, it’s two to two and half percent of whatever the fund size is. They charge to pay for salaries and rent and research, all that sort of stuff. And then there’s carried interest, which is a share of the profits, if any, that we generate, and the carried interest varies between 20 and 30 percent based on a firm’s history and their performance history. So, let’s just say that if you invested 100 million and you turn it into 200 — and let’s just say your carry was 20 percent — there’s 20 million, so only 100 million of gain, obviously. 20 million would go to the partners, and the limited partners would get 180 million in that scenario —
Tim Ferriss: Got it.
Roelof Botha: — in that example. So, that’s how our fee structure works. So we actually talked about whether we should raise our fee structure, because people were still going to invest in us. And we actually made an affirmative decision to not do that, because we are very happy with what we earn, and we appreciate that the majority of what we generate goes to great causes. It goes to education. It goes to medical research, poverty alleviation. The Ford Foundation was helping to fight apartheid in South Africa in the 1960s, before I was even born. So we’re proud that these are the people we work for. Because we’ve had such a long history with them, we invited them to roll into the Sequoia Capital Fund, and 95 percent of the dollars that were eligible to roll into the Sequoia Capital Fund did. So, they are the same investors that have rolled into the structure, and we have had decades of experience with them. We have clients that have been clients of ours longer than I’ve been alive, and there’ll be clients long after I’ve gone, and that’s the way we want it.
We want our LPs to outlive our GPs. The GP is the general partner, the people who work at the partnership, and we really care about that. That’s part of this long-term orientation we have at Sequoia. So to answer your — do you want me to go to the other question?
Tim Ferriss: Yes, please.
Roelof Botha: Sure. So the reason we ended up with this structure — because it’s a fair question, we talked about it. “Let other people decide. Why should we hold the shares? Here, X, Y, Z LP, you can take the shares and decide.” If you’re an endowment or a foundation somewhere, you’re managing a couple of billion. Maybe if you’re a big university endowment, you have 20 billion or something like that. You don’t know this latest company that we’ve just distributed. And so what we’ve found is that our LPs almost exclusively sell as soon as we distribute. And part of what we observed — we did other analysis, which is if we’d waited 12 months longer than we actually did to distribute, what additional return would we have generated for our LPs?
And that was a lot of what informed the decision to form this fund. Now, I’ll give you a concrete example. At the point that Square went public, the gain for our limited partners was about 140, 150 million dollars at IPO, and we waited. We waited several years, in that case, to distribute, and we ended up generating well north of a billion dollars for our LPs in that case, by being patient, because I was on the board. I’m still on the board. I’m involved with the company. I understand their prospects, and I just had a different view that the company’s share price eventually was going to catch up with its performance.
Tim Ferriss: So, a question on the research, if you look at the data, and you have each of your portfolio companies value at time of IPO and then there’s lockup, or whatever it might be, and let’s just say, even if it’s hypothetical, that you do the math on what the value would be at that point and then 12 months later, and you’ve made the decision to hold, what percentage of the time with your portfolio companies, to date, roughly, would you say the value is higher versus lower after an additional, say, 12-month hold period?
Roelof Botha: I don’t have the precise number at my fingertips, but it’s the majority.
Tim Ferriss: Yeah. That’s good enough. I was just wondering if —
Roelof Botha: The “overwhelming majority,” I should say. That’s the case. Obviously, the past is no guarantee of the future, disclaimer, disclaimer, but the thing that’s even more important, and I don’t know if you’ve run across this book by Sebastian Mallaby called The Power Law.
Tim Ferriss: It has been recommended to me. I’m sure it’s amazing. His book, More Money Than God, on the hedge fund industry, I thought, was exceptional. So I haven’t yet read The Power Law, but it’s been recommended too, but please, continue.
Roelof Botha: I’ll second the recommendation. I mean, the reason he chose the title for the book is that our industry follows a power law curve so that there — in our Sequoia funds, I can just cite some of the parameters roughly. In a typical venture fund that has, let’s just say, 35 to 45 companies in a given vintage, in a given fund, we probably have a third of the companies that fail to recover capital, which may mean there’s a complete write off, or it may mean we only realize 50 cents on every dollar we invested, but it’s not a success. Then there is a whole group of companies that have modest success. Maybe you get your money back. Maybe it’s a 2X or a 3X, but what really drives the performance of the fund is the, typically, five to eight companies that end up being 10X companies, 10X returns.
And the key is that ones get to 10X sometimes run, and they become 55X. They become 100X. They become 200X returns. And so when you have a YouTube, an Airbnb, a Unity, a Snowflake, Palo Alto Networks, WhatsApp, Stripe, Square — you have these companies — they’re completely bowed out on the right-hand side, and so you get a power law curve if you look mathematically. It’s just a very steep curve where a small number of investments really account for the majority of our returns. So, in our history, between five and 15 percent of the investments we make account for over 80 percent of the returns.
Tim Ferriss: Sounds about right.
Roelof Botha: And so, to your question about holding off to the IPO window, it’s not just that — even if it’s 50-50, whether it goes up or down, it’s, “What’s the asymmetry?” The ones that keep compounding, look at the scale that has been achieved by a company like Google over time. That’s the kind of compounding potential that exists, not with all businesses, clearly. There aren’t too many trillion dollar companies out there, but when you get them right, they can make a big difference.
Tim Ferriss: The biggest takeaway for me, in my, as I mentioned, sort of amateur tinkering in startup investing is, “Tim Ferriss, you don’t know what the hell you’re doing with public investing. Do not sell after lockup, because you have clearly no idea which companies are going to end up compounding incredibly.” All of my worst mistakes have been panicking. I shouldn’t say “panicking.” Well, actually this is a perfect frame for a question I wanted to ask you. So, on one hand, I can look at, for instance, selling Shopify right after lockup, in retrospect, from my financial position now, and say, “That was a stupid mistake. It cost me 100 million plus dollars. I should have made a different decision.” However, I can also take the counter position, and make a very compelling argument for why, even though now it seems like I made the wrong decision, that the absolute dollars at the time were a life changing amount for me then.
And so it was a logical decision, and I use that as a segue, because — please, correct me if this is wrong — but I found a supposed quote from you, which was, “PayPal was a 1.5 billion acquisition, and today it’s company worth over 300 billion.” I’m not sure of the timing of this article. “And Mike Morris was on our board, and Mike, I think, saw the potential and pushed us and challenged us to think longer term, and what did we know? What did I know? And I made the wrong decision, and didn’t quite fathom how much potential PayPal had as a business,” but I imagine that it had a significant impact on your life. So, I’d love to know if you still feel that was the wrong decision, and also how you talk to founders about this, because not every slamming of the briefcase, Zuckerberg style, walking out on Yahoo after a multi-billion dollar offer, works out. Sometimes it backfires. So do you still think that was the wrong decision for you, and if this quote is even accurate, and how do you talk to founders about this kind of thing?
Roelof Botha: So, the question I’ll ask founders is — and my partners tease me, because they know that this is my question — and it’s, “What’s the scale of your ambition? What are you aiming to achieve? Are you interested in a company that gets to 100 million in revenue, and that’s the end of your ambition, or do you want to blow past a hundred million in revenue on your way to a billion in revenue?”
Tim Ferriss: Quick question, sorry to interrupt. At what point do you ask them this question, because I imagine if it’s in a pitch meeting, they know the right answer, but when are you asking them?
Roelof Botha: In a pitch meeting often, and they may not have thought about it, and it’s not to be critical. I mean, often when you’re a founder, if you just found a problem that you’re passionate to solve, but I’m still interested to understand, “Where do you want to take it? Are you trying to build a small company? And again, that’s fine if you want to do that, but we’re looking for outliers who want to build really, really big businesses. That’s the business we’re in, and I want to make sure that there’s an alignment, and that we’re on the same page, that your ambition matches what we’re looking for.”
Tim Ferriss: Yeah.
Roelof Botha: So that is the “scale of ambition” question.
Tim Ferriss: It’s a critically important question, to try to ensure, to the extent possible, that you’re on the same page. Let me throw out, just as a thought exercise, a hypothetical, because I’ve seen it happen with founders I know. They start off. They have incredible founder-problem fit. And in the beginning, their scope of ambition actually is quite modest. They just want to be able to buy snowboards online, or whatever the hell it is. It’s not to build an enormous company. And then, partially through competency, partially through timing, partially through luck, they end up having tremendous traction.
And then let’s say they end up in a pitch meeting with you. You end up investing and then a few years later, fortunately, the company is doing really well, and they get an acquisition offer. And let’s further say that these two founders come from middle class families. Maybe their parents made 50 grand a year, and one founder wants to swing for the fences and say, “YOLO, it’s all or nothing.” Although, in this day and age, I mean, they’ve probably taken some money off with secondary and so on. But let’s say the other really wants to cash out, because they’re looking at how their life would change, and they’re just saying, “You know what? This is a bird in the hand. I don’t know what the future holds. I want out.” How do you navigate a situation like that? And maybe the fast answer is, “If we can, we just buy out Founder B,” but how do —
Roelof Botha: Well, that [inaudible].
Tim Ferriss: Well, I know, but how do you handle a situation like that?
Roelof Botha: And you alluded to it. Secondaries are so important. At PayPal, we did a small secondary in 2001 people talk about it as though it’s a recent invention. It was around at 20 years ago, and I remember going from having been a student, still paying off student debt — my net worth was negative in 2001, and we did the secondary, and I think I got $50,000. I mean, I felt rich. I mean, it was transformative. I could actually travel, and I could stay in a hotel, and it was really amazing to have this experience, but the reason I mentioned this is, in this summer of 2001, eBay made a run at us in August, and I think part of what stiffened our backbone was that we had all taken a little bit of money off the table. We were such a young team, and none of us worried about making rent next month, and it was a really important, I think, ingredient to us pursuing the IPO, and getting a far better price.
We got triple the price that they offered that summer 12 months later. So it was a wise decision to have done that. So I love being able to provide secondaries for people. And then there’s a conversation with people about the meaning, going back to Viktor Frankl, just, “What is it that you want to do? Do you really think having the money and having the beach house is going to make you happy, or buying this fancy car?” Because then what we often do is we’ll put them in touch with founders who’ve been in that predicament, and have them speak to them, and talk about the regrets about maybe having sold too early.
Tim Ferriss: Do they ever run into someone who says, “You know what? Given your specifics, I think now is the right time?”
Roelof Botha: Yes. That does happen. I mean, and it’s part of what — I’m sorry to interrupt you. I mean, that’s part of what we try to do just given our experience is try to shepherd the conversation, and to let people know, “Look, we have this front row seat to hundreds of portfolio companies. I’ve got the unfair advantage that I’ve seen many, many more companies unfold than you have. I’m the founder. You’ve obviously personally seen many companies. And so I can’t give you a perfect prediction, but I’ve got to tell you. You’re in this outlier category. You’re in this one in 10 companies that we see that really just has outsized potential, and I think you’re going to regret letting go.”
And sometimes it’s not the case. We are valiant. We made an effort. We thought the company had a shot, and sort of, “It’s ended up where it’s ended up, and I think this is a good acquisition offer. It’d be a good home for your team, and your technology will end up flourishing with somebody else at the helm,” and that’s happened sometimes, where the companies are very flourished being acquired, because that company has the right distribution, maybe, for the technology, or they can — and that also is gratifying for the entrepreneur, because their creation sees life and flourishes, not just because it’s an independent business.
Tim Ferriss: For people who don’t know what secondary transactions are, would you mind just defining that quickly? I brought it up, so I should have defined it, but you’re far more qualified to do this, so if you wouldn’t mind.
Roelof Botha: A primary issuance of shares is when a company sells equity in the business as part of raising capital. So the company sells a million shares at 10 dollars a share, and they actually raise 10 million dollars that goes into the coffers of the company to help the company pay for payroll, and for helping to grow the business. A secondary transaction is where the money doesn’t end up in the company’s balance sheet, but instead it’s just a secondary transaction between two individuals that are unrelated. So, an employee of the company, a founder of the company, sells shares to somebody outside who is interested in owning shares in that company. And so the company doesn’t raise money. It’s just the founder sells 100,000 dollars worth of shares to an investor. That might be an example.
Tim Ferriss: Perfect, thank you for that. So, we’ve talked about the counsel you might provide founders. I’d like to turn that around, and ask if any founders come to mind who have had a large impact on you in any capacity, and that doesn’t need to mean, of course, through the financial magnitude of their outcomes.
Roelof Botha: Several. I think it’s interesting. One of my partners actually pointed this out, that when he first got into the business, he had this impression that you should always maintain a delineation between your professional and your personal life, and that you shouldn’t mix the two, and that he found it interesting that I seemed to be doing something different, because I was very close to the founders I work with, and I’d help him with a pediatrician recommendation, or have dinners with him on weekends, or sometimes travel with him for family vacations and things like that. And so maybe it’s just my style. I’ve ended up really enjoying the long-term relationships I’ve formed with founders. So we spoke about Matt Rabinowitz earlier, the person I’d met in high school. He’s become a very dear friend. Given his background in genetics and what he’s exposed to in the healthcare system, he’s actually volunteered hours and hours over the last 12 months, helping me with a close family member who has a medical situation, and it just warms my heart to see somebody who is so busy running a company make that kind of a sacrifice.
I didn’t even ask. I mean, he just volunteered. So, it’s through loyalty, and being involved with people for a long time that you can build those sort of relationships, to me, is deeply meaningful. The Hartzes, who run Eventbrite — and Kevin was the founder of a company called Xoom, with an “X,” not with a “Z,” that we’ve invested in as well — they’ve become close personal friends, and — I don’t know — just it makes life so rich when you can have these sort of relationships with your founders, and that, to me, has been a big part of the job, honestly, I’ve enjoyed.
Tim Ferriss: Is that something that comes from your own family experience, your cultural upbringing? Is that something you made a point of doing, in terms of fostering these types of relationships after arriving in the US? Where does that come from?
Roelof Botha: There’s a talk I listened to from Esther Perel. I don’t know if you know her.
Tim Ferriss: I do.
Roelof Botha: I met her a couple of years ago, and she talks about how you sometimes grow up in a society, or in a family, where there’s the balance around relationships or transactions. You can imagine, some cultures are very transactional, and you’re fearful, and you’re out on your own, or you’re in a society, or in a family, or a culture that is more nurturing, and it’s more about relationships, and I think I grew up with relationships. And so I think it’s part of the way I grew up that I value those, so I think it’s informed the way that I behave in business too.
Tim Ferriss: Let’s zoom back for a minute. This is as opportune a time as any. Am I correct that you did not grow up speaking English at home?
Roelof Botha: Correct.
Tim Ferriss: Okay. For most people listening, I would imagine they don’t have much context on your home culture. Could you perhaps describe some of the defining characteristics of the culture within which you grew up? In the same way that if someone said, “Hey, you lived in Japan for a year, what are some of the defining characteristics?” I could pull out a few things that I think really characterize and set it apart, in a sense. How would you do that for the culture in which you grew up?
Roelof Botha: For the Afrikaner culture?
Tim Ferriss: That’s right. Yeah.
Roelof Botha: So at a family level, I’ll get started off with a bump. My mom was 16 when I was born, my dad was 18. So I doubt I was planned. She finished high school with me. And needless to say, they were young and in love, but probably not compatible. So a couple of years later, they got divorced. And my mom moved back with her parents, who by then were the early forties. So they were, in some sense, also an extra set of parents for me. And they had a huge influence in raising me.
And my grandmother in particular was just an incredibly warm, gregarious person. Everybody knew who she was. And maybe some of the loyalty that I exhibit and the way that I operate came from her, either genetically or through living with her. So it was a very warm family. It was the sort of family where if a friend or a distant relative showed up on a random Thursday night, you just assumed that you had enough food to cook for them, and that you were going to have dinner together. It was that kind of an environment. There were always people around, always people visiting.
But then my mom remarried and we moved to another town that was about a 1,000 miles away from Pretoria, where I had been born. And hence I needed to start to speak English, because I moved to a city that was predominantly English, not having spoken it before. But it meant that I grew up in a different place. And I was a bit of an outsider. I was prejudged, especially in a community that viewed itself as more liberal. There was a sense in which my grandfather was viewed as being very conservative because he served the national government. And so I faced an enormous amount of prejudice, where I always felt as though people judged me before taking the time to get to know me. And that I had to earn their trust and show who I was over and over. And that was daunting in some respect. But I definitely felt like a bit of an outsider when I moved to a new city.
I went to an Afrikaans high school. And then I realized that if I wanted to live abroad eventually, I needed to improve my English. So I chose to go to an English university, the University of Cape Town, purposefully. And just to give you a sense of the challenge. I remember in first year math, I got a problem wrong because I literally didn’t know what the word “isosceles” meant. Because I’d done math in Afrikaans in high school. And we had a completely different word to describe an isosceles triangle. And I mean, I could solve the problem, but I didn’t know what the word meant. And these are the sort of little things that you trip over when you try to switch your principle language.
Tim Ferriss: Now I remember you mentioning, and I’m not going to get this perhaps exactly right, but you wanted to be top 10 in the state, or the province, or the region. And then you wanted to be number one in college or university. Am I getting that right? Why did you go from top 10 to number one, not number one to number one? Did you start raising your sights, or was it easier because the pool was smaller? I’m curious, because you seem like a “Second place is first loser” kind of guy. Not to project, but I’m just curious how you went from top 10 to number one.
Roelof Botha: So at the end of high school, unlike the US where you write standard SATs and ACTs, I’m now learning because I have kids that are eventually needing to go to college. So all of these new things I have to learn about. But in South Africa you write standardized exams at the end of high school. So if you’re doing math, everybody writes the same math paper. And it gets graded by people that are not affiliated with your school for neutrality. And so that was difficult, because I was doing English as a first language, even though I was an Afrikaan speaker.
So you’ve got languages. I knew I could do well in math and science and things like that. But it was a bit of a crapshoot to know if you’d get number one. And they only published the top 20. But I thought I could make the top 10. So that I thought was realistic, honestly. When you get to university, you could choose your subjects a little more purposefully. And I knew that within that cadre of studying actual science, maybe I knew who the individuals were, and maybe I became too cocky. Maybe it was dangerous. But I thought I could be number one. That was my goal.
Tim Ferriss: This is going to seem like a bizarre question. But since you brought up your kids, I read that at some point, they were raising South African silkworms. Now I wasn’t even aware that silkworms were a thing in South Africa. How did your kids end up raising South African silkworms? It’s just not the first thing that comes to mind when I think of a pet. Not to malign South African silkworms as pets.
Roelof Botha: They weren’t South African silkworms. I mean, I bought them here in the US!
Tim Ferriss: Okay, this is hilarious that I read, whatever source I had, had them down as South African silkworms. So I’m like, “Wow. I had no idea.” Okay. That makes more sense.
Roelof Botha: Well, last time I checked, they came from Asia, anyway. So I don’t know who — they were this secret in China. They had all these walled-off gardens because they didn’t want Western traders to understand where silk actually came from. So it was a hidden secret from the West for a long time. So I guess when I was a kid, we had, just one of the things you do is you learn about silkworms and you buy a couple of eggs from somebody in primary school. And there are enough mulberry trees around so you can feed them and you actually observe the full life cycle. And eventually they become moths and mate and lay their eggs and die.
So anyway, I thought it’d be fun to do with them. Except in my typical eyes bigger than my mouth fashion, we ended up with a complete mess. Because we had thousands of silkworms. To the point that the little mulberry tree we had in our garden couldn’t provide enough tree. So I was driving around the neighborhood in Los Altos, and I would try to find mulberry trees that had overreached the boundaries or fences and I would go there with bags, steal leaves.
Tim Ferriss: “Mommy, mommy. What’s that strange man doing by the fence?” Oh, that’s incredible.
Roelof Botha: And my wife said that like, “Venture capitalist caught stealing mulberry leaves.”
Tim Ferriss: That is really funny. Oh, man.
Roelof Botha: But it was actually fun by the way, my daughter ended up running experiments with them. So you get white ones and you get zebra ones. We call them zebra ones. They’re white with little black stripes. And my daughter ended up running experiments where she segregated them to see how the genetics would line up. So she was doing a little controlled experiment, which was probably a clue that she wanted to be in biology eventually.
Tim Ferriss: Well, if Dad’s reading the America’s Best Nature and Science Writing on an annual basis — well, this leads me to what to ask about questions about interests outside of, say, venture capital or investing. If you were invited to give a TED Talk on the main stage, but you could not talk about investing. What topic might you choose?
Roelof Botha: Probably genetics. I’m really fascinated by what’s happening in the field of genetic engineering.
Tim Ferriss: Please elaborate.
Roelof Botha: I mean we happen to have a company in this space. That’s helping with delivery of CRISPR. But I mean the point is not about investing. It’s about programmability of biology. And it’s the reason I got interested in having us invest in Natera a long time ago, is I was starting to read about genetics. Not having studied biology at college because I went in a different direction. But when the Human Genome Project concluded, it really opened my eyes to what was possible with the information that we have in genetics. And so whether that’s for diagnostic purposes, but now the ability to engineer, to treat disease. And there was just the drug approved today actually for treating bloodborne cancer disease that is reliant on genetic engineering. So this idea that we can treat human disease with precision genetic engineering absolutely blows my mind. So that’s the field that I’d want to study if I had infinite time.
Tim Ferriss: What would the runner up be? Do you have any other pet obsessions, former potential career tracks that you gave up on or put aside, if you want to put it that way? Anything else that would be runner up for —
Roelof Botha: Rugby. I really love rugby. I think it’s one of those, because I grew up in South Africa, it’s the African sport of choice at some level. And I think when I moved to the United States, it was one of those anchors back. It was a bridge back to the country for me. It was something for me to talk about with my brothers, and my dad, and my grandfathers. It gave me an excuse to keep in touch with the country. And so it’s an unnatural and unhealthy obsession I realize. But I do love the sport and I used to play until I got a pretty bad concussion. If you could see this little grey patch over here?
Tim Ferriss: Yeah! Is that really from the impact? No! Really?
Roelof Botha: Yeah. I was playing for Stanford and I got a spear tackle right on this spot and I was knocked unconscious, 911, ambulance showed up. I woke up two hours later and I was inside a CT scanner and I had no idea where I was. And after three, four months of persistent headaches, I realized that was the end of my non-money making rugby playing days. But I’m certainly an enthusiast as a spectator.
Tim Ferriss: I will say for most of my life knew nothing about rugby. And then in the process of doing research for The 4-Hour Body, my second book, spent time in South Africa at the South African Sports Science Institute with a professor. I think he was a professor, at least a PhD —
Roelof Botha: Noakes.
Tim Ferriss: — named Tim Noakes. Exactly right.
Roelof Botha: Yeah, Noakes. He’s well-known.
Tim Ferriss: And did all sorts of tests and proved through muscle biopsy that effectively my enzyme levels are worse than Homer Simpson, it turns out. But in the process I was able to watch the Springbok Sevens team warm up and train. And I have to say, easily some of the most impressive athletes I’ve ever witnessed in my life. Just in terms of combination of strength, agility, speed, endurance. Absolutely mind blowing. And still couldn’t tell you how the game is played other than throwing the ball underhand. But beyond that, yeah.
Roelof Botha: It’s fun. But maybe just to digress on that for a second, when I was a kid in primary school, I was starting to do well academically and playing chess and doing all these sort of things. And I had a teacher who pulled me aside and really encouraged me to play rugby, because he was worried that I was going down a path of doing things that were very academic and individualistic. And he encouraged me to play rugby. And I played all the way through high school and grew to love the sport. But part of it was a way to bond with people from every demographic in my school.
I didn’t go to an academic school. I went to a public school in South Africa. And so we had people who were not academically gifted. But I play with them. They’d be my teammates. And I had very little in common with them if we weren’t playing rugby, but it enabled me to form relationships and bonds with people. And the sport itself is not about individual attribution. It’s all about the team winning. No one cares who scored the try, everybody cares that the team won. And so it had a lot to do with my approach to business and the way that we think about managing our team in Sequoia as well.
Tim Ferriss: What are your current exercise or movement routines, if any. I don’t have much to report. So I should say with full disclosure. Look, I’m not fully sedentary, but I mean I wouldn’t say I’m exactly winning any Ironmans anytime soon. So I’m just curious, as part of self-care, what types of physical routines are important to you or consistent for you?
Roelof Botha: I exercise at least four or five times a week, an hour or more each time. If I can on a weekend, especially if I’m watching a rugby match, I’ll burn a thousand calories doing all sorts of different things. Which is very helpful by the way, because if your team loses, you’re too exhausted to be angry.
Tim Ferriss: So wait, are you doing jumping jacks and pushups while you’re watching rugby? What does this look like?
Roelof Botha: No, if I’m watching a game, I’ll alternate between a treadmill, a rowing machine and an assault bike, one of those air bikes. And I’ll spend 20 minutes on each and I’ll just keep rotating. But you’re sort of sustained a heart rate at 140-145 and you’re just spent at the end of that, and drenched. But no more energy to be angry. Part of the beauty is honestly of what’s happened with COVID, obviously terrible humanitarian disaster, but the side effect has been that there are all these trainers that are available on Zoom now. And so I’ll prop up an iPad in the gym and train with the trainer who just changes the workout routine and a lot of functional training as well. Because I think especially as the one gets a little older, things like balance and making sure you have good core strength.
I love exercise. I absolutely love exercise. And I love snowboarding by the way. I had not touched snow until I was 24 when I first came to the US. And a friend of mine at business school convinced me to go up to Tahoe for a weekend. I went for five days thinking I would figure it out in five days, but I was so sore that I couldn’t go on days two and four. I could only go every other day, I was in pain, but now I can get up to about 60 miles an hour on a snowboard, which is fun and dangerous.
Tim Ferriss: Braver man than I, that’s for sure.
Roelof Botha: And it’s the only sport I dream about. It’s fascinating.
Tim Ferriss: I have to just point out that you stopped playing rugby because you had a concussion, but you’re going 60 miles an hour on a snowboard. I hope you’re wearing a helmet.
Roelof Botha: Oh yes, I’m wearing a helmet.
Tim Ferriss: And I love moving quickly on snow. I just have taken a little pause because I actually tore my right labrum snowboarding last winter. So it’s feeling good. I’m going to get back on the snow, but I’m going to stick to the two sticks. Probably keep on the skis for a bit before trying any snowboarding again. I’d love to ask you a question that I think you ask, I want to say founders, reasonably frequently. And I’m sure I’m going to get the phrasing wrong. But the question relates to key career decisions. And maybe you can tell me first how you actually ask it. But I would just love to know how you would answer the question of absolute key sort of watershed decisions in your career. If one or two float to the top of the list.
Roelof Botha: Sure. We call them crucible moments.
Tim Ferriss: Crucible moments, perfect.
Roelof Botha: That’s Sequoia. And my partner Jim Goetz actually is the one who came up with that. I’m not going to claim credit. He deserves credit for the phrase. And we apply it to business context by the way. And so I’ll answer your question, but I think it’s really important for companies to think about crucible moments. Because often they don’t even identify them. They don’t realize that they face a crucible decision. Whether it’s geographic expansion, product expansion, a key shift that the business must make. And I’m not talking about pivots where what you try doesn’t work. It’s something really different. At MongoDB, the decision to go become a cloud business is a crucible decision. At Square the decision to build Cash App as a personal individual product rather than an SMB product, that was a crucible decision, very difficult to pull off within the company. But these decisions end up having a huge bearing on the ultimate outcome of a company.
And so do they with careers. And so when I interview somebody, for example, I don’t focus on tell me everything that happened while you were at this job. Tell me why you chose this job. How did you find this opportunity? What else were you thinking about and what is it about this particular opportunity that attracted you? Or why did you go to this school? And why did you not go to that school? Those are the more interesting questions. They’re also indisputable because that’s what you actually did. You can’t tell me that. What am I good at? Oh, I’m a perfectionist. Okay, great. A clever answer to the question. So for me the crucible decisions, one of them was to join McKinsey when I qualified as an actuary. I took a 50 percent pay cut relative to what I would’ve been earning as an actuary, to join McKinsey. And I had to pay back the bursary that I’d gotten from the insurance company. So it was a double whammy, financially.
Tim Ferriss: And the bursary is effectively a scholarship?
Roelof Botha: College. But you have to pay back if you don’t go work for them. So the deal was that they would pay for my tuition and I had to work for them for the same number of years that I studied to pay off the debt. And if I didn’t work for them, I literally had to pay them back every penny. And so I earned less and had the debt to pay off. I made the same decision when I joined PayPal. So McKinsey was paying for some of my tuition at Stanford and I had to pay them back. And what I was getting, I still have my offer letter. Elon recruited me to pay PayPal slash x.com. And I have the signed offer letter store on my drawer. And I got $80,000. That was my salary when I finished my MBA in 2000. And it was less than McKinsey was going to pay me, and I had to pay McKinsey back. And then the third one was joining Sequoia. And those are the three key career decisions.
Tim Ferriss: How did you end up in Silicon Valley?
Roelof Botha: It was a funny story. There was an American who had come to University of Cape Town when I was an undergrad. And he was a guest lecturer in economics. His name is Peter Baird. And it was fascinating to meet him. He had a wonderfully bubbly personality, and he was just one of these larger than life people. I loved working for him. Well, I ended up working for him later, as I’ll explain. He ended up working in McKinsey, coming to South Africa. And I was staffed in a project with him ,where he was my engagement manager. And he convinced me that I should apply to business school. Because I’d done a business undergraduate.
Tim Ferriss: What is an engagement manager? Just before we jump over that, what does that mean?
Roelof Botha: An engagement in McKinsey language was a project, basically. So he was the project manager. They just needed to come up with fancy words to merit the exorbitant fees they were charging.
Tim Ferriss: Yes. Got it. Sorry to interrupt.
Roelof Botha: No problem. So he was the project manager. He convinced me I should apply to business school, which I didn’t think was necessary, because I’d done a business undergraduate as part of my actuary science training. And he wrote one of my recommendation letters and strongly encouraged me to think about coming to Stanford. And at that point, this was in the late ’90s, obviously Stanford or Silicon Valley in general, looked like an interesting place. This was the well of opportunity. So many companies were being formed. Instinctively it seemed like the place to be. And so that’s how I got to Stanford in 1998.
Tim Ferriss: 1998. It’s easy for me to forget how young you are. I mean for me, right? Just looking at your bio and resume, it’s crazy to think you got there in ’98. I got there in 2000. I mean the end of ’99, 2000. It would’ve been in 2000. So not that long afterwards. And how old are you now, if I may ask?
Roelof Botha: 48.
Tim Ferriss: 48. Man. Overachiever. Okay. So you get to Silicon Valley. Now up to that point, your decisions seem to be very methodical. You’re thinking about preserving optionality and mitigating certain risks, as you explained earlier with the political climate changes taking place, choice of McKinsey. Was the intention from the get go to go to business school and join a startup before you even got to the West Coast?
Roelof Botha: Nope!
Tim Ferriss: Okay. Okay. So how do we go from that to speculative — of course, because they all are — speculative startup?
Roelof Botha: You need to change your mind. If we talk about mentors, by the way, I have a specific anecdote about one of them that really hammered this into me. So right before I came to business school, I was doing a master’s degree, which I didn’t complete, at the University of Cape Town on long-term option pricing using stochastic simulation techniques.
Tim Ferriss: You too? No, I’m kidding. Just kidding. Please. Sorry. I screwed up the flow. My apologies.
Roelof Botha: No, that was perfect. It’s what one does on the weekend, you know, you run these Monte Carlo simulations on your little compact laptop. I was fascinated by finance, serious finance. And I thought I’d end up in Wall Street and work in the derivatives group somewhere. And when I was a first year of business school, actually I was doing advanced topics and derivatives, and ended up taking all the finance classes. And I thought that would be where I could shine, because I’ve got mathematical skills. I thought it was interesting. It was fascinating. I actually spent my summer working in London at Goldman Sachs when I was at business school. I thought is Europe interesting? I didn’t know. Is banking interesting? I didn’t know. And I’ve got a no on both of those, by the way. So I tried to realize it wasn’t for me.
Tim Ferriss: You got a no, meaning you gave it a shot and got rejected? Is that what you mean by a no?
Roelof Botha: No, no. I realized that was not the right calling. Going back to Europe at that point to me felt like going back to the past as opposed to the future. And the West Coast was the future.
Tim Ferriss: Okay. Because the figuring out those were not the right paths is very critical. I don’t want to gloss over that. So could you expand on that? Was Europe, as you said, felt like going to the past instead of the future and that’s how you arrived at a no for that option? Okay.
Roelof Botha: And for me as a South African, there are many South Africans that live in the UK, it’s same time zone essentially as South Africa. And so it was closer to home. I mean, California is about as far as you can get from where I grew up and my family, and I was very close to my family. And so I was wondering if that made sense. And so I tried it, I got enough information to realize that was not my destiny. And so I came back for second year. One of my classmates had met Elon before he came to business school when Elon ran Zip2. And this friend of mine was at City Search and introduced me to Elon.
And I thought the intersection of financial services and technology was interesting, and he made me a job offer. And I couldn’t quit because I didn’t have a work permit. I was here on a student visa. And so we kept in touch and I started to learn more about PayPal was really intrigued when PayPal and x.com came together because I loved the business model that had. And at that point when he made me another offer and the opportunity was actually to report to Peter, Peter Thiel, that seemed like something I shouldn’t turn down. So I accepted the offer and I was so delighted they took a chance on me.
Tim Ferriss: Why did it seem like something you shouldn’t turn down? Because Elon and Peter were not the Elon and Peter in all marquee lights of today, right?
Roelof Botha: No, no, no. Just earlier. Obviously I loved the business model and let me be clear. I still vacillated because I had to pay back an enormous amount of student debt. I didn’t have any money. I’d run out of money actually in second year of business school and was living with borrowed funds from friends of mine and I was struggling to make rent.
Tim Ferriss: Did your family know this?
Roelof Botha: They did. They didn’t have money. I didn’t grow up with wealth.
Tim Ferriss: Understood. I’m wondering what your family, assuming you were in contact with them, what did they say about this? How did those conversations go? Were they worried about you?
Roelof Botha: Yeah, they were worried. Of course, they were worried. But they didn’t have the means to be able to support me. So Peter Baird, the person who I worked for at McKinsey, he lent me some money. My best friend who was working in London at that point, was my best man when I got married, he lent me some money. My now wife who was a classmate, we were dating already, she lent me some money. It was embarrassing at some level, but I had to get through. And so I was struggling with the decision because it was an expensive decision to walk away from going back to McKinsey or maybe joining Goldman. And so I struggled with those two choices and the choice to go to a startup.
And my wife actually studied computer engineering at Carnegie Mellon, who’s also an immigrant from Singapore. She and I had long conversations and she really encouraged me to take the startup route. And she had worked at startups before she came to business school. We were classmates, we’d met there. And so she was a huge influence. I made that decision. I liked the business that they were building. It was clear that the payments space was a way to make a very — well, there was a clear path to turn it into a revenue business. I thought that the combination of X and PayPal would really dominate the PDP payment space. And I fell in love with the business and the people.
Tim Ferriss: Was there ever a moment in the first handful of years where you second guessed that decision? Do any particular moments —
Roelof Botha: Two weeks later. No, so my offer letter was signed on March 30th, 2000. April 12th, the NASDAQ has a massive correction. I mean, literally two weeks later. Then I go to a class where Meg Whitman was a guest speaker in one of the classes I was taking at Stanford. I’d already accepted my offer to join. And she came to this class and she says, “Well, we own this payment service called Billpoint and we’re going to crush this annoying little startup in Palo Alto called PayPal.” Don’t say that, I’m going to go work there. I thought we play nice in Silicon Valley, what’s going on here? And then we had the fraud challenges. Then our burn rate was $14 million in June of 2000, before we started to charge for payments. And our burn rate was accelerating.
Tim Ferriss: Can you explain the fraud challenges? Just so people don’t misinterpret what that means.
Roelof Botha: Sure. What was happening, so first PayPal wasn’t generating revenue yet. So whenever somebody accepted a transaction on PayPal, let’s just say a hundred dollars transaction, roughly speaking two and a half percent was the fee that goes back to the credit card associations and the issuer of the credit card. So we were paying that $2.50 for every single transaction that was happening on PayPal, and never charging the recipient, the merchant for the transaction. So our losses were growing very, very quickly.
And then we were dealing with two types of fraud. The first is unauthorized fraud. This is where somebody stole your credit card number, enters it onto the PayPal website at that time, charges a hundred dollars, and withdraws the money and runs away. And then you get your credit card statement at the end of the month and go, “I didn’t authorize this transaction.” You file a charge back, PayPal was on the hook to pay you back your hundred dollars. So we had to protect against this unauthorized fraud use case. And then there’s merchant fraud, which is the person said they’d trip you something, it never arrived, it arrived damage, it didn’t look the way it did on the website, things like that.
Tim Ferriss: Was it a crisis of faith or were you like, “Hmm, not sure about this?” How severe was the second guessing?
Roelof Botha: Well, I never thought about quitting, by the way. It was more just, I’m not sure we are going to make it. I might have to row a boat back.
Tim Ferriss: Why never consider quitting? This is interesting to me. Not saying you should have quit, clearly it worked out. But why this stick-to-itiveness? Despite all of the challenges, the massive NASDAQ correction, why never thought of quitting?
Roelof Botha: I don’t know. I felt like we were in it together as a team. We had incredible spirit and camaraderie within the building. I felt like we had each other’s backs. We became good friends. I mean it’s part of the reason I think the PayPal Mafia was as successful as it was is we formed incredibly strong bonds then. I don’t know, we just rallied as a team and we’ve sort of felt we’re going to build this and if we don’t build it, we’ll go down with the ship rather than abandon ship. It was just the sentiment. So we just kept trying. Problem after problem, whether it was fraud, whether it was eBay trying to kill us, whether it was regulators, whether it was Visa. We just kept fighting. I don’t know, maybe we were too naive to understand that it was foolish.
Tim Ferriss: Well, I mean, I think that goes for a lot of founders who end up doing very well. People with creative projects. I mean, you hear it all the time. It’s kind of cliched at this point, I guess. But if they had known what was involved at the outset, they never would’ve done it. Right? But they did it also. So we’re talking about PayPal, clearly all’s well that ends well. And I’d like to try to flesh you out a little bit as a human, as opposed to someone who steps up and hits home runs nonstop, which you’ve had a lot of home runs to be clear. But could you describe a meaningful or favorite failure? And by that, I mean, anything that seemed like a failure at the time or was a failure that was particularly valuable for you, looking back, or that set you up in some fashion for later success. Does anything come to mind?
Roelof Botha: Did you say favorite failure?
Tim Ferriss: Those are the words I used. Yes.
Roelof Botha: The failing sucks.
Tim Ferriss: Right.
Roelof Botha: It’s painful.
Tim Ferriss: It is. It is.
Roelof Botha: I don’t know if I’d use the word favorite.
Tim Ferriss: Meaningful, insightful.
Roelof Botha: Insightful.
Tim Ferriss: We could definitely re-label it however you like. But in effect.
Roelof Botha: No, and I say that whimsically partly because I really hate losing.
Tim Ferriss: Also something common for quite a few members of the PayPal Mafia.
Roelof Botha: Which has its downsides, obviously. So one of the things we talk about in our partnerships is the sense of commission and the sense of omission. And the sense of commission is we made an investment we shouldn’t have. And the sense of omission are the ones you didn’t, but should have. And I’ve probably made six, seven investments in my career already that literally went to zero.
Roelof Botha: My career, already, that literally went to zero. I don’t think I should really highlight any of them, because we made a good try. The founders were great, didn’t quite work out. It was valiant, we did what we could. I will tell you, the first time I had an investment that went to zero was a $10 million complete write off. I literally cried in our partner meeting, because I had such an immense sense of shame and guilt for having failed. For having lost money for our limited partners. It was an important moment, partly because of the senior partners at Sequoia. Part of what we do well as a team, part of our longevity, is the way that we help each other.
And so, senior partners who had gone through this themselves were there to support me and guide me through this, because the danger in the business, if you’ve had an experience like that, is you recoil. You become very careful, and you’ll never get back to the glory days. Maybe like an athlete who has a severe injury. They never want to test that knee again, because they had a bad knee injury or something. They’ll never attain what they had in the past. That, to me, was a very painful experience, but the ones that really sting are the ones we should have made. I think back to meeting Jack when he was at Twitter. I met him and Ev, and we had an opportunity to invest in series A at Twitter. This was in 2007, so this was before the iPhone was released. There was no Twitter app, this was text messaging. Different business.
I just didn’t dream enough. I failed to imagine what might happen with a service like this, and that was incredibly painful for me. We missed the A, and we missed the B, and we missed the C. That was a huge lesson for me. Sometimes, you can explain away an investment you didn’t make by saying, “Well, ex-ante with those same facts. Would you make the same decision today or not?” Because obviously, ex-post you should have made the investment. There are weird twists and turns on the road to company building. And so maybe you could justify that the series A was a bit more random, because it took a lot from there to where they were in, say, 2010. But by 2010, we should have looked at it and reevaluated our decision. That I feel really guilty for. That was terrible. I really, really messed up for not revisiting assumptions.
Tim Ferriss: What did you learn from that? In terms of things that you discounted that you shouldn’t have, things that were invisible that you should have made visible. I’m wondering what you carry forward from that.
Roelof Botha: The two things are imagination, dreaming. Sitting back for a second and saying, and my partner, Mike Moritz, often hammers this home for us in our partner meetings when he was part of the team full time, “What if it goes right? We’re in the business of investing. We’re not in the business of not investing. Assume for a second it goes right, what could you imagine this being?” It’s the pre-parade exercise in some sense. Just put on your thinking caps. I remember being in a meeting with Mike, and Max Levchin, and Jeremy Stoppelman when Yelp was an idea. An idea in 2005. Mike, in a meeting, said, “I imagine a future where there are Yelp stickers outside restaurants.”
I mean, that was an amazing insight. An amazing vision for the future, which came to be true. And so, I’m always reminded about the need for imagination in our business. The need to be naive at some level. If you become a curmudgeon in the venture business, you’re done. You need to be naive, you need to dream. That’s the one. The second one is learning a little bit from behavioral economics of the need to revisit your assumptions. I was really stuck in a sunk-cost fallacy, where my recommendation was for us to not invest. Wrong decision. Let’s dig my head into the ground, hide, and just keep saying, “We shouldn’t invest. We shouldn’t invest,” because why admit that I was wrong? And so, you need to be able to revisit your decision and admit you were wrong.
We got the series A at Sequoia wrong. We corrected it, and we paid up for the series B. I helped lead the investment. I had to swallow my pride. “I’m sorry, team. I should have recommended it nine months ago. My bad. Now, we’re paying a higher price for the investment, but I still believe in it. I think there’s huge up sign.” Psychologically, that’s a very difficult thing for people to do, and so we want to create that safety for us in our investment team.
Tim Ferriss: We’re going to come back to changing your mind. Before we get to that though, I just want to read something that I think is profound, which I’d never really thought of before. This is from Don Valentine. I am paraphrasing here, but I understand that he said to you at some point, maybe in the interview process, “Successful people join venture capital only to have to face the fact that good investing means taking risks and startups that are more likely than not to fail. Coming to grips with being wrong not five percent of the time, but 30 percent of the time, 40 percent of the time really eats it at your self confidence.” I think that’s a quote from you actually. You had this experience of crying in a partner meeting. Did it continue to be difficult? I suppose I’m wondering if there was a moment, particular company, when you can identify that you became more comfortable with some of your portfolio companies going to zero? Is there anything that helped with that, aside from the support of the partners in that particular meeting?
Roelof Botha: It wasn’t the support of the partners just in that meeting in general. I think we started to have conversations about not doing post-mortems. Because at one point we had an exercise of doing post-mortems on investments. “We got this one wrong. Let’s hammer into each other why we got it wrong.” What does that breed? That breeds a culture where people are going to be scared. Scared to take chances. If you’re dealing in a powerful business with asymmetric upside, why cry over yet another one that failed? You need to focus on the ones that really succeed. That’s where the business is won. Obviously, if all you do is make a dozen investments that don’t work out, then you probably need to go do something else with your time. You need to get enough ones that are good, obviously, to survive.
That was part of it. We stopped doing post-mortems and we supported each other. It was clear to me that my partners weren’t judging me, and that my head wasn’t on the block for the next failure. I felt secure enough that I could make decisions and knew that I was part of the team. Maybe if you want to use a sport analogy, if you go for a crazy shot, are you going to be cut from the starting team next game? No, because you took a rational shot. It maybe didn’t drop that time. There are probably a million Michael Jordan quotes you can use that make that point. That was one piece. The other one was: At some point, you have enough success, where you realize, “Well, I made an investment that made us $500 million. That excuses three of those failed $5 million investments many times over.”
You have to get over it. You just psychologically have to accept that you just have to move on from that failure and not have it encumber you. Learn from it. Don’t dismiss it, but you just rationally have to look at the math and go, “Okay, next.” Part of it helped me, by the way. I was in the doldrums in 2009. I actually thought about quitting the business. YouTube was a great success early on in my career. I was incredibly fortunate to have had such a big success within my first three years as a venture investor. Then I had a pretty lean backlog, and I wasn’t sure I was cut out for it. One hit wonder. Is this going to be one and done? I kept at it, and I realized that there’s always another red bat in our industry.
In 2009, after I thought about it, after my partner Doug, and Mike and Jim really pulled me out of my doldrums, we ended up investing in Unity, Eventbrite, Square, and MongoDB. A list of companies. It was just this purple patch of investing. It just reminded me, “Don’t give up. Keep going.”
Tim Ferriss: How did they pull you out of your doldrums? What did they say? Do you remember anything specific, even if it’s paraphrased or a rough guesstimate? What did they actually say to you?
Roelof Botha: Well, there’s a balance that we have. I’ve now learned, since I’ve been there long enough, to recognize when other people go through this as well. You can’t coddle. You can’t be there with making it too safe, too many boundaries, too many guardrails. People actually have to walk through a little bit of the valley of despair on their own and wrestle with it. But at one point, Jim realized that I was going too far and he would take me for walks around the office.
I don’t remember the specifics of what he talked about, but I remember him spending a lot of time investing in trying to get me into the right space. Then Doug Leone showed up at my house one day with homemade pesto. He was knocking on the door on a Saturday. I, honestly, didn’t feel like opening the door. I was like, “Leave me. I want to be miserable by myself.” Doug knocked. Literally from basil that he grew in his own garden, he brought this little jar of pesto for me, which was delicious, but it was the sign that he was there for me and knew what I was going through. It was memorable and had a big impact.
Tim Ferriss: So, mentors. You mentioned changing your mind is important. You said, “Let’s come back, if you like, to mentors,” because you have one in mind. Do you still have that thread? If so, would you like to pick up on that?
Roelof Botha: Yeah, Peter Thiel. Peter came back as our CEO. If you’ve read any of the PayPal books and know the story, we as a team rallied to get him back as CEO. It was difficult, because the board wasn’t fully supportive. As a team, we had to keep interviewing other candidates. We kept feeling, “We’re a team. Peter’s our man. We want Peter to be our leader and CEO.” Peter had incredible ability to change his mind. Peter would say, “We’re turning left, turning left.” If we weren’t sure, we’d go analyze, bring him data. We’d show him the results, and he’d say, “Yep, I’ve just looked at it. We’re turning right.”
He would just turn like that on a dime, and he had no qualms about this. I think most people get so stuck in escalation of commitment where, “I need to remain consistent with the person you thought I was yesterday. Otherwise, I’m going to be viewed as irrational.” There’s a whole branch of psychology that talks about this, right? To some extent, people view flip-floppers negatively, especially in politics and things like that. But in business, it’s incredibly valuable if you’re just rational. Peter did that to a T, and it made him an incredible CEO.
Tim Ferriss: Do you think that’s just Peter out of the box? Different motherboard, different programming? Or, is that something that he cultivated? If you think there’s a component of it that is cultivated, how do you think he did that? Or, how would you help someone to develop that ability?
Roelof Botha: I obviously didn’t know him growing up. I met him in the PayPal context. I mean, Peter is just so supremely smart and rational. My guess is it’s innate in him. He doesn’t suffer that kind of baggage, if you will. He thinks for himself. There are a lot of people that are so worried about what others think of them, and Peter just doesn’t seem encumbered by that. Not that he’s indifferent to it, but I just don’t think he spends his whole life worrying about what others think about him. He just does what he thinks is right and interesting.
Tim Ferriss: It seems that way.
Roelof Botha: I think it’s innate. In terms of cultivating it, just calling it for what it is. In an organization, creating a culture where you are willing to stand up to new information and change your mind, and then praising people for changing their mind on things. “Look, I said no to this decision. I’ve reevaluated,” or, “I walked into this partner meeting thinking we shouldn’t make this investment, and I’ve been swayed by your arguments.” Or, recognizing that somebody else changed their mind and praising them for doing that. I think you need to cultivate that kind of culture.
Tim Ferriss: I find it so fascinating. I’m going to sit with this. It makes perfect sense, although I have some misgivings, so let’s come back to it. The not doing post-mortems. Psychologically, it makes a lot of sense to me that if you overemphasize post-mortems, you could breed fear in those who you want to take risks. Therefore, it’s self defeating. But I suppose there’s some post-mortem required, at least on an individual level, to change your mind about a company that you said no to, or there’s a revision of your thinking that needs to take place. If any companies come to mind, it doesn’t need to be a specific company, but what is the process that you have gone through to change your mind? To revisit assumptions for any of those investments where you turned down the seed, the series A, and then you end up paying up on the series B or series C?
Roelof Botha: It takes work, by the way. I don’t pretend that it’s easy and that it just comes naturally. I think we’ve evolved with all these heuristics. They maybe served us well 200,000 years ago when we first evolved as a species, but it hampers us today. I have to fight it the whole time. We’ll start discussing a company that I remember meeting nine months prior, and I can just feel my instincts. Like, “No, I didn’t like it then. Why should I like it now? Why do I have to work and think about it again?”
I mean, the lazy part of me just wants to say, “No. I already made the decision, move on.” Right? It takes effort. It really takes effort, but that’s part of why heuristics are valuable, right? They’re shortcuts. For many things in life, shortcuts are great. But if you want to make important decisions, maybe shortcuts are a curse. Anyway, I don’t make it sound like it just comes naturally. By the way, we do do lightweight post-mortems on the things that failed where we made an investment. It was just that we used to have this exercise, which is the sponsor has to go write a memo and mea culpa, and —
Tim Ferriss: Right, there was a punishment. Maybe not punishment. That might be too dramatic, but there was a dire consequence.
Roelof Botha: It was just too much, it was just too much. We have to learn from them. We got the space right, but we picked the wrong team. “Why did we pick the wrong team?” “Oh, they had better technology, but they didn’t have the right go-to-market capabilities,” or, “They aimed at the wrong part of the value chain.” We try to learn from those, because it informs future decisions. I don’t want to make it sound like we’re oblivious to the mistakes of the past, but it’s then re-looking at a company. I can’t remember when we did this particular analysis, but many of the best investments that happened in particular window of time were companies that we had previously met.
We’d already met them before. We should be even better prepared to make a good decision now. Why do we not do that? And so, we’ve tried to think about, “Do we ensure that the people who were there before meet them again, because they have a sense of continuity in how far they’ve progressed, but do we also inject some fresh pair of eyes to help guard against the individual who maybe is jaded by their past experience?” Sometimes, we have to switch who the point person is, because some of the chemistry is just between a founder and an investor. It’s a personal relationship. You’re joining somebody’s board. Google is a case in point, where the person who found Google for Sequoia was Doug Leone. The person who became the board member was Mike Moritz, right?
Mike had the right chemistry with the founders, the right experience because of Yahoo, and that made sense for us. And so, we always try to think about, “What’s the right match? Do we have the right group of people in the room?” At the end of the day, back to the rugby analogy, we have to win as a team. We have to win as a team, which is why things like the Midas List are a little bit insidious from our point of view, culturally, because it tries to create individual attribution. When we have a success at Sequoia, when there’s a company that goes public or gets acquired, we actually write an email internally and we enumerate all the people that contributed to the success of the company, not just the person whose name is nominally attached to it as the board member.
Tim Ferriss: I love that. Sebastian Mallaby, Power Law or The Power Law. I don’t know if there’s a definite article on the book title. What did he leave out? What did he not cover, right? If he said, “You know what, Roelof? I’d love for you to write an appendix, or an afterward, or a sidebar. Anything at all just to make this more complete or more compelling,” what would you do?
Roelof Botha: Maybe because of the time period that it covers, I think the professionalization of the industry that’s happening right now is something that’s not fully captured in the book.
Tim Ferriss: Just for people who don’t have a familiarity with the venture capital world, what would be some of the components of that professionalization?
Roelof Botha: If you go back 25 years, the typical venture firm had eight to 12 investors. Just factually, they were probably white men at the time. That obviously is changing very quickly in our industry, appropriately, but you had a handful of people sitting around a table making investments. The total organization size was maybe 25. They had some assistance, some receptionists. Maybe a finance person, maybe they were outsourcing everything. There was very little offered in the way of services to portfolio companies to help them. It was just small professional services organizations, at some level, that were investors. Today, our team at Sequoia US and Europe is about 180. Like I mentioned earlier, the investing team is still pretty small. We have 25 ish investors in our business, but we have marketing capabilities.
We have data science, we have engineering, we have product. We obviously offer talent services to our portfolio companies. We have a big finance organization now that manages the complexity of all of this. And so, we’ve just changed as a business to be able to serve founders. The business has gotten more competitive, and so you can’t just be money. As you pointed out earlier, there’s just so many people who are willing to write checks. That is not a differentiator. What is it that I’m offering an entrepreneur that makes him or her choose to work with me? Because they think that I have a disproportionate impact on their chance of success, right? That’s partly me, my experience. My partners, what we bring as a team, and what are the other services around our partnership that we can deliver to help you succeed?
Tim Ferriss: Completely agree. Just having watched from the cheap seats, where I can keyboard quarterback. Just having observed, I think that would be a really important addition in your appendix epilogue to Sebastian Mallaby’s book. Now, let’s say the editor comes back and says, “Okay, this is great. However, we’d love one of the professionalization really working, if there’s a specific example, and then we’d love for you to include a counter example if such exists.” The reason I ask, I’ve been out of this world for a while, but I do remember back in the day. This was probably, let’s call it, 2008/2009, which was a great time. I mean, I really lucked out with that time period.
If I’d started this 10 years later, things would look very different. I remember Steve Anderson of Baseline Ventures always impressing me, just because he seemed to do so much with so little. Just in terms of actual boots on the ground. If there was a specific example that you could give of the professionalization really working, I’d love to see it. By the way, just one or two more questions. I know we’ve gone pretty long, so I appreciate your time. One example of it really working, and then if there are any counter examples. Throwbacks or lean-and-mean operations that you admire and think do a good job.
Roelof Botha: When I say what I did, it doesn’t mean that other models don’t work. For us, it’s what works repeatably. Even in our own business, there are examples where an individual partner has an idea, forms a connection with a particular team, and can bring that entire opportunity home. Then that partner probably is most of the interface for that company, in terms of company building, board building, and things like that, and we want to encourage that. Actually, at Sequoia, one of our cultural frameworks is maintaining tension between individualism and teamwork. It’s not either/or, it’s and. We want both. You need to stick your neck out, you need to do exceptional work, you need to be accountable for what you do. But you also need to be supportive as a team member, because that’s part of why we’ve been able to endure as a partnership. It’s both.
Can you do incredibly well as an individual or a collection of individuals? Absolutely. But the cultural consistency for us inside our organization is, we need that for us to consistently do well. To give you an example: We’ve built internal systems now for us to track companies. If you give me a company name, I could look it up and I could tell you, “Have we met it? Who met it? What are the notes? What did they think of the company?” I have data science signals that tell me how this company is doing. The proprietary to give me a sense of whether or not it’s worth pursuing. These are things that didn’t exist in our industry 15 years ago. Actually, Jim Goetz was one of the first ones to help us pioneer with this. He built a system called Early Bird, which is part of how we identified WhatsApp.
Tim Ferriss: Oh, wow.
Roelof Botha: WhatsApp was growing outside America because of the way that cell phone carriers outside America were charging people on a per SMS basis. In the US, we had all-you-can-eat plans. And so WhatsApp was growing. Our data science effort showed it. No one in America was paying attention to it, because no one in Silicon Valley or the US was using WhatsApp. And so, we connected with Jan. He’d worked at Yahoo, and so we were able to use our historical Yahoo connection to make sure we can get to him. That is a glimmer into the data science capabilities that we’ve now honed, a decade later, that give us an unfair advantage. That, to me, is a concrete example of how our business is better for it. It doesn’t substitute for the insight, the grit, the salesmanship that an individual partner has in actually landing an entrepreneur.
Tim Ferriss: I have two more questions. Second to last question is the billboard question, which I ask a fair amount. If it’s a dead end, it’s a dead end. Sometimes it is, and I take the blame for that. If you could put a message on a billboard that would reach billions or millions, you pick, of people? It could be a quote, it could be a question, it could be an image. It could be anything non-commercial. This is a metaphorical question, of course. It could be a push message on a phone. It doesn’t really matter. What might you put on that billboard?
Roelof Botha: Since I was aware that this was a potential question, I had some —
Tim Ferriss: Perfect.
Roelof Botha: — time to think about it beforehand. My answer would be, “Dare to dream.” The reason I say that is, actually, when I interviewed at PayPal, and Peter interviewed me, part of what he talked about is people’s failure to understand repeat gains. If I told you to take a chance in your career with one role of the dice, proverbially, it’s pretty dicey to do that. No pun intended. But instead, I told you, “Look, you have one shot. If it doesn’t work out, there’s another one and another one and another one.” You have many at-bats, so to speak. You have many different opportunities for different companies over your career.
Would you take a chance on something that has a low probability of success, and that’s fun along the way? Yeah, sure. You would. And so, I saw so many of my classmates — I’ve seen so many people over the years make safe decisions, play it safe. They make these conservative decisions. “Oh, I can’t take a chance on this thing. What if this company fails?” They just end up getting in a rut. Before you know it, they’re in their forties. They have a midlife crisis. They feel that they’ve wasted their lives. And so, dare to dream. Take a chance. Just do something interesting. Just think, “If it doesn’t work out, then there’s something else. There’s something else.” Just keep taking more chances.
Tim Ferriss: I love that, and it’s good advice for me right now. I have something very absurd cooking with a very low probability of success, so I’m going to take that as an endorsement of my path.
Roelof Botha: No, absolutely. The most boring thing is a life left unexamined, right?
Tim Ferriss: Yeah.
Roelof Botha: If it’s fun, who cares? You’ve had so much success. I mean, no one remembers you for your failures, by the way. Can you numerate the six companies, seven companies that I invested in that were complete write-offs? Probably not, but you remember the ones that made it, right?
Tim Ferriss: Good point.
Roelof Botha: Get over it. Go do it.
Tim Ferriss: Go over it and go do it. Roelof, this has been a lot of fun. I’ve really enjoyed this conversation. Is there anything else that you would like to mention? Anything you’d like to draw attention to? Closing comments? A request of my audience in any capacity? Is there anything else you would like to say? Of course, people can find you online. On Twitter and Instagram, @roelofbotha. On LinkedIn, the same. We’ll include all of these links in the show notes, for people who want to find those directly in the show notes, but is there anything else that you would like to add before we come to a close?
Roelof Botha: I would just reiterate the dare to dream. Carpe diem, seize the day. Make the most of the opportunities in front of you.
Tim Ferriss: All right. Well, that’s a perfect place to end. Thank you, once again, for the time. This was really fun, really enjoyed it. Took a ton of notes. You certainly saw me scribbling. People who watched the video will see me scribbling. Lots and lots of notes. It’s given me a lot to think about, which is great. I’m really excited to pursue this absurd idea that I have. If it fails, nobody will remember it in three years anyway, so it’s fine. For everybody who is interested in resources, everything we’ve talked about will be in the show notes. Links to everything you can imagine, including all the books, people, and so on, at tim.blog/podcast. Until next time, be just a little kinder than necessary and follow the advice, dare to dream. Get after it, get it done. Thanks, folks.
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