Invest Like the Best with Patrick O'Shaughnessy
Doug Leone - Lessons from a Titan - [Invest Like the Best, CLASSICS]
Fri, 28 Feb 2025
Welcome to this classic episode. Classics are my favorite episodes from the past 10 years published once a month. These are N of one conversations with N of one people. There's nobody I've met quite like Doug Leone. Doug led one of the world’s most successful venture firms, Sequoia, for over 25 years after he was given responsibility for the firm by its founder, Don Valentine, in 1996. Alongside Mike Moritz, the pair managed its expansion from a single $150m early-stage fund into an $85 billion global powerhouse. It was a privilege to sit down with Doug and learn from him. We talk about his tough start at Sequoia, get into the technicalities of great go-to-market motions, and survey his advice for other investors in the industry. A key theme that will stick with me from this conversation is Doug’s insistence on keeping things simple and clear. I listen to this at least once a year. I hope you enjoy it. Subscribe to Colossus Review. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Passthrough. Passthrough streamlines subscription documents, KYC, and AML compliance, so you can focus on running your fund, not managing paperwork. New SEC Update 31 CFR hits investment firms in under a year, and managers are getting ready for it now. If you think basic OFAC screening is enough, think again. You'll need continuous monitoring of your investors and all their beneficial owners across multiple watchlists, plus a comprehensive anti money laundering program. Passthrough has already processed 50,000 LPs and built the complete solution. Don't risk SEC deficiency letters, fines, or regulatory enforcement. Visit passthrough.com to get compliant now. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:00:00] Welcome to Invest Like the Best [00:05:21] What Don Valentine’s heart was like [00:08:30] The most productive and unproductive parts of Don’s toughness [00:12:55] Why it’s so important to understand someone’s core motivations [00:18:44] The most formative experiences he had prior to becoming an investor that impacted his investing the most [00:22:37] What venture looks like to him today relative to his prior career [00:28:37] Whether or not he’d go into venture today if he was in his late 20s [00:34:10] Helping companies circumnavigate mediocre positioning [00:39:15] How interacting with companies early on has changed over the ears [00:43:12] Whether or not new entrants into venture should build firms with enterprise value [00:48:14] Sussing out the killer gene in somebody [00:51:04] How successful people can instill the lessons learned from hardship into their children [00:54:30] Whether or not competitive advantage can be architected ahead of time when building a company [00:57:21] The early 2000s clawback at Sequoia and what navigating that period was like [01:01:06] What he’s learned about picking the right LPs and partnering with them [01:04:18] Making sure that performance is on everyone’s minds all the time [01:09:59] The kindest thing anyone has ever done for him
Chapter 1: What were Don Valentine's core motivations?
It's truth be known for the first 20 years, I did not know whether he had a heart. It was all pure business. It was all for the cause of generating returns for our clients, most of which are endowments and foundations. So for the first, I would say, 15, 20 years, He was visionary, but extremely tough, and certainly dedicated to the cause.
At his eulogy, I was very amused and interested to find out from his kids that they spoke of him as having his huge heart when he went home. And it was really interesting how he segregated his work life from his home life. As he got older and developed a sense of history and put himself in perspective of other leaders, there were certain things he did not want to do.
He did not want to be one of the older folks that stuck around too long. He had images and knowledge of other leaders his age or a little younger that were falling asleep in meeting, and there was starting to be a drag on their partnerships. And he was very cognizant. of not wanting to do that.
And the other thing he was very cognizant of is, boy, how do we leave Sequoia in the best possible place for the next generation? And it was interesting that he chose, and I say chose as if he's pointed us out, he had his own subtle way of choosing. assigning Carrie, maybe two of us at 10% more than the other folks. That's how he chose leadership.
That he chose younger folks that he was willing to mentor. And I would just say that the heart showed up and it was a transformation. Not a transformation out of weakness, but a transformation out of wisdom. And you get to see his heart and how much he deeply cared and how much he cared to mentor and how much he loved youth and how much he loved new ideas and so on.
So very, very, very interested, very interesting human being for the time in which he lived. He would sell shares at 2 billion, not buy shares at 2 billion. Back in his day, if you reached 2 billion or 3 billion, that was a huge exit. So there was the learning curve of a world that was changing at a rapid pace. He understood that he wasn't going to adjust to that world. He got out of the way.
He never asked a question unless he was asked. The only comments he made once he stepped down, comments when he was asked for his opinion. I found that extremely interesting. He was the ultimate of what the, if you will, the old king should do. In fact, I model my behavior, now being the old king, to his. Never intrusive, always helpful, always ready to assist, but never second-guess.
You mentioned his toughness in the earlier years. Maybe draw the spectrum for me in terms of what was the most productive part of his toughness and if there was any unproductive part of his toughness. It feels like this is an era where that word toughness might become important again.
I remember attending a meeting with a founder. And as we walk out of the meeting, Don only wrote in green ink, yellow pads and green ink. And in green ink, he left a note on the table, said, Doug, not fit to listen to founders. And he just left it there for me to see. And in this new day and age, everybody wants weekly feedback. Why should I do better? This and that.
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Chapter 2: How did Doug Leone's early experiences shape him as an investor?
I spent a lot of time talking to your partner, Ravi, about demons and the demons that are in certain people for whatever reason, and the ways that those demons can motivate or drive entrepreneurial type people to enormous success. And one of the things that Ravi told me was that you are extremely good at sussing out a person's core motivation and
via listening, ironically, given Don's note to you. And I'd love you to talk a bit about that skill and why you think it's so important to understand someone's core motivation.
First of all, when we look for founders, we also look for Sequoia partners, investors, young people. The same set of traits, use the word insufferable, use the word he doesn't listen, she doesn't listen, or he's belligerent, she's belligerent. Those that other people may view as a negative, we actually view as a positive.
Because in order to get something done in life, you can't just walk down Main Street and be a sweetie pie. We look for outlier people, whether it's founders or investors, and outlier people do extraordinary things. Outliers, what do I mean by that? Extra driven, for whatever reason. Maybe daddy told them they weren't good enough and they want to show daddy how good they are.
Maybe they have a twin brother. Twins have a way of competing with one another. They love one another, but they compete with one another. Maybe they failed miserably in their first startup. They're embarrassed and so on. So we look for those things. And sometimes, believe it or not, genetics. I've actually met some people that I'm now convinced they were just wired that way.
And I try to look for that for the simple reason that I view that to be the greatest advantage but could be the greatest weakness if not channeled appropriately. So one, I look for it to see if it's there, because I like to be it there. Then I look to see what it is and whether it's on the right side of this good versus bad trait.
And thirdly, because once we understand it and then that's the good side, then how do we channel it, complement, and make sure this incredibly wonderful, insecure, scared, because that's what we all are when we're coming up, how do we help them as if we were their brothers to achieve maximum type of success? So I'd dig for that. I just really want to understand what makes this person tick.
And to me, the greatest question is why? Why, why, why? When someone says I was recruited by, I hear I was lazy ass sitting down. I got a call from a recruit. I was nothing better to do. I got suckered into listening to something. I got sweet talked. Then I talked to a company that made me an offer. I wasn't too happy with my job or a little bored and I went.
To me, that's what I was recruited by sounds like. The converse of that, of course, is I was sitting on a job. I saw an opportunity in a market segment that I didn't know existed. I called seven or eight companies. I realized this is the leading company. I cold called the companies. I found a way to get a meeting. I sold my way in. I got an offer. I negotiated.
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Chapter 3: What are the key components of great go-to-market strategies?
Achieve balance on your board and your company so that you are in some ways a force to behave correctly. And in the momentum cycles, and we've seen them before, whether it was 97 to 99 or 6 to 08 or 20 to 22, all these horrific habits got involved where CEOs wanted, I want to be a unicorn. And venture guys were fighting all over, that were stepping over their feet to try to do that.
And what we have right now is a bit of a shit show. You know, a whole bunch of companies. There's companies with 500 million in the bank. A billion in the bank, I heard of one. with maybe an $80 million run rate and no growth perspective. They don't know what to do. Bad habits all over the place. And that's what happens during, quote, wonderful time. All these lousy habits are built.
You're in times like these, Where I'm much more optimistic, you have real founders coming out. There's a lot more balance between investors and founders. That helps founders. It doesn't hurt founders. There's still people that are willing to invest. Now it's AI. We'll invest in AI.
There is a lease in the water, a little more of a restraint, a little more thought process of who do I want to bring as my next 10-year partner? Not, I got a term sheet last Thursday. Very different. Got a term she likes Thursday is I walk into a bar and the first male or female that talked to me, I got married.
As opposed to, no, I met and dated someone for a year, six months, or whatever it is, or three months. Got to know them a little bit. I decided our value system was going to be aligned. We decided to get together and build a company. These are much healthier times. And like everything else in life, reality is usually the opposite of what it seems. Tough times, healthier times.
Some of the greatest companies got created during times like this, whether it was Cisco, whether it was PayPal and Google, whether it was Stripe and Square, those companies with terrific DNAs got built during very difficult times.
We're seeing right now a harder market for sure, but with AI as a subsector of the technology market, one that is very red hot and still seeing prices for deals that seem crazy from the outside without investigating the companies. I'm sure you've seen countless little mini cycles like AI is today. So what is your style of approaching one of these new thermonuclear technology markets as an investor?
I actually think that AI is the next platform shift in the same way that mobile was the one before, internet was the one before, infrastructure, the hardware software layers that allow the internet to be overlaid over that. So I think AI is real. But I said earlier, we're going to overestimate it in the short term.
We're going to invest in everything in the same way that in 1999, we invested in everything. But then Google came out of that or Facebook came out of that.
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Chapter 4: How does Doug Leone define competitive advantage?
But there are certain times where the thing is off the rails, that it's worth a small piece of the pinky to get back in the right direction. First, what I try to do, instead of telling, I like showing. So let me give you an example. Your VP of marketing stinks. If I say that, it means nothing to a founder. But if I say, I'd like you to meet these three VP of marketing from other companies.
Let me tell you what happens nine times out of 10. They come back and they say, holy shit, the guy we have or the gal we have is nothing like this guy. Duh. So try to show, not tell. Build trust, which doesn't get built day one. It really gets built with the first time the CEO founders in a pinch and he understands you're there to help him out.
So once you have trust, which is really the foundational layer, it's the grease that makes all business runs. And once the founder understands maybe you have a little experience, a compliment is incredible talent. And once you show the founder without telling the founder, and once in a while you have to tell because maybe you don't have the time to show, but you better do that once a year.
It's very rare. That's what you do. Those are the actions that you take. And you want to come out of that in a win-win. You want to come out of that with an enlightened founder who's extremely happy and better in his role rather than having achieved your goal of a new VP of marketing where the founder feels like his knees were cut off.
Assuming we've got a company that has a fantastic positioning story, the next stop upstream is demand generation, which I assume by which you mean the proliferation or the propagation of that message through a bunch of different channels. Leads, getting leads. Getting leads. What are the great components of demand generation?
Well, the first thing to understand, is it a broad product? Is it a widget? If you have a widget, it's simplicity. If you have a widget, you do less account-based management. because you've got 10,000 accounts that you can call. So that becomes a volume play. You build something a little more complex with a little more of a solution cell versus a widget cell. A pencil is a widget.
A solution is you've got to tell a story. Fewer accounts, you better have your story right per account. So you have to understand what that is. You have to make a guesstimate of what percentage of your leads comes from BDR versus salespeople. I will tell you that early on, it's a Rolodex of the salesperson. First, you got to make those decisions.
Then you have to find the optimal curve with the optimal leads. You don't have too few because the greatest sacrilege is to hire an expensive sales rep if you go the direct sales route. If you go PLG, it's a whole different game because the worst case is to hire expensive people with not enough leads.
And so to find that balance, to figure out where that slope curve is in the ability to close account, you over invest and you have too many people, word gets around, your salespeople cannot make money in your company, nobody's gonna wanna join you. So you have to make them very successful. If you will overpay,
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Chapter 5: What are the challenges of investing in today's venture landscape?
Is it really the same type of due diligence as you do in a Series A? Or is it just a spiky, super talented founders? Here's a million dollars. Everything changes. Your strategy changes. And when that happened, we did a few things. We did three things, actually. We're vertically integrated from 100K, 50K investment to our biggest investments are billion dollars.
We have written twice a billion dollar investment. Second, we have gone across geos. Why? Because all companies in the US go to Europe, all your companies go to the US. We know the world irrespective of... Everything you're reading is more globalized now than it's ever been. India, India founders in the US. There are certain companies we can't tell if they're in the US.
We went into China, as you know. Now China has to build their own tech stacks, which is a smart thing. We have to build our own. So there's some issues there for sure. We went into Israel. So we went across GEOs because companies want to go across GEOs. We vertically integrated. And the last thing we did, we threw technology at our business. We can't run like a law firm structure.
We can't have five, six partners, quote, looking for deals, same way the lawyers do. Technology in every aspect of the business to help us look, to help companies assess, not just for us, but for our founders. And we know we have to be at tech companies. And that is the transformation that we've done over the last three, four years. All of it to look for, win, and then help.
Those are the three goals. It sounds like in that description, one of the things that whether this was the goal or not, I guess doesn't really matter. But one thing that's happened is that Sequoia itself has built serious enterprise value.
It's a private company, but unquestionably, if you were to float it in the public or go to a firm that wanted to buy, Goldman wanted to buy a piece of it, the price would be really high. And that's probably quite distinctive from the older school law firm like Cottage Industry Partnerships.
Do you think that's the right orientation for new entrants into the venture space, that they should be trying to build a firm that has enterprise value? I think that is the kiss of death.
Let me explain. One, you want to be competitive. You want to pay well. You want to get the best people. The moment you build enterprise value, what you're really asking, you're not asking about enterprise value. What you're asking is to monetize the enterprise value. That's what you really are asking. Boy, now we can sell Sequoia.
Selling a piece of that firm means that the people in the building today are getting richer, but the pie to be shared for the next generation is smaller. We looked around, Mike Mertz and I in early 2000, we looked around and we wanted to see what the enduring firms did and how they worked it. And our favorite was the Capital Group. They managed a trillion dollars, public vehicles.
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Chapter 6: How should new entrants approach venture capital?
Think of Google. Competitive Vantage was architected in a product. Think of many companies. Think of ServiceNow. It was simple workflow. You asked me to do something that you need a PC, it goes to someone, I fill that workflow, I give you a PC. Couldn't be any simpler. Clarity of thought of what the easiest way to do workflow.
But that got built upon and built upon, built upon, and there's a history of the simple utilities
becoming platform because the founder has a vision how to do that so i've seen it both ways look sometimes you build a utility and you're stuck that there's just no way to go but these little seemingly simple utility for which you get purchase orders for which allows you to now have a two-way conversation with a customer what else do you need
These bottom-up things tend to be, for me, way more interesting than these top-down, monolithic, big solution for a million dollars. I like these 25, 30K, quick and solve a point product. Now we've got 100 customers. I love those the best.
Has your view on competitive advantage changed or evolved a lot over the years?
I remember in the days of the consumer type internet, a competitive advantage was a 30-day head start. Competitive advantage was a founder who can run like crazy. So yeah, it's change. It's not always technology. Sometimes it's the first one in. Sometimes there's many late market entrants that have come in and have said, I've seen all the mistakes. So all these rules, you've got to be first.
You better write it in pencil. All your principles, ethics, careful due diligence, those get written in pen. But all these other things, competitive advantage, should you build an imperfect product and get to market early? Sure. Should you build a perfect product that takes longer? Sure. If you look at what Steve Jobs did, everything he put in your hands, that was not some rev one cheap shit.
So there's many ways to heaven. There's many ways. The trick is to understand where you are and break it down to first principle. If I'm selling a hardware software product with a cost of goods to millions of people, I probably don't want a very shitty first product. If I'm selling a simple utility and I need customer feedback, I want to get that out there, especially in the consumer marketplace.
piece of software. I want to get that out as quick as possible, as imperfect as possible, knowing that Rev1 is the wrong product, but at least we're talking. So don't have a textbook.
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Chapter 7: What lessons can be learned from navigating tough market environments?
I'm happy to report 20 years later in the US, the shoe has never been on the other foot, but it could happen.
As you think about your LPs who you've mentioned already are predominantly foundations, charities, endowments, et cetera, even just constraining to that world. What do you learn about picking the right LPs? Even if I was only going to sell to foundations, let's say, what have you learned about the right LP partners and finding them and partnering with them?
I would say long-term thinkers with business sense. The thing we don't want to do is get a call from an LP. I hired a new analyst. Please give us all the investments you've done in odd year, every Tuesday of the month. We're not going to give you that. The other thing I tell LPs, ask the tough questions.
Because I've learned from sales, a customer who's talking, a customer who's asking a tough question is an engaged customer. Sometimes they're a little more pissed, sometimes less, but they're talking. It's a customer that doesn't talk that you have to be terrified. You don't know what they're thinking. And sometimes LPs don't talk. They're afraid of upsetting Sequoia, getting fewer allocations.
And I remind them, you are the client. So you are the important side. And we build great LP relationships where we have no turnover. We have more and more than want to come in. Unfortunately, the funds are closed now. We have most large endowments, most foundations.
And we have schools, schools that your friends, I don't know if you have kids I want to go to, that 20% of the endowment, not of the private equity side, the whole endowment is Sequoia. You want to talk about a responsibility because these people have scholarships they have to hand out, they have operating budgets and so on. So we feel that huge burden, huge.
What stands out as the most interesting question that an LP has ever asked you? Let me give you a little secret.
Our culture at Sequoia is not to spit shine things. Our culture at Sequoia is to let them have the bad news. So first of all, any Sequoia pitch has returns on slide one, not slide 28 where you bury it. Slide one, welcome, here's returns. And they're net returns, not gross returns before fees. No, it's the money you get back. Slide two is probably the lowlights. Not the highlights, the lowlights.
Let me tell you everything that's screwed up. So once you have that conversation, first of all, they're blown away. The newbies are a little scared. Oh my God, I didn't know there were all these problems. But that builds trust because then they go to all the other meetings and they've sold a pile of shit. Here's our returns before marketing expenses. Like, what does that mean?
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