Special: Sequoia Capital's Investment Playbook (with Alfred Lin)

A special episode with Alfred Lin, partner at Sequoia. Context: when the hosts did their comprehensive two-part series on Sequoia's history, they noted the firm had invested early in companies that went on to be worth over $3.3 trillion — at a time when the entire Nasdaq's market cap was about $10 trillion. At the end of the prior year, a Sequoia doubleheader: the two enormous IPOs of DoorDash and Airbnb — Alfred sits on not one but both boards. As Dan Primack at Axios pointed out, these were his first two IPOs after his decade at Sequoia. "It certainly pays to be patient."

Who is Alfred: CFO of LinkExchange and Tellme Networks, co-founder of Venture Frogs with Tony Hsieh, COO and chairman of Zappos until its sale to Amazon (all covered in the Zappos episode). Today a Sequoia partner managing the US early-stage business, on the boards of Airbnb, DoorDash, Houzz, Instacart, Reddit, Zipline, and more. The hosts congratulate him on the two IPOs; he deflects with the Robert Louis Stevenson quote he loves — judging each day by the seeds you plant, not the harvest you reap — and credits the whole partnership and, above all, the spectacular founders "for having the courage to start those companies and wanting to put a ding in the universe."

How did Sequoia's idea of entering markets with a prepared mind come to be? Alfred traces it to Don thinking about the market. What they look for is a combination of a great founding team and a great market: great founding teams find great markets, or a wedge into them, or what's wrong with them — discovering a problem the world has gotten wrong and wanting to fix it. They've always had to listen to founders, because founders come from solving their own pain — they may not be thinking about the market per se. To partner with them, Sequoia has to come prepared thinking about the market and what it can become. Nobody wakes up one day suddenly knowing lots of people will share bedrooms with strangers, or that delivery can work without suburban density.

"Chance favors the prepared mind," as Louis Pasteur said. When Jim Goetz joined Sequoia he had identified many interesting areas; he pioneered the thinking on landscapes — a prepared mind for the mobile landscape, for the rise of the developer — working to understand where the white spaces were, where you could actually build a company, because the incumbents weren't focused there.

In Airbnb's case, Greg (McAdoo) had been thinking about timeshares and vacation rentals for a long time — it was weird that hotels were being aggregated onto global online travel platforms but not timeshares and vacation rentals to the same extent. It didn't immediately lead to an investment, but it gave them a prepared mind: localized listings didn't really exist, and VRBO/HomeAway made most of their revenue from advertising rather than booking and the transaction. When they saw Airbnb, it was a completely different vector and way of thinking about the business.

In DoorDash's case, between 2011 and 2013 — the rise of the on-demand economy — Sequoia evaluated a variety of opportunities in the space: met with Grubhub, Caviar, PostMates. Each time, they passed — not because of market size, but because they noticed this required a very, very operational founder: the business would be won by both a differentiated strategy and a team very focused on operations. When they met Tony (Xu), that was the combination: a differentiated approach — focusing on merchants and the suburbs — plus a keen eye for operations. Unfortunately they passed on the seed ("That's my fault"); it took time to understand Tony had both the strategy side and the operational side — founder-market fit. They invested in the Series A and every round after.

How does something bubble up within Sequoia from personal fascination to proactive work? The simple answer: there's no straight formula. It comes from identifying a trend through reading — curious about vacation rentals, start reading, start digging; nothing may come of it at that point, later it becomes more important. It can be a full-blown landscape plotted out and written up in a memo — who are the players, what's going on, where's the white space — or anywhere in between: mention it to your partner, what do you think of this idea?