Sequoia's Roelof Botha: Why Venture Capital is Broken & How Great Companies Are Built

The session opens by introducing Sequoia Capital's Roelof Botha. The introduction calls Sequoia the most sought-after name in venture capital and says the firm has made over a thousand investments now worth trillions in public market value. It names YouTube and Instagram as examples. The introduction also states the partnership's stated goal: to build a firm that endures and to leave it in a better place than its current leaders found it.

After some joking on stage, the first question is about the Sequoia Scouts program. The program launched in 2010. It was built on the observation that some contemporary founders had unusual access to up-and-coming founders who asked them for advice, but these founders did not yet have enough money to invest on their own. Sequoia supplied the capital so these scouts could invest, and hoped the scouts would in turn introduce the firm to those companies.

The conversation credits the first cohort with helping Sequoia invest in Uber and says Sam Altman, also a scout, helped with an investment in Stripe. That scout fund is described as a 26x fund. Asked which Sequoia fund has the highest multiple ever, the answer is probably Venture 12, which includes Airbnb, Dropbox, Natera and AdMob. Venture 13, the next fund, includes Stripe, Square (now Block) and MongoDB. Both are described as returning more than 20x.

The sharpest argument in the session is that venture capital is overfunded. The speaker says they prefer to call venture an industry rather than an asset class. The industry invests about $150 billion to $200 billion a year. For investors to earn a reasonable net return of 12% a year, which the speaker says isn't great and could be matched by an index fund, venture funds would need to return roughly 3.5x to 4x over a reasonable time frame.

The speaker applies this to $200 billion of annual investment. The transcript gives the required annual payback as "$700,000 a year," but the arithmetic around it points to hundreds of billions of dollars. Because venture investors don't own 100% of their companies, the speaker concludes that total exit value would need to be more than a trillion dollars a year. Figma, recently public at $25 billion to $26 billion, serves as the yardstick: the industry would need about 40 Figmas a year, "which means that they don't."

So, in my opinion, investing in venture is a return-free risk.