December 26, 2023 • 1hr 9min

Doug Leone - Lessons from a Titan - [Invest Like the Best, REPLAY]

Invest Like the Best with Patrick O'Shaughnessy

In this episode of Invest Like the Best, Patrick O'Shaughnessy interviews Doug Leone, former managing partner of Sequoia Capital. Leone led Sequoia for over 25 years, overseeing its growth from a $150 million early-stage fund to an $85 billion global powerhouse. The conversation covers Leone's career journey, his leadership of Sequoia, insights on identifying great founders, and perspectives on the evolution of venture capital.

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Key Takeaways

Simplicity and clarity are crucial in venture capital and building great companies. Doug Leone emphasizes the importance of clear positioning, simple business models, and straightforward communication.
Understanding founders' core motivations is key to identifying great entrepreneurs. Leone looks for "outlier" personalities with strong drive, often stemming from past experiences or insecurities.
Execution is critical for startup success. Leone values founders and executives who can execute relentlessly over those with grand visions but poor follow-through.
Venture capital has evolved from a high-margin cottage industry to a more mainstream, lower-margin business. This has brought both opportunities and challenges.
Building enterprise value in VC firms can be detrimental. Leone believes firms should focus on empowering the next generation rather than monetizing for current partners.
Tough experiences build character. Leone credits his challenging upbringing and early career setbacks with developing his resilience and drive.
Performance and accountability are paramount in Sequoia's culture. The firm has clear metrics for evaluating partners at different career stages.
Great companies often start with simple, clear value propositions that solve obvious pain points in large markets.
Venture investing requires both analytical skills and intuition. Leone looks for partners who can break down complex situations while also having good instincts.
Long-term thinking and stewardship are crucial for building enduring firms. Leone emphasizes leaving Sequoia better for the next generation.

Introduction

In this episode of Invest Like the Best, Patrick O'Shaughnessy interviews Doug Leone, former managing partner of Sequoia Capital. Leone led Sequoia for over 25 years, overseeing its growth from a $150 million early-stage fund to an $85 billion global powerhouse. The conversation covers Leone's career journey, his leadership of Sequoia, insights on identifying great founders, and perspectives on the evolution of venture capital.

Topics Discussed

Don Valentine's Leadership Style (2:59)

Leone reflects on Don Valentine, Sequoia's founder, describing his evolution from a purely business-focused leader to one who showed more heart later in his career:

Initially, Valentine was extremely tough and focused solely on generating returns
Later, he developed wisdom and showed more care in mentoring younger partners
Valentine was careful not to overstay his leadership, stepping back gracefully

"He was visionary, but extremely tough and certainly dedicated to the cause," Leone says of Valentine's early leadership style.

Toughness in Leadership (6:03)

Leone discusses the productive and unproductive aspects of toughness in leadership:

Productive toughness can drive high standards and performance
Unproductive toughness may alienate people or be inappropriate for the times
Valentine's tough feedback helped Leone improve, though it might be too harsh by today's standards

Leone emphasizes the importance of balancing toughness with support: "Within that toughness, frontally, there was enormous support when you weren't looking. And, boy, I think that's the best way to lead and manage."

Understanding Founders' Motivations (10:12)

Leone explains his approach to assessing founders:

Look for "outlier" personalities with strong drive
Understand the source of their motivation (e.g. past failures, family dynamics)
Assess whether their drive is channeled productively

"We look for outlier people, whether it's founders or investors. And outlier people do extraordinary things," Leone states.

Interviewing Techniques (13:35)

Leone shares his favorite interview questions and techniques:

Ask about upbringing and life journey
Request comparisons to siblings to reveal self-awareness
Inquire about best and worst references
Look for self-awareness and ability to break down problems

He notes: "I love asking the setup question of where would you get your best reference? And they're eager to tell you that. Complete setup question because the next question is where would you get your worst reference and why?"

Formative Experiences (16:01)

Leone reflects on key experiences that shaped his career:

Early sales roles taught him to turn negatives into positives
Learning to share credit and commissions at Sun Microsystems
Tough experiences built resilience and drive

He emphasizes the importance of learning from both positive and negative role models: "You meet two kind of people that teach you - the one that teach you what to do and the ones that teach you what not to do."

Evolution of Venture Capital (20:21)

Leone describes how venture capital has changed over his career:

Shifted from a high-margin cottage industry to a more mainstream, lower-margin business
Increased competition and momentum-driven cycles
Current "s**t show" of overvalued companies with bad habits
Healthier times ahead as balance returns between investors and founders

"We have right now is a bit of a s**t show. 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," Leone states bluntly.

Approaching New Technology Markets (23:37)

Leone discusses Sequoia's approach to emerging areas like AI:

Recognize AI as a major platform shift, similar to mobile and internet
Avoid indiscriminate investing driven by FOMO
Make rational investments based on market maps and thoughtful analysis

"AI is real. AI is the next platform. But how do we not invest in everything that walks?" Leone explains.

Go-to-Market Strategy (28:04)

Leone shares insights on effective go-to-market approaches:

Start with clear product management and positioning
Develop concise messaging (3 words, 30 seconds, 2 minutes)
Balance lead generation with sales capacity
Understand product-specific constraints on growth

He emphasizes the importance of debugging the entire "merchandising cycle" from product to sales.

Sequoia's Evolution (37:00)

Leone outlines key changes at Sequoia over the years:

Vertical integration from seed to growth-stage investing
Geographic expansion to multiple countries
Increased use of technology in operations

He notes these changes were driven by the evolving needs of founders and the globalization of technology.

Building Enterprise Value in VC Firms (41:04)

Leone argues against focusing on building enterprise value in VC firms:

Can lead to monetization that benefits current partners at the expense of future generations
Sequoia aims to leave the firm better for the next generation
Leone left at 65 with no ownership in management company

"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," Leone explains.

Identifying the "Killer Gene" (45:28)

Leone describes how he assesses drive and competitiveness in founders and investors:

Look for early risk-taking and putting "guts on the line"
Value those who are "a little desperate" with only one way to go - up
Appreciate the competitiveness often instilled through American sports culture

"The killer gene for me is stay away from the parallel tracks. Just put yourself out there with no net," Leone states.

Parenting and Building Resilience (47:28)

Leone shares thoughts on raising children with drive and resilience:

Avoid excessive comfort and coddling
Set high expectations and let kids struggle
Be honest in feedback rather than offering false praise

"It takes hard times and makes strong people. Strong people don't make it from easy times," Leone emphasizes.

Competitive Advantage in Startups (51:42)

Leone discusses how competitive advantage emerges in startups:

Can be architected in advance (e.g. Google's search algorithm) or emerge over time (e.g. ServiceNow's expansion from simple workflow)
Often starts with solving a clear, simple problem before expanding
Prefers "bottom-up" utilities that can grow into platforms over top-down monolithic solutions

Sequoia's Early 2000s Challenges (54:34)

Leone recounts Sequoia's struggles after the dot-com crash:

Partners faced negative net worth due to clawbacks
Cut fees and carry, wrote personal checks to make investors whole
Turned 0.3x funds into 1.9x through reinvestment and persistence

"That might be my proudest moment at Sequoia," Leone reflects.

Limited Partner Relationships (58:37)

Leone shares insights on working with limited partners (LPs):

Value long-term thinkers with business sense
Encourage LPs to ask tough questions and stay engaged
Maintain transparency, showing returns and lowlights upfront

"Our culture at Sequoia is not to sugarcoat things. Our culture at Sequoia is to let them have the bad news," Leone explains.

Performance Culture (1:01:53)

Leone describes how Sequoia maintains a performance-driven culture:

Establish clear norms for performance at different career stages
Look for sourcing ability, good judgment, and courage to disagree
Value teamwork and ability to win deals

He emphasizes the importance of being a "good human being" who uses the "we pronoun" frequently.

Identifying Exceptional Founders (1:05:55)

Leone shares examples of founders who immediately impressed him:

David Vélez of Nubank, who clearly articulated the opportunity to disrupt Brazilian banking
Drew Houston of Dropbox, who lucidly explained why existing solutions were inadequate

He emphasizes the importance of simplicity and clarity: "It's never something you scratch your head, you have to go to your AI expert and say, what does this mean? It's never that. It's always the other."

Conclusion

Doug Leone's conversation with Patrick O'Shaughnessy offers a wealth of insights from his decades leading one of the world's top venture capital firms. His emphasis on simplicity, clarity, and relentless execution provides valuable lessons for both investors and founders. Leone's reflections on Sequoia's evolution and his own leadership philosophy highlight the importance of long-term thinking and stewardship in building enduring institutions. His candid discussion of past challenges and the firm's commitment to its limited partners underscores the value of transparency and accountability in the venture capital industry. Overall, Leone's perspective offers a compelling vision of venture capital as a high-performance, mission-driven endeavor focused on empowering exceptional founders to build world-changing companies.