June 18, 2024 • 1hr 30min

Pat Grady - Relentless Application of Force - [Invest Like the Best, EP.378]

Invest Like the Best with Patrick O'Shaughnessy

In this episode of Invest Like the Best, Patrick O'Shaughnessy interviews Pat Grady, a longtime growth investor and senior leader at Sequoia Capital. Grady has been involved in many of Sequoia's legendary investments including Snowflake, Zoom, ServiceNow, Qualtrics, Okta, HubSpot, Notion, and OpenAI. The conversation covers Grady's approach to investing, how Sequoia builds and maintains its culture, evaluating founders, the AI revolution, and what it takes to build enduring companies.

0:00

-0:00

Key Takeaways

Internal pressure at Sequoia comes from a sense of stewardship and responsibility to leave the firm better than they found it. They create structures to maintain pressure, like flattening hierarchies and anonymous voting.
Values are critical for decision making and building an enduring organization. Sequoia's growth team values include being "aggressive but humble" and "demanding and supportive".
Founder quality is crucial but difficult to assess. Grady looks for founders with high "magnitude" (exceptional performance) and clear "direction" (passion and vision) when evaluating people.
AI represents a major platform shift, comparable to cloud and mobile. Current AI capabilities could revolutionize industries even without further advances. The key question is whether we've hit diminishing returns on scaling or if breakthroughs are still possible.
Building a VC platform amplifies investor efforts and creates compounding advantages over time. Sequoia has built out capabilities in areas like data science, engineering, and talent to support this.
Legendary potential comes from "relentless application of force" - the ability to keep pushing forward despite challenges, driven by deep motivation and commitment to the mission.

Introduction

In this episode of Invest Like the Best, Patrick O'Shaughnessy interviews Pat Grady, a longtime growth investor and senior leader at Sequoia Capital. Grady has been involved in many of Sequoia's legendary investments including Snowflake, Zoom, ServiceNow, Qualtrics, Okta, HubSpot, Notion, and OpenAI. The conversation covers Grady's approach to investing, how Sequoia builds and maintains its culture, evaluating founders, the AI revolution, and what it takes to build enduring companies.

Topics Discussed

Creating Internal Pressure and Structure at Sequoia (3:05)

Grady explains that the internal pressure at Sequoia stems from the sense of stewardship instilled by founder Don Valentine. When handing over leadership, Valentine didn't ask for any buyout, creating a feeling of responsibility to leave Sequoia better than they found it. This drive for performance is also reinforced through hiring and internal structures.

For example, Grady notes: "One of the first things [Doug Leone] did was he changed the legal docs. He didn't want to be safe. He wanted to be able to be voted off the island just like anybody else. Because as soon as you're safe, you start to get a little bit complacent."

Sequoia tries to flatten power dynamics as much as possible to ensure the best ideas win
They use anonymous voting on investments to prevent deferring to senior partners
Senior partners often speak last in meetings to avoid swaying the conversation

Sequoia's Team Values and Family Influence (9:22)

Grady discusses how values shape decision making at Sequoia and in his personal life. He shares his family values of "work hard, be kind, think for yourself, family first" and Sequoia's growth team values:

Aggressive but humble
Demanding and supportive
High give-ish at zero vol
Strong under scrutiny

On being demanding and supportive, Grady explains: "Most people think there's an inherent trade off between these two things. We do not. We think that being demanding of one another is being supportive and that the best thing we can do for each other is to demand excellence first of ourselves and then of each other."

Assessing Founders and Investments (16:50)

Grady outlines his approach to evaluating founders and making investment decisions:

Focus on understanding the person, not just the business metrics
Go for long walks with founders to understand their background, motivations, and values
Look for founders who want to build something meaningful long-term, not just play "entrepreneur"
When pitching, focus on validating the founder's vision rather than selling Sequoia

He notes: "The thing that we try to do is not to sell the merits of Sequoia and all the wonderful value added, hands on company building stuff we can do for you...The main thing is your vision and your dream. And if you believe that we believe in you, and we are going to be here to support you...that's what gets them over the line."

Evaluating Companies Through Three Business Criteria (32:44)

Grady outlines three key criteria Sequoia uses to evaluate growth stage investments:

Emerging market leader - The company doesn't need to be #1 today, but should have potential to be the market leader in the future
Unique and compelling value proposition - This drives strong gross margins (unique) and efficient customer acquisition (compelling)
Sustainable competitive advantage - Often comes down to the DNA and culture of the team more than any specific moat

On sustainable advantage, Grady states: "The number one sustainable competitive advantage that we see at companies, it's not a network effect, it's not an ecosystem advantage, it's not some piece of IP that's impossible for other people to replicate. It is the DNA of the team."

The AI Frontier: Market and People (49:51)

Grady shares his perspective on the AI revolution and how Sequoia is approaching it:

AI represents a major platform shift comparable to cloud and mobile
Current AI capabilities could revolutionize industries even without further advances
The key question is whether we've hit diminishing returns on scaling or if breakthroughs are still possible
Sequoia is looking for founders with the right background and timing to capitalize on AI opportunities

He notes: "If you froze capabilities today, and the only thing that you invested in was optimization, making it cheaper, making it faster, making it easier. If you did that, you would revolutionize almost every industry on earth."

Harvey: The AI Legal Assistant (59:51)

Grady uses Harvey, an AI legal assistant, as an example of the type of AI company Sequoia is excited about:

Founded by experts in both law and AI research
First company to get access to GPT-4 for development
Can do the work of a first-year associate at a big law firm
Aims to democratize legal services by making them more affordable and accessible

He explains the vision: "The idea for Harvey is never to replace the human beings. It's to dramatically expand the market to a whole bunch of people who don't have access to legal services today."

Sequoia's Platform Strategy (1:04:07)

Grady outlines how Sequoia has built out its platform capabilities to amplify investor efforts and create compounding advantages:

Grown from 14 investors and 2 operators to 27 investors and 65 operators
Built capabilities in areas like data science, engineering, talent, and marketing
Developed proprietary systems like a CRM powered by data science
Created a database of talent signals on hundreds of thousands of people

On the strategic choice to build a platform, Grady notes: "If we concentrate the knowledge and the experience of the partnership on the smallest possible number of people, we have a chance for each one of those people to grow into something really special. And if we're hunting outlier founders, they don't want to deal with people who are just okay. They want to deal with people who are outliers themselves."

The Importance of Teamwork and Performance (1:15:51)

Grady discusses how Sequoia balances the dual priorities of teamwork and performance:

Focus on doing the work rather than just telling others what to do
Be willing to take on supporting roles rather than always being the lead
Prioritize achieving the mission over individual roles or credit

He explains: "Whatever the mission is, whatever the job is that needs to be done, just do the job. It doesn't matter what your specific role is in achieving the mission. It just matters that we achieved the mission."

Legendary Potential: Relentless Application of Force (1:24:57)

Grady shares his perspective on what it takes to achieve legendary potential as a founder or company:

It comes down to "relentless application of force" - the ability to keep pushing forward
Requires deep motivation beyond surface-level goals like becoming a unicorn
Can be driven by passion for the problem, love of building, or sense of responsibility

He notes: "Of course, the question is, what is it that causes you to relentlessly apply the force? And that gets to the core of who you are and what you care about and why you're building this company to begin with."

The Kindest Thing Anyone Has Ever Done for Pat (1:27:03)

Grady reflects on the kindest thing anyone has done for him:

Giving him a chance despite being "rough around the edges" early in his career
Seeing his potential and helping positive attributes flourish over time
Specific examples include getting a scholarship, John Carroll taking a chance on him at Summit Partners, and Jim Goetz defending him at Sequoia

He shares: "The kindest thing that anybody's ever done for me is to see through that and to see whatever goodness or whatever positive attributes might have been hiding inside and to help those things come out and flourish over time."

Conclusion

This wide-ranging conversation offers deep insights into Sequoia's investment philosophy, culture, and approach to identifying and supporting legendary founders. Grady emphasizes the importance of values, relentless drive, and seeing the potential in both people and markets. His perspectives on internal pressure, founder evaluation, and building a VC platform provide valuable lessons for investors and entrepreneurs alike. As AI and other emerging technologies create new opportunities, Grady's focus on finding founders with the right mix of vision, expertise, and commitment to apply "relentless force" offers a framework for identifying the next generation of world-changing companies.