Source: Lessons from 20 Years of Venture Capital: Roelof Botha (Managing Partner at Sequoia Capital)
Compiled & Translated by: Daisy, ChainCatcher
Editor's Note:
Against the backdrop of rapid AI technology development, AI investment continues to heat up, and the decision-making logic of venture capital is constantly changing. Roelof Botha, Managing Partner at Sequoia Capital, shared his views on the current market stage, AI investment risks, and how Sequoia internally addresses decision-making biases in an interview with "The Generalist" podcast.
He reviewed his experience in crisis management at PayPal, pointing out that enterprises are prone to strategic loosening in an environment of abundant capital. Meanwhile, he also discussed how to evaluate the long-term potential and market ceiling of early high-growth companies, and the importance of maintaining investment discipline in specific contexts.
This conversation provides an entry point to examine the AI entrepreneurial cycle from a venture capital perspective, covering practical experiences in risk control, psychological biases, and investment strategies.
The following is a compilation and translation of the interview.
TL;DR:
1. From an overall market perspective, there is no systemic bubble. Of course, in specific areas, such as artificial intelligence, there are indeed overheating phenomena.
2. Accelerated company growth is part of a major trend, not a random occurrence.
3. Rapid growth in the early stages of startups does not necessarily mean they have a foundation for long-term success; market ceiling and sustainability need to be considered.
4. When investing, looking only at the early growth curve can easily lead to misjudgments about future potential. Early investors must consider: Can this model truly become a mass behavior?
5. Rapid growth does not equal success.
6. Excess capital can easily lead to corporate strategic relaxation, while resource constraints can instead stimulate maximum innovation and execution.
7. People are easily influenced by the first information they encounter.
8. Sequoia reduces cognitive bias interference in decision-making through institutionalized processes (such as horizontal comparison of investment projects and publicly identifying psychological biases).
9. Long-termism and collective judgment are the core principles for Sequoia to maintain rationality in volatile markets.
Current Market and Investment Rationality
Mario: Do you think there is a bubble in the current market?
Roelof: By my standards, I do not believe this is a bubble period. To me, a bubble means widespread inflation of asset prices across various fields, which is not the case now. For example, the U.S. real estate market, both residential and commercial, remains overall sluggish. We have an internal tracker at Sequoia that updates weekly, tracking the enterprise value to revenue multiples of about 690 listed tech companies. From this statistic, the current overall level is around the 60th percentile of the past twenty years. In other words, from an overall market perspective, there is no systemic bubble. Of course, in specific areas, such as artificial intelligence, there are indeed overheating phenomena, but this is not the case overall.
[The translation continues in the same manner for the rest of the text, maintaining the specified translation rules.]Roelof: Interest stems from multiple aspects. First, my father was an economics professor, which influenced me from a young age. During university, I majored in actuarial science, a discipline that requires predictions over decades-long cycles, training me to think with extremely Longing time scales. Most people, like accountants, are accustomed to looking only at the past year's data. At Stanford Business School, I took organizational behavior courses and systematically studied cognitive biases. Since then, I began reading extensively on this topic. Later at Sequoia, we not only introduced bias recognition in team discussions but even required each investment memo to proactively list potential psychological biases, such as: "Am I overly anxious because I haven't invested for too long? Am I too close to the founders because I know them?" By making these biases explicit, we can greatly reduce their hidden impact on decisions.
Mario: This method of actively identifying biases is like adding a layer of protection to decision-making.
Roelof: Exactly. If you can openly discuss biases in the team, such as someone admitting, "I might have some bias in this case," then other team members can participate more rationally, thereby collectively reducing the impact of biases. We always believe that the team is superior to individuals, and group rationality can remedy the blind spots caused by individual emotions.
Mario: What do you consider the most common and most cautionary decision biases?
Roelof: There are two particularly important ones. The first is the anchoring effect. People are easily influenced by the first information they encounter. For example, six months ago you saw a company that was cheap, and now it has tripled in value, so you instinctively resist investing. But the correct question should be: Given today's conditions, is this a good entry point? Rather than dwelling on past prices. The second is loss aversion. People often exit too early when they have gains, afraid of losing existing profits, instead of continuing to hold assets with potential for growth. This psychology causes people to miss truly Long-term compound opportunities. To counter this tendency, we specifically established the Sequoia Capital Fund, allowing us to hold shares of excellent companies Long-term after going public, rather than immediately distributing them to LPs.
Mario: Sequoia's establishment of a Long-term fund is, to some extent, using institutional design to correct human nature's shortcomings.
Roelof: Exactly. Establishing mechanisms is one way we combat innate weaknesses. Relying on individual willpower is not enough; we must improve the rationality of collective decision-making through structural design.
Investment Review and Long-term Mindset
Mario: In your investment experience, what cognitive biases or wrong decisions have left a deep impression?
Roelof: There are some. For instance, we once had the opportunity to invest in Twitter's early rounds but ultimately chose to pass. One reason was our skepticism about the company's growth data at the time, without sufficiently forward-looking understanding of its network effect potential. In retrospect, this was an error of over-relying on short-term quantifiable indicators while overlooking the possibility of Long-term non-linear growth. This is why we later emphasized in our internal education the importance of considering both quantitative data and qualitative trends.
Mario: Truly world-changing enterprises often don't have impressive data in their early stages.
Roelof: Exactly. Legendary companies are often full of uncertainty in their early stages, with non-linear and seemingly chaotic growth paths. If you only apply traditional financial metrics, you'll often miss them. Therefore, identifying early potential requires combining data, trends, founder qualities, and broader market insights.
Mario: In the current AI investment boom, how do you view the rapid growth of startups? What risks exist behind this?
Roelof: The growth speed of companies today is indeed astonishing. Some companies have generated hundreds of millions in revenue in just a few months. But the question is whether this explosive growth is sustainable. First, you must assess market capacity. Some fields have inherently low ceilings and will quickly slow down after reaching a certain scale. Entering when valuations are already extremely high carries enormous risk. Second, consider the competitive landscape. Early leadership doesn't mean maintaining Long-term leadership. As competitors continuously emerge, user stickiness and network effects are the true moats that can withstand impacts.
Mario: In other words, rapid growth doesn't equal success.
Roelof: Completely correct. Fast growth is a signal, but it must be comprehensively evaluated with factors like market size, moats, profit models, and team execution. Otherwise, you'll easily fall into the trap of blindly chasing high growth.
Mario: In such an environment, how does Sequoia maintain calm and rational decision-making?
Roelof: We have several internal principles. First, always adhere to "discounting future value rather than tracing past prices". Even if a project was cheap before and has now tripled, if it still seems reasonable from a Long-term value perspective, we won't miss the opportunity due to psychological barriers. Second, conduct broad comparisons. Each new investment decision isn't just compared with the current case but also horizontally compared with all investments in the fund's cycle to ensure standards don't decline. Additionally, we openly discuss potential biases. Each investment memo requires the responsible person to list their possible psychological biases, such as whether they're too eager because they haven't made a move for too Long. Through collective discussion, we can make these biases explicit, thereby reducing their hidden impact on decisions.
Mario: Sequoia seems to place great importance on self-reflection.
Roelof: Exactly. We believe that only by continuously examining ourselves can we maintain excellent decision-making in the Long-term. Market environments change rapidly; being complacent at any moment can lead to catastrophic consequences. For fifty years, Sequoia's continued success has relied on this culture of continuous self-iteration.
Mario: What advice would you give to young investors or entrepreneurs?
Roelof: Maintain curiosity and humility. Curiosity drives you to continuously learn new things, while humility reminds you to always be aware of the limitations of your understanding. Don't be complacent because of short-term success, nor discouraged by short-term setbacks. Truly great endeavors are forged through continuous trial and correction.
