Sequoia hosted a private, sponsored AMA for founders in Startup Battlefield and Startup Alley at the virtual Disrupt SF last month. Stephanie Zhan, Konstantine Buhler, George Robson and Josephine Chen shared some key insights and best practices. It was good stuff, so we wanted to share. We took some highlights from the session and chatted with a couple more partners to dive deeper into what founders need to know — how to ask for help, fundraising principles, how to build company culture and more.
Fundraising requires the stars to align
You’ve sat on both the founder side and investor side, what is one thing you wish you could have told your founder self?
Shaun Maguire: I think most founders don’t appreciate how random fundraising is. Having sat in the room for five years now, it really requires the stars to align for an investment to happen. It requires finding a champion — in order to find a champion you have to find them at the right time. Maybe they have done two other investments this year. They feel too busy. They take on board seats and don’t have the bandwidth when you meet with them. Or you’re catching them on a bad day. Or it’s an industry they had invested in previously with a company that didn’t work. There is a lot of randomness.
The firm can feel like their investment pace is too high because they invested in three companies the week prior. So now the week you’re pitching them, they feel like the pace is too high, so the bar is now higher than it was a week ago. Ninety percent of the time it’s randomness and it’s not you.
What are things a founder can do to prepare for when the stars align?
Shaun Maguire: If someone is going to join the board of your company, it’s a long-term partnership. It’s a 10+ year commitment. A lot of founders think they should only meet VCs in the fundraising process. They want to hold the meetings when they have the deck ready. Of the 15 boards I’ve been on, I’ve only invested in one founder, where I met them within the month of the investment process. All of the others, I met them three months before they came to raise. Personally, if I’m entering into a long-term relationship, I want to know them as a person and get longitudinal data. I want to see how they have been performing over time.
What would you say to founders who are not “typical founders”? How do you break through the pattern-matching framework some VCs have in their head?
Shaun Maguire: Identify your high-level ambition to start a company, and then work backwards. If that’s my goal, what are the stepping stones I need to get there? I personally had a 1.0 GPA in high school and had to recover from that. I thought a lot about stepping stone paths. I wanted to go to a good college…so I went to community college first. I thought about: How am I going to stand out? I need to go do something crazy and stand out. I need to do something different.
Reverse engineer it. Are there any immediate things I, as a founder, can do that are stepping stones to the bigger goals. Second piece, be really persistent. And it’s not what people want to hear. With Escape Dynamics [Shaun Maguire’s first company], we had to pitch 100 investors and eventually found one that would work with us.
Tactics to prepare for fundraising
It’s a challenge to raise. What do you do when you don’t have a lead and you need a lead? How do you cross that bridge?
Stephanie Zhan: Treat fundraising as you would recruiting critical team members. It’s invaluable to find the right partner, especially at the very beginning of the company. I like to think of it as a compass: A small degree change in the direction of your company in month one has an outsized impact on where you will be 10 years out. If it’s a challenge to raise and you don’t have a lead investor, I would evaluate whether additional capital is absolutely necessary, and if so, how much the company truly needs. The earliest rounds are the most expensive dilution for a founder — and will only compound over the years — so it’s important to raise as much as the company requires to grow and strive for a lead investor that can have a transformative impact over the long term.
When should a founder turn down an investment even if they are running out of runway?
Stephanie Zhan: The value of having the right partners — a strong brand and network, a team who rolls up their sleeves alongside you, and someone who cares about you as a person and founder — compounds over time and provides incredible signaling for your company. The reverse is also true. There are lots of options for capital these days; it’s up to founders to recognize the ones who offer real value, not valuation. Always ask yourself: Can this partner truly add value and help me bend the arc of my company? Cut through the marketing noise by talking to founders who have worked with that partner over years. Ask about the good and bad times, as well as the successful and less successful outcomes — this will help you truly discern the differences among investors. Think about which partner you want by your side for the next 10-20 years and who you want to turn to during the highs and lows of your company-building journey.
What recommendations do you have for founders who are on the cutting edge of things that investors may not know how to invest in or may not understand the space of?
Shaun Maguire: It’s really important to understand the [min rule decision making] psychology and that’s what you’re dealing with as a founder because it can change the tactics that you use. It’s hard when you are doing something cutting edge because there is less pattern matching for everyone in the partnership. First you need to find a champion and then you need to find the most negative person in the firm and try to win them over.
How does a previous startup failure factor into your decision to invest in a new company?
George Robson: A startup can fail for a variety of reasons, so we check any bias at the door by decoupling the success or failure of a business from the quality of the team. When we partner with a second-time founder, we talk a lot about their former experience to gauge their ability to reflect and carry those learnings into a new chapter.
What are other success markers outside revenue that you look for in early-stage startups?
Stephanie Zhan: We look for founders who are building companies that will become generational and shape history. The most important thing we look for is a special team: one that deeply understands the problem they are solving, has a unique and compelling insight that’s shaped their way of going about the problem, has grit and ambition to take them through the long haul, and has commercial instincts to understand how a compelling product can be over time to become an enduring, independent business.
Running a successful startup
What’s one of the hardest parts for founders building companies in the early stage?
George Robson: Early-stage startups have an abundance of choice, yet they also have finite resources. It’s important for founders to prioritize in a thoughtful way. For example, when looking to expand internationally, focus on the key questions that matter, such as: ‘who are your customers?’ and ‘where can you build a repeatable GTM function?
When should a founder talk to an investor about issues/red flags/problems?
George Robson: Similar to other relationships in life, the connection between an investor and founder is built on trust. Founders should be transparent with their investors and feel safe flagging issues early so they can help troubleshoot. If we’ve done our job well, nothing we discuss at a board meeting should ever be a surprise, as we’re supporting our founders to build their businesses everyday.
At what point does someone deserve a co-founder title?
Jess Lee: There’s no ‘one path’ to finding or becoming a co-founder. I was retroactively made a co-founder of Polyvore as the founders felt I deserved it based on my contributions — and that’s always meant a lot to me. I was technically the first hire and not there from day one, but I acted like an owner, poured my heart and soul into the work and helped shape the culture. In the end, I was also just lucky that Pasha, Guangwei and Jianing were generous people who went out of their way to give me the title and even some of their own shares. I’ll always be grateful for that.
Culture comes up a lot. Thoughts? What are the two main tactical steps companies can take to build a strong culture in the beginning?
George Robson: Don’t compromise on people. Put culture first at your company and codify your culture early.
Jess Lee: It’s never too early to define your culture. In fact, in our Company Design Program — which gives early-stage founders the learnings and community to build an enduring company — we provide founders with a framework for culture: values → behaviors → stories. Values are the fundamental beliefs and guiding principles of the company, ideally stated in a pithy, memorable way. Behaviors are how you want to see people act, based on those values. Stories are the real-life anecdotes of when your company lived those values. The stories are especially important, since that’s what people remember. They help make the company culture tangible and easier to operationalize. As an example, people know the story of the Airbnb founders selling cereal to make ends meet or of Jeff Bezos using doors for desks, which embody their values of entrepreneurship and frugality, respectively.