sequoia’s roelof botha warns founders about chasing sky-high valuations as the firm doubles down on its selective approach

Government Investment in American Companies: A New Paradigm

The U.S. government is now initiating direct equity investments in domestic companies, a shift from the temporary interventions seen during the 2008 financial crisis. These are being established as enduring components of national industrial strategy.

This development prompts significant considerations, notably regarding the implications of the White House appearing as a shareholder in private enterprises.

Concerns and Comparisons to Global Competition

During a discussion at TechCrunch Disrupt in San Francisco, Roelof Botha of Sequoia Capital addressed this very question. His response, eliciting laughter from the audience, referenced the caution inherent in government involvement: “Some of the most dangerous words in the world are: ‘I’m from the government, and I’m here to help.’”

Botha, identifying as a proponent of free market principles, acknowledged the necessity of industrial policy in specific instances where national interests are at stake. He explained that the U.S. response is driven by the actions of competing nations, particularly China, which are actively employing industrial policies to bolster strategically important industries.

Despite recognizing the potential need, Botha expressed unease with the government acting as a co-investor. He also noted parallels between the current market conditions and the funding environment during the pandemic, though he refrained from labeling it a “bubble.” He described the period as one of “incredible acceleration,” while also cautioning against valuation increases.

Valuation Volatility and Founder Advice

Botha shared an example of a portfolio company experiencing a dramatic valuation swing, rising from $150 million to $6 billion within a year, before subsequently declining. This illustrates the challenges faced by companies navigating rapid growth.

He cautioned that inflated valuations can be detrimental, as a sudden correction can significantly impact team morale. The temptation to continually raise capital to sustain momentum can be counterproductive, as a rapid ascent often precedes a substantial fall.

His guidance to founders was twofold: avoid raising funds unless absolutely necessary for at least the next 12 months, as company value is likely to increase during that time. Alternatively, if capital is needed within six months, secure funding immediately while it remains readily available, recognizing the potential for market shifts.

Drawing upon his classical education, Botha invoked the myth of Daedalus and Icarus, warning against excessive ambition. “If you fly too hard, too fast, your wings may melt,” he cautioned.

Sequoia Capital’s Investment Strategy

Founders closely heed Botha’s market observations, given Sequoia’s successful track record of early investments in companies like Nvidia, Apple, Google, and Palo Alto Networks. He announced the launch of new seed and venture funds, adding $950 million to the firm’s investment capacity.

While Sequoia adapted its fund structure in 2021 to accommodate longer-term holdings of public stock, it remains fundamentally focused on early-stage investments. Over the past year, Sequoia has invested in 20 seed-stage companies, including nine at their inception.

Botha emphasized a selective approach, describing Sequoia as “more mammalian than reptilian,” prioritizing focused attention on a smaller number of portfolio companies rather than spreading investments thinly. He acknowledged that approximately 50% of seed and venture investments do not fully recover capital, a humbling statistic.

Decision-Making and the Venture Capital Landscape

Sequoia’s success is partly attributed to its unique decision-making process: every investment requires unanimous partnership consensus, with each partner holding equal voting power. This ensures a thorough evaluation of potential opportunities.

The firm begins weekly partner meetings with an anonymous poll to gauge individual opinions on proposed investments, discouraging the formation of factions. The objective is to facilitate sound investment choices.

This process, while sometimes lengthy, is considered essential. No single partner can unilaterally approve an investment.

Venture Capital as an Asset Class

Despite Sequoia’s achievements, Botha offered a provocative perspective: venture capital should not be considered a traditional asset class. He stated that the industry, excluding the top 20 firms, has underperformed compared to investing in an index fund.

He highlighted the proliferation of venture firms, with over 3,000 currently operating in the U.S., a threefold increase since he joined Sequoia. He argued that increased capital in Silicon Valley does not necessarily lead to more successful companies, but rather dilutes the potential for exceptional growth.

Botha advocates for a strategy of remaining small, maintaining focus, and recognizing that only a limited number of companies will achieve significant success. This philosophy has guided Sequoia for decades and offers a contrarian approach in a market characterized by government intervention and abundant capital.