A peek inside Sequoia Capital’s low-flying, wide-reaching scout program
Ten years ago, Sequoia Capital began quietly encouraging founders of its portfolio companies to consider which of their founder friends they might like to get behind financially. Sequoia would let them write checks to those companies, and it would share with them any later rewards.
It was a brilliant idea. It allowed Sequoia to keep tabs on entrepreneurs — and nascent technologies — not yet in its universe. It cemented the firm’s ties to the founders who were already in its family. Not last, it grew Sequoia’s already considerable influence in Silicon Valley.
Fast forward, and the ripple effects of the program have not only been wide-reaching, but they’ve quietly reshaped the industry in ways that only those closest to Sequoia have been able to fully appreciate — until now.
To learn more on the tenth anniversary of Sequoia’s “scouts” initiative — which has since been widely copied by other venture firms — we reached out to Sequoia’s Mike Vernal, the partner who today oversees the seed-stage program, as well as four scouts whose names you will recognize. What we learned in the process is that their experiences, while fairly different, have had an outsize impact on the way they lead as well, as well as on the founders whose paths have crossed with their own.
Ready, set. . .
The program began working almost immediately, too. Among those first scouts — one of now hundreds to work with Sequoia — was Jason Calacanis, a serial entrepreneur whose then startup, a search engine called Mahalo, quickly raised $20 million from Sequoia and others after its 2007 founding.
Mahalo didn’t wind up putting Google or Yahoo out of business, but even back then, Calacanis, who’d earlier sold a blog network to AOL, had an established network that Sequoia realized was valuable. As Calacanis tells it, he’d told Sequoia about Zynga when its founder, Mark Pincus, was still figuring out the company in 2007. He’d also told Sequoia about a project that his friend Ev Williams was fiddling with. Both times, it passed.
Those decisions seemed to smart. At least, not long after, Sequoia’s Roelof Botha reached out to Calacanis and asked him, “‘What if we’d just given you some money to make those investments?’”
According to Calacanis, Botha explained that if he could turn up other interesting deals, Sequoia would give him money to invest, then split some of the profits with him and other Sequoia-backed founders who it was also inviting to scout deals on its behalf. (One of them was Sam Altman, then the founder of another Sequoia-backed startup called Loopt. Other early scouts included Airbnb CEO Brian Chesky, and Dropbox founders Arash Ferdowsi and Drew Houston.)
Calacanis loved the proposal, though he chafed at Botha’s insistence that he write an investment memo. As pushback, Calacanis says his first deal memo as a scout included two words, “Cabs suck.”
Calacanis laughs about it now. “I was protesting the fact that Roelof was making me do homework.” As it turns out, his short memo was spot on. The company Calacanis wanted to back was Uber. Sequoia approved it, and the small stake ultimately grew to be valued at “over nine figures,” according to Calacanis, who has collectively plugged $600,000 into 20 startups over the years as part of Sequoia’s scouts program.
From scout to VC . . .
As industry watchers may know, Calacanis has since gone on to raise his own funds, including two $10 million vehicles, and, more recently, a $30 million fund. Yet he’s far from the only person to learn the ropes with Sequoia’s help.
Altman, of course, went on to advise Y Combinator companies, then to become the organization’s president, before resigning earlier this year. Other former scouts who have joined the world of venture capital full-time include Lee Linden of Quiet Capital, David Ulevitch of Andreessen Horowitz, Jana Messerschmidt of Lightspeed Venture Partners, Cat Lee of Maveron, and Deep Nishar of SoftBank Investment Advisors.
Three other former scouts have landed inside of Sequoia itself: Vernal, who before joining Sequoia spent more than eight years at Facebook, including as a vice president of engineering and product; Jess Lee, who previously cofounded the shopping site Polyvore and oversaw its sale to Yahoo; and Alfred Lin, the former COO and chairman of Zappos.
Not every scout has been plucked from Sequoia’s portfolio, as Mike Vernal himself makes plain. Though Vernal declines to delve into certain specifics about the program, including exactly how many scouts have worked with Sequoia, he says that while “early on, in that first batch, the program was biased toward Sequoia companies,” it’s no longer the case that Sequoia taps only the founders it has already backed.
We also know that Sequoia is now in the middle of its fifth batch of scouts, that it chooses two “classes” of scouts for each separate scout fund, and there have been three to date, including a $180 million fund it closed last year.
As for how much they have to spend, scouts are given up to $100,000. Some invest a little bit in a lot of companies; others invest more in a few. Their checks tend to lead to more checks, too, unsurprisingly. More than 230 companies that have received checks written by Sequoia scouts have gone on to raise more than $6 billion in follow-on financing, excluding Uber. Many of these have received further funding from Sequoia itself, including Faire, GenEdit, Guardant Health, Stripe, Thumbtack, and Vector.
Certainly, it’s worth the scouts’ time, given how lucrative this particular side gig can prove. According to Calacanis, for example, Altman wrote a check to Stripe as a scout, a position that’s now worth $25 million. As with Uber, Calacanis says, “It’s likely that everyone in that class will get a taste of that, too.”
No blank checks . . .
Still, being a scout does not mean having carte blanche to do whatever one chooses. When PlanGrid cofounder and CEO Tracy Young was asked by one of the partners to become a scout for Sequoia, she says she had “no idea what that meant. But they basically give us $100,000 to do whatever we want, assuming it passes a stringent approval process. [Sequoia] wants to know: how big can this get? What’s the market?”
It can take “hours of conversation” with a founder before Young — whose Sequoia-backed construction software company recently sold to Autodesk for a whopping $875 million — is able to “write up this whole thing. It’s almost like a business plan” to pitch Sequoia, she says.
It may sound inconvenient, but she has learned much from this back-and-forth, she says. “Much of what we do as founders centers on our own problems within our own companies in our own industries. I’m in the construction software world every day, and [being a scout] has enabled me to see other companies’ problems in a deeper way.”
Clara Shih, a scout and the founder and CEO of Hearsay Systems, a Sequoia-backed digital marketing platform for financial services, echoes the sentiment, adding that the “series of diligence items that we go through” also helps her to sharpen her thinking about her own company.
“When you’re the CEO of a company, that’s your baby and you’re biased in favor of your own startup,” says Shih. Scouting on behalf of Sequoia — along with her role as a director on the board of Starbucks — “helps me think what would someone from the outside be [prioritize as part of] their strategy for Hearsay. It helps me to think more objectively and gets me out of the minutiae” that can occupy a founder’s thoughts and time otherwise.
Altogether, Young says she has made “six of seven” investments to date on behalf of Sequoia, and “probably talked with 50 companies” altogether; Shih has made a similar number of bets.
Both say their primary responsibilities are running their companies but that they are often contacted by founders who are looking to them for advice, and that it’s during these meetings that they sometimes wear the hat of investor, too.
“I’m not out there prospecting,” says Shih, “but a lot of women entrepreneurs reach out to me, because there are still too few of us and it’s my mission to change that.” Young meanwhile says she hears from founders in spaces “adjacent” to her own.
Both suggest that becoming a VC is a path to which they’re open — though not yet. “I have a very busy full-time job,” says Shih.
Young also says she’s “full time at Autodesk right now, integrating PlanGrid into the company.” Still, she continues, “We’ll see. I’m pretty sure a lot of [people in the scout program] are going to become future VCs because a lot of them are really good at investing in and valuing companies.”
A lot of them are also women and minorities, she notes. “I’m biased,” says Young, “but having pitched to a lot of white men at different venture firms, including at Sequoia in 2014, when you walk into a room of scouts, it’s super diverse. It just feels different.”
Calacanis tells us the same. “They’ll never get enough credit for this, but one thing Sequoia did was use scouts to radically increase the amount of diversity in the industry,” he says. “Ten years ago, it was a bunch of Stanford people of a certain gender and [skin] color. But they opened the aperture to get more women and underrepresented investors” into their network, and he says it’s now among the most diverse groups in Silicon Valley — even if it’s also one of the lowest-flying.
Down the road . . .
One outstanding question is what happens when a scout sells his or her company, or takes it public, or otherwise becomes wealthy enough to invest on their own. After all, Sequoia tends to work with founders who have the contacts and the industry know-how but who also need its financial support if they want to invest in new startups.
Calacanis falls into this category, yet says he still does the occasional scout deal and happily. “Sequoia is the greatest venture firm in the world. Whatever they ask me to do, it’s like ‘Yes.’ It’s a no-brainer.”
Another member of this particular club is Matt Macinnis, the founder of Sequoia-backed Inkling Systems, which sold for an undisclosed amount to the private equity firm Marlin Equity Partners last year. Macinnis is today the COO of Rippling, the online payroll and HR startup founded by Zenefits cofounder Parker Conrad, and he says that he has written 24 checks for Sequoia over the last five years. Among the recipients: the note-taking app Notion (founder Ivan Zhao spent a year working on product at Inkling), and the education applications company Clever, whose founder was a Harvard classmate of Macinnis.
Macinnis suggests that as he has begun investing more actively as an angel investor, deciding how much of his own money to pour into a company has become a more complicated affair. Yet like Calacanis, he only sings Sequoia’s praises.
He points to a new investment in Memfault, a startup that was among the most popular to graduate from the Y Combinator’s accelerator program this past winter. He says he was “super excited about the company because they’re doing firmware deployment to internet of things devices — doorknobs, cars, temperature sensors.” He also liked that the startup’s CTO came out of Fitbit.
In fact, he excitedly told Sequoia about the company. The good news: Sequoia partner Bill Coughran — a former SVP of engineering at Google who well understands hardware — grew excited, too. The bad news: Coughran made Memfault an offer before Macinnis had closed his own investment. (Says Macinnis, the company was “surprise, surprise, oversubscribed right away.”)
Given different circumstances, Macinnis might have been out of luck. Instead, he says. “It was not problem at all. Bill adjusted the allocation so that both [I] and the scout program and the founder were able to get the desired outcome. He made room.”
There’s allegiance for good reason, suggests Macinnis, who implies that scouts get as much if not more than Sequoia from their relationship. To underscore his point, he points to DoorDash founder and former scout Tony Xu, whose company is currently valued at $7.1 billion, then to Weebly cofounder David Rusenko, whose Sequoia-backed company sold last year to Square for $365 million. “I’m not Tony or David,” he says, “but those guys wouldn’t hesitate for a millisecond to pitch in and help a scouts company however they could.”
Says Calacanis separately, “I thought angel investing was stupid” before becoming a scout, which he credits with changing his career trajectory. “I thought I should invest in myself, that I was the smartest entrepreneur I know.”
Sequoia, he says, knew better. “They know If you’re smart, your friends are probably pretty smart, too.”
Pictured above: Mike Vernal and Tracy Young.