Sequoia’s Roelof Botha warns founders about chasing sky-high valuations as the firm doubles down on its selective approach

The Trump administration has begun taking direct equity stakes in American companies, not as a temporary crisis measure as in 2008, but as a permanent fixture of industrial policy.

These moves raise interesting questions, including what happens when the White House appears on your cap table.

Last week at TechCrunch Disrupt in San Francisco, Sequoia Capital’s global steward Roelf Botha fielded just that question, and his response drew laughter from the packed house: “One of the most dangerous words in the world is: ‘I’m from the government, and I’m here to help.'”

Botha, who describes himself as a “libertarian by nature, a free market thinker”, recognizes that industrial policy has a place when the national interest demands it. “The only reason the US is resorting to it is because we have other nation states that we compete with that are using industrial policies to advance their industries that are in strategic and long-term interests adverse to the US.” In other words, China is playing the game, so the United States must play.

Still, his discomfort with the government as a co-investor was not evident during his presence. And that caution extends beyond Washington. Indeed, Botha sees alarming echoes of pandemic-era fund circuses in today’s markets, though he stopped short of using the term “bubble” on stage. “I think we’re in a period of incredible acceleration,” he suggested more diplomatically, while also warning about inflation.

He told the audience that, early in the morning of his appearance, Sequoia explained about a portfolio company whose value had grown from $150 million to $6 billion in the twelve months of 2021, only to come crashing back down to earth. “The challenges you have inside the company for founders and teams, [is] You feel like you’re on this trajectory, and then you succeed, but it’s not as good as you hoped at one point.”

It’s tempting to keep raising money to keep momentum, he continued, but the faster a valuation rises, the harder it can fall, and nothing demoralizes a team like seeing a paper fortune evaporate.

His advice for founders navigating these frothy waters was twofold: If you don’t have to raise at least twelve months, don’t. “You’re probably better off building because your company will be worth a lot more 12 months from now,” he said. On the other hand, he added, if you’re six months from needing capital, raise money now, because markets like the one we’re in can turn sour quickly.

Being someone who studied Latin in high school (his word), Botha reached for classical mythology to drive the point home. “I read the story of Daedalus and Icarus in Latin. And it stuck with me, the idea that if you fly too hard, too fast, your wings can melt.”

When founders heard Botha’s take on the market, they paid attention, and understandably so. The firm’s portfolio includes early bets on Nvidia, Apple, Google and Palo Alto Networks. Botha also started his Disrupt appearance with news about Sequoia’s Two new investment vehicles: The new seed and venture fund that gives the firm another $950 million to invest and is “essentially the size of the fund we launched six, seven years ago,” Botha said onstage.

Sequoia though Change its fund structure On holding the public stock for a long time in 2021, Botha clarified that it is still an early-stage store at its core. He said that in the past twelve months, Sequoia has invested in 20 seed-stage companies, nine of which are corporations. “There’s nothing more exciting than partnering with founders at the start.” Sequoias are “more mammals than reptiles,” he continued. “We don’t lay 100 eggs and see what happens. We have a small number of offspring like mammals, and then you have to give them a lot of attention.”

It’s a technique rooted in experience, he said. “Over the last 20-25 years, 50% of the time we’ve invested in a seed or venture, we fail to fully recover the capital, which is humbling.” After her own first full write-off, Botha said she cried at a partner meeting out of shame and embarrassment. “But unfortunately, that’s part of what we have to do to get outsiders.”

What accounts for Sequoia’s success? After all, many companies invest in seed-stage companies. Botha partly credits a decision-making process that even surprised him when he joined two decades ago: Every investment requires partner consent, with each partner’s vote carrying equal weight regardless of tenure or title.

Every Monday, he explains, the company kicks off partner meetings with an anonymous poll to elicit a range of opinions on the ingredients partners are asked to digest over the weekend. Side conversations are verboten. “The last thing you want is coalition building,” Botha said. “Our goal is to make great investment decisions.”

The process can test patience — Botha once spent six months lobbying partners to invest in a single growth — but he’s convinced it’s essential. “No one, not even me, can force us to invest through partnerships.”

Despite Sequoia’s success, or perhaps because of it, Botha’s most provocative position is that venture capital isn’t really an asset class or, at least, shouldn’t be treated as one. “If you take out the top 20 or so venture firms from industry results, we are [as an industry] “Investing in index funds actually underperforms,” ​​he said bluntly on stage. He pointed to the 3,000 venture firms now operating in America alone, triple when Botha joined Sequoia. It actually makes it harder for us to develop a small number of niche companies.”

The solution, in his view, is: stay small, stay focused and remember that “there are only so many organizations that matter.” It’s a philosophy that has served Sequoia for decades. And in a moment when Uncle Sam wants your cap on the table and VCs are throwing money at anything, that might be the most counterintuitive advice.