Sequoia's Scout Program
pandodaily.com
pandodaily.com
They have always been an early stage investor. They invested in Apple when it was run by two scruffy kids and nobody believed their "personal computer" story. Even the ones who believed were scared of IBM crushing them. They believed Yahoo guys and their Internet story when it was still part time project for PhD students. They believed in YouTube even though there were bigger players in video sharing market. They invested in YC company (sama's company) when people were mocking YC as place where "feature based" companies are crated to be acquired. They invested in YC itself when YC didn't have hits like Dropbox, AirBnB or Heroku. They never invested later stage at pricy valuations like some of the recent funds. Be it that "hot" startup that comes around the corner like Netscape, Facebook, Twitter, Tumblr and number of other dot com companies.
VC's are figuring out how to combat things like YC and number of micro funds. And here you have Sequoia, who is quietly doing things without any ruckus. That too for last 3 years. They saw the threat of incubators/micro funds before anyone else. And they acted upon it before anyone else.
PS. I don't work for Sequoia. Nor I'm their "scout"
That we've assigned brand value to particular VC investors is, on balance, generally irrelevant to startup success. A brand-name firm is a nice feather in one's cap (and, as a former VC, occasionally an actual value-add), but it is by no means a guarantee of success or protection against failure. Who one's angels or VCs are is nice for the press, but it changes the likelihood of success/failure of the company only marginally. Google would have been Google no matter what firms were listed as owners in the S1.
Disclosure: I've known Nick Mehta for 15 years. He is without question one of the smartest, most ethical people I know. Sequoia chose wisely in making him a "scout," and I would accept his investment (of his own or anyone's money) without reservation.
Yes. One type of LP are execs in companies that do acquisitions. When the acquisition is done, the LPs do not disclose their involvement or profit.
This will continue until some shareholder lawsuit slams them for it, and even then it will probably continue.
Edit: I should note that John Chambers has disclosed his profit in some acquisitions, and stated that he would donate his proceeds. He did not state that he would also donate the sizable tax deduction that he incurs from such a donation.
But that's a protection for public shareholders of the acquiring corp, not a protection for the startup being acquired. (Public shareholders have a host of principal-agent problems to contend with, this among them; worse still is share repurchases to avoid option dilution, but that's another subject.) To the extent such disclosure makes an acquisition by CSCO less likely (as Chambers is reluctant to disclose his LP interest), then it's a potential concern for the startup. I'm not aware of that ever happening, however.
Your last sentence suggests that he should have forgone the tax deduction associated with the donation. Why?
He had a gain that he gave up by making the donation. The value of the deduction for making the donation is significantly less than that gain.
Since making the donation means that he doesn't get the gain, why do you think that he should pay taxes associated with said gain? Taking the deduction leaves him at 0. Do you really think that he should lose money?
Because shareholders do not employ executives to make acquisitions of terrible companies simply for their personal profit.
> The value of the deduction for making the donation is significantly less than that gain.
In CA, it is about 50% of the gain.
> Taking the deduction leaves him at 0.
No, it leaves him with profit of 50% of the gain.
We're talking about a gain that he donated.... You want him to pay taxes on that gain, to forgo the deduction for the donation. That leaves him in the hole.
> In CA, it is about 50% of the gain.
Not if it was long-term capital gains. CA gets 10% and the feds get 15% of the remainder.
> Because shareholders do not employ executives to make acquisitions of terrible companies simply for their personal profit.
Cisco's board apparently disagrees.
Companies can easily add a representation to their seed docs to prevent this or at least force disclosure. The ethical and legal questions are around exactly how the scout/angel presents the investment, how the rights work, how the agreements are written, etc.
Says Nick Mehta, another one of the first scouts, “They
definitely left it open to us but told us to think about the
impact on the entrepreneur. We were told we should tell the
entrepreneur. But they told us to make sure the entrepreneur
thinks about it before they broadcast that Sequoia is an
investor because of the signaling effect if Sequoia didn’t
invest later on.”Could you please elaborate on this point?
Representations are great. Anytime you are negotiating a deal, and the other side makes some crucial claim that persuades you to accept the offer (for example, "all of our other partners agreed to this term!"), just insert that claim as a representation of theirs and watch if they squirm.
http://nexthotstartup.com/2012/05/04/on-sequoia-funding-by-s...
This is the downside of 'celebrity journalism'; when almost every professional writer insists on having a headshot and bio on every article published, then their output becomes as much about self-promotion as about reportage. If their reportage falls short it damages their brand, and so the story must be spun in such a way as to reflect well upon the writer. Hence the phenomenon of writers breathlessly reporting every snub or obstacle as if it were a personal affront to them, frequently mentioning themselves in the story, burying the lede beneath many paragraphs of overdramatic narrative, and baiting their writing with more and more clicheed hooks and attention-grabbing headlines. A good many writers are no longer practicing journalism, but rather marketing their own brand of punditry. I partly blame Hunter S. Thompson for this - he popularized a narcissistic style of writing that suggests the events under discussion are nowhere near as interesting as the way in which the author experienced them - except that Thompson was both more interesting and more acutely observant than most of his imitators.
Of course, the increasing popularity of blogging is another major factor; unlike print journalism for most of its history, the marginal cost of adding extra information about the author or publishing every new bit of ephemera on a blog is virtually zero, and so there is every incentive to do so. Personalization is thought to make readership more sticky, and so everyone does it; the same way every blog and news page is now festooned with invitations to like things on Facebook, join the conversation on Twitter, tell them what you think in the comments, and so forth. Very little of this adds information to any given story - in the main, it's just an attempt to buy traction by giving free advertising to networking products.
1. Tech bubble. Everyone and their brother became day-traders, chasing the hot stocks and trying to make their fortune. People were throwing their retirement savings, spare cash, anything they had into tech companies trying to make a quick buck.
2. Housing bubble. Everyone and their brother became flippers, chasing the hot properties and trying to make their fortune. People were throwing their retirement savings, spare cash, anything they had into properties trying to make a quick buck.
Copy/paste intentional.
I agree with this, which is why I am confused as to why you see this program as evidence of a bubble, since it's pretty much the exact opposite of what you're describing.
Sequoia doesn't choose duds as their scouts. These are all experienced entrepreneurs who have "done things" (like YC choosing its alums as partners). And Sequoia is not investing in millions. They hare investing in thousands. Their returns on Instagram alone can take care of this program for years to come. They are helping budding, young first time entrepreneurs to get started. They are creating network of budding entrepreneurs and budding angels. Many companies may fail but you have hardened entrepreneur out of this program.
Can there be a bubble bubble? Instead of irrational exuberance you have irrational cynicism?
"How is it that SV can have so much money changing hands when the rest of the world is suffering. There must be something wrong!"
If the accusers spend a few minutes thinking about the facts, the probable conclusion is SV is an outlier of the economy. Not only is it relatively insulated in terms of geography, it also seems to attract a whole different breed of investors. Instead of trying to scrutinize why this is happening maybe we should try and study how we can replicate this sort of mini-economy else where.
* Seen the Zynga/Groupon stock? The market still appears to evaluate companies with a non-bubble mindset.