StrictlyVC Download - Sequoia’s Alfred Lin on FTX, Crypto, and Investing for the Long Haul

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Hi, I’m Connie Loizis, and this is Alex Gove, and this is Strictly VC Download.

Hi, happy Friday, dear readers and listeners. Hope you’re well and enjoying the start to the

new year. We are finishing up the week over here. We’re really excited and enervated after our first

Strictly VC Insider Evening of the year last night in San Francisco. We had a great time,

we saw a lot of readers, and we thoroughly enjoyed the different discussions that were happening.

Toward that end, we do not have a new segment for you this week, but we do have interviews

with some makers and shakers and builders to share with you, starting with Alfred Lin of Sequoia

Capital, a longtime operator who has been a partner with Sequoia for the last 12 years,

and who’s mostly had a very smooth ride, until two months ago. Lin was, for better and now worse,

credited with leading the firm into its sizable investment in the crypto exchange FTX.

As you’ll hear, he argues that the bet wasn’t quite as disastrous for the firm

as it may seem. Though they wrote off roughly $200 million, Sequoia is managing so much money

at this point that the capital really represents a tiny amount of their assets under management.

Of course, it is still a black eye for the firm, which seemingly wasn’t asking enough questions.

But again, as Lin tells it, the problem was really that the firm was dealing with someone

who has a strange relationship with the truth. Either way, we really appreciated Lin’s time,

we thought his answers to our questions about FTX were thoughtful, and we hope you enjoyed

the conversation. More from the event to come, by the way, but first, a word from our sponsor.

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So guys, thank you all for coming. And let’s offer a warm welcome to Alfred Lin,

who I’m so excited is here. Also, Alfred, I have to apologize. These chairs were my idea,

and they’re gonna like swallow us whole. It’ll be fine. So, you know, everyone here knows who

you are, and they’re excited to see you. But just in case, I have a friend’s son,

for example, who’s here, who’s a senior in high school, may not know you. Alfred famously was

an operator at Link Exchange and Tell Me and Zappos, two of those operations with your Harvard

classmate, the wonderful, widely beloved Tony Hsieh. As it happens, Zappos was backed by Sequoia

Capital, and unsurprisingly, Sequoia thought that you knew what you were doing when it came to

company building, brought you in more than 12 years ago, which is kind of amazing. It kind of

goes by quickly. And now you’re on the boards, you represent Sequoia on the boards of Airbnb,

DoorDash, a really interesting company called Dolls Kill for misfits and mislegits.

And also a company that I hope we have a time to talk about today, the global market maker,

Citadel Securities, which I think is interesting. It’s kind of funny, because I’ve, I mean, I know

who you are. And I believe we’ve talked in the past, but I’ve never met you in person. I feel

like I do know you, because you’ve been so prominent. We haven’t met a lot of people in

person in the last three years. Right, right, the last three years, right. We’ll subtract those out.

But I mean, I feel like I was aware of you even before you went to Sequoia. But now you’re with,

you know, you’ve been with Sequoia. Sequoia is this incredible firm when you think about it. I

mean, Sequoia has been crushing it for 50 years, which is really, you know, phenomenal. When you

think about the firms that were started in the late 60s and early 70s, most of them are gone,

or they’re unrecognizable today. So, you know, I want to talk to you really about how the firm

maintains its kind of pole position over time. But before we get there, we have to talk about

the elephant in the room. FTX. Do we have to? I know, I’m sorry. So, I mean, what’s funny about

FTX, especially is that you were the Forbes list, the number one person on the Forbes list in 2021.

And so it’s amazing because of, you know, Airbnb and DoorDash and some of your other investments.

And then things were going along pretty well this year. And then, you know,

blammo, I guess, in November last year. So, I mean, I don’t think it’s probably overstating

it to say that this turns out to be like one of the worst investments in the history of venture

capital. I mean, which is, you know, very unfortunate. I think people are wondering,

obviously, how did this happen? Well, we work in a business where 30% of the time we strike out,

so it’s going to happen. It’s we’ve reflected on it. We looked at the diligence package again and

again on whether what we missed. We do extensive research and diligence when we make an investment.

This was this happened for this investment as well. And I think in retrospect, we looked at

a bunch of things, but we were, you know, sort of reflecting on it. We believe we’re misled

for a variety of situations. And we’ll find out when the court documents and the investigations

happen a lot more closely. I mean, I guess. And also, you know, you are a math whiz. You

studied applied mathematics and statistics. Were you given fake numbers? I mean, what did

you have to look at? We looked at balance sheets. We looked at organizational charts of where the

subsidiaries were. We looked at how much Alameda was a percentage of FTX’s volume. We looked at

a variety of things. The company Alameda we knew was a hedge fund. We knew that they were trading

on FTX, but it was not on any of FTX’s organizational charts. So we thought that they

were, when we asked, are these two companies independent? And we were told that they were.

And, you know, I think another thing that obviously shocked everybody was that

there was no board. And you invested something like $200 million across a couple of funds.

In retrospect, was that a responsible decision? You know, was it ever that you wanted to be on

the board and they said, you know, you can’t be part of the deal in that case? Or what was

that discussion like? Well, we were investing in a late stage round. We owned less than 1%

of the company. It was less than 3% of our private fund, Global Growth Fund III. So we

invested $150 million out of that fund. We invested another $60 million or so out of

our hedge fund. And it was less than 1% of the assets of the hedge fund. So in some sense,

and yes, should we have asked for more board representation? We could have. But at the same

time, they didn’t think that we deserved to be on the board because we own less than 1%

of the company. Yeah, that’s really, I mean, it’s stunning in retrospect, but that’s a great point.

That’s a great point. It is stunning. And look, it was a lot of money that was lost. But if you

just take on the private side, $150 million investment, which was done over three rounds,

we invested $125 million to start. $150 million out of a $6.3 billion fund. If you lop off some

zeros, one zero, it’d be $15 million out of a $630 million fund. And if you look at it that way,

which is how we looked at it from a risk management standpoint for Global Growth Fund 3,

you’d be like, fine, we can take a $15 million loss out of a $630 million venture fund. And

that’s how we kind of looked at it from a risk management standpoint. The fact that you multiply

a zero to it makes the quantum look large. It doesn’t make the percentage look large.

And that is the thing that sort of we had to wrestle with. So did we do what we could

to manage risk? Did we make a good investment? Did we do our diligence? And then if it goes wrong,

it goes wrong. We work in a business, again, 30% of the time, we’re just wrong. We’re going to

lose money 30% of the time. This is more painful because of the quantum. And it doesn’t feel good.

It doesn’t feel good. Sure. I mean,

and it’s hard because it was such a high profile company. Sam Bankman Freed was literally plastered

all over San Francisco and many other cities. So it’s, you know, going to be in the headlines for

a while. And obviously, the SEC is very interested in it as well. I’m wondering,

they are reportedly talking to investors about their due diligence. I assume they’re talking

to you since you are one of the highest profile firms, although there are many, many people

involved in this to your point about, you know, your ownership percentage. Do you think they

understand what you’re telling me now? I think the SEC has a lot of smart people.

They’ll get to the bottom of this. Though, there’s a lot of forensic accounting that is being looked

at, and I’m sure they’ll get to the bottom of it. I think the concern for some is sometimes

something like this happens, and then you know, people start making proposals. Right now,

the SEC is apparently looking at ways to strip away, I guess, some of the investor protections

if they’re accused of bad behavior, sort of better enabling investors to come after them. I guess

it’s not just VCs, but hedge funds, private equity funds, certain real estate funds. This,

according to a political story that said it was kind of like imminent, the proposal is almost

done. I’m just wondering, what do you think that would do to the industry?

I don’t, I haven’t read the proposal, so I don’t know, but we’re going to all have to follow the

regulation. And if the regulation is good, well, whether it’s good or not, we have to follow it.

And we want the regulation to be good. So, well, as an industry, we’ll have to talk to

the SEC about what controls and mechanisms do we want in the system.

I guess, do you think there’s room for improvement in terms of,

due diligence and the way that, you know, VCs and other investors communicate with their LPs

and the transparency that they offer?

There’s always room for improvement. The world moves forward. We learn from our mistakes.

We don’t have, just like historically, the institutions that have been created in the

United States have been great institutions that copied around the world, whether it’s the Federal

Reserve, the SEC, etc. So, there’s always room for improvement. And every time something like

this happens, we learn from it and we get better. So, I’m hoping that we, you know, there was a lot

of commentary about the crypto industry wanting more clarity around regulation. I’m hoping that

we do get that.

Right. I know I’ve told people that, you know, that the crypto industry actually has been asking

for this for quite some time. I do want to just, you know, ask on a personal level, what your

impressions were of Sam Bankman Freed? And, relatedly, in retrospect, if you feel like there

were, you know, signs that you missed or not?

I thought he was very smart. I thought he was quite a good, you know, in terms of, like,

answering questions very logically. He answers questions very logically and very succinctly.

And the question is, could we have spotted any tells?

Yeah, were there any tells, in retrospect?

I don’t know. If we, if I, you know, there’s what I know today and what I knew at the time.

If I knew at the time, we wouldn’t have invested. So, today, I think the thing that gets me

to reassess is that it’s not that we made the investment, it’s the year and a half working

relationship that we’ve had. And, you know, we’ve had a lot of discussions about, you know,

the relationship afterwards, but I still didn’t see it. And that is difficult. And the one

thing I think about is, in the venture industry, it’s a trust business. And, yes, we need to

trust and verify, and we try to verify what we can. But we start from a position of trust.

Because if we don’t trust the founders that we work with, why would you ever invest in them?

That’s true. And I wonder, so that is hard, because you have a relationship with this

person over a year and a half, I don’t know how often you saw him, but

I guess, do you have any sympathy for him now?


Look, for a person who is as smart as he is, so let’s put aside, we lost a lot of money.

For a person who is as smart as he is, if the allegations are true by the SEC,

these allegations go back past when we invested. If those allegations turn out to be true,

and it’s not just simply, I levered too much, I made, you know, sort of, I’ve made a mistake,

I’ve made a mistake, the crypto market turned against him, I feel like, it’s not sympathy, I feel bad for him, that he had to sort of resort to the type of things that he did

to either raise money or prop up the company, etc. Because I think he could have done it in a much more legit way.

Yeah, I mean, he also seems to still be a little bit, I don’t know, deluded. I mean,

obviously, there’s a lot of facts that still have to come to the surface. But he, you probably saw

that he started a substack today, sort of. Yeah, I read that when I woke up this morning.

The best part about this country is we presumed, we presume innocence until proven guilty. And so

we should give him that. He’s, he’s going to have a stay in court. And he’s going to be judged by

a jury. And we’ll see what the what the evidence that both sides present.

In the meantime, Sequoia finds itself in a very unusual position of, you know, being affiliated

with a company that’s, you know, in the headlines for all the wrong reasons. And I did talk to some

LPs ahead of our sit down. And of course, they are very happy with Sequoia on the whole. But

but they have concerns about this, you know, one, one said, I don’t care, nobody cares. It was,

you know, just a minute, part of the, you know, overall funding picture. But another said,

you know, it’s not about the money, it really is just that, for the first time ever, their faith

is like slightly shaken in Sequoia. This is not something that I don’t I think they would tell you

because they, you know, respect you. And I think they fear the firm a little bit. But what do you

say to those, those LPs or that LP? I think it’s good to question. And we question ourselves. So

before they, they don’t need to tell us that because we’re thinking about that internally

all the time. There’s two things I was taught when I first joined the venture industry, one of which

is if you start your career with, with fear, and there’s two sets, two sets of fears, you’re not

going to be a very good investor. One is the fear of missing out because you’re going to be chasing

what other people are chasing. So you’re not going to differentiate yourself against others,

because you’re just going to invest in what everybody else is investing in. The second is

the fear of looking stupid. And again, back to the fact that 30% of the time we lose money,

you’re going to look stupid sometimes. You just can’t look stupid all the time.

That’s great advice. You know, I will say, a separate LP told me something interesting that

I wasn’t aware of. And they said that Sequoia really does like when things are not maybe going

quite as well as they might hope, or maybe the market’s down, that they really do try to

accommodate the LPs, including maybe charging them for capital invested versus capital under

management or capital committed. Is that is that accurate?

Well, I think just going back to like, when things are not going well, we focus on the long run. And

we’ve survived 50 years and every single downturn because we’re focused on the long run. And this is

this is a not so fun year. Last year was not a not so fun year. This year may probably will

probably be a not so fun year. The not so fun years are the best times to invest. Because

all of the tourists are gone, both the tourist entrepreneurs as well as the tourist investors,

because it gets hard. And those are good times to build because your competitor is not going to have

an easy time investing. So if you’re really, really good, you are, you have real insights,

and you have real products that you’re building that solve real problems, you’re going to shine.

And so these are great times to invest in terms of you’re talking about we did, there are two funds

where we decided to charge only invested capital. That’s both the crypto fund and our ecosystem fund.

Okay, so so quickly talking about those funds, you know, I did want to talk to you

more broadly about the evolution of Sequoia. I think these new two new initiatives are especially

interesting, the crypto fund and the fact that Sequoia decided that it wants to manage money,

or the investments, sort of for a longer period when the companies go public.

So going back to the crypto fund, again, you know, unfortunate timing, seemingly.

I think the LPs I talked to said, and I think this is kind of common throughout the industry,

the VCs here could probably attest to it. But sometimes when they have new funds,

there’s like a little bit of, you know, the hope that the LPs are going to invest across funds.

So I think some of them, even though they maybe had discrete investments, discrete investments

in crypto funds sort of felt like we should put some money in the crypto fund that is apparently

not working out quite so well right now. My question is, will you continue on with

this strategy? Sorry for that very long winded question.

The crypto fund, I mean, the fund is still we raised $600 million from the fund,

we’ve invested 10% of it. We’re pretty disciplined about it. And we’re,

there’s no plan, we’re going to continue with that fund. And just so you know, I think the just,

again, back to the when times are bad, I think there are still crypto founders who are building

for the future. And the need for some of the technology that is needed for crypto, the thesis

of it, which is to be able to create trust when trust doesn’t exist through a blockchain. That’s

still true. Just because prices, asset prices have come down, that investment thesis still holds.

And we’re just, we may be going through a slower time, we’ll deploy,

we’ll invest through a slower time, but we will continue to invest. We are long term optimistic

in crypto and in variety of other sectors. Were you were you surprised, though, I guess,

by how kind of interrelated and codependent some of these companies were or are on one another?

Was that a revelation to you? The whole economy is interrelated. The reason why asset prices have

come down is because interest rates are higher. So the world is more interrelated than we would

like to think we we think in discrete terms, and it turns out the world is quite correlated.

It is speaking of correlations, I guess, you know, public and private markets, everything’s down.

So but again, just seemingly unfortunate timing, you know, launching the strategy of hanging on

to companies or holding on to stock longer than you would have, it’s been reported,

oh, if Sequoia had gotten rid of Robinhood or Snowflake or, you know, other things,

they would have, you know, captured billions of dollars more for their LPs. You know,

if you could rewind the clock, 1824 months, would you do anything differently?

No, because we’re, we’re investors for the long run. So if you believe in these companies,

the only question we ask is whether you think these companies are going to be worth

more 10 years from now than today, not any short term, any three month period, one month period,

one year period. So the companies that are in the Sequoia Capital Fund that we’ve distributed

into the Sequoia Capital Fund are companies like Airbnb and DoorDash and Snowflake.

I’m pretty sure those company, Unity, I’m pretty sure those companies

have long lasting value that can be created. They’re, they’re run by builders,

they’re building their product and service, and they serve massive amounts of customers.

They all have real revenue, and they’re building for the long run. And if you had decided to sell

Amazon in 1999 at a high, yes, you would have done better than holding on to it until 2001.

But I think you’d be doing worse than holding it on until today. So it just depends on your

view of these companies. And we, we really pride ourselves on not looking at interim prices,

because you have the luxury in the private market as not having to look at prices every single day.

And somehow the company becomes public and you have, you want to look at them every single day,

seems a little silly. And it doesn’t, if you believe in the long run, one of the best

advantages of holding is something called temporal arbitrage. You’re just arbitraging people’s

nerves, because they don’t like seeing volatility.

You know, so obviously the VCs in this room have, in most cases,

the luxury of kind of waiting out the market. Meanwhile, founders are very, very nervous.

I think a lot of them turn to Sequoia for advice on how to weather a sustained downturn,

you know, which is something that many, many of them have not seen previously. So

can you maybe talk for a few minutes just about mistakes that you see them making and, and, you

know. Well, instead of mistakes, it’s a time to get back to basics and assess your business and

what is the real, what is your mission? What is the problem that you’re really solving? And who,

and just go back to basics. If you have a great product or service, and you’re continuing to

build for your customers, you’ll do great. This is a time where it’s it may be a bit rainy outside,

but this is a time when you can surpass all of your competition if you play your cards right.

And so the advice we give them is just be really, really judicious about what problem you’re

solving for your customers. In terms of navigating this time, understand your cash, your cash runway

and your unit economics. And that’s the side that we forgot for a while, which is eventually all of

these things have to be real businesses. And one of the exercises I give some of our founders is

just plot out your free cash flow and do a discounted cash flow of what interest because

interest rates have risen four to 5%. What does that do to your, your DCF? And it’s really

illuminating because it’s shocking what compound interest does.

Alfred, we’re almost out of time. I did want to ask you so one of your investments is is an open

AI, which is supposed to be a huge company. You’re interested in generative AI more broadly.

It sounds you know, from the headlines right now, like this is going to be so

disruptive to everything. I wonder how that’s impacting how you think about your other

investments? Well, I think that there are a few things, one of which is, we talked about this a

lot recently. And, you know, it was you go back to 1999. And you ask people, what is the internet,

they would have said, Well, it’s this, this disruptive thing, and it’s probably going to

be bigger than anybody imagined. But there was a lot of hype in a period of time from nine,

from 1998 99, the valuations were a little nutty, and companies that just to their company

name in the public markets went up by 300%. That’s not sustainable. And so we’re going through a

period where there’s going to be some great companies that are built right now. And then

there are some companies that will not really sustain. And it’s one of those situations where

you have to understand that a bunch of things are going to change. And within three months,

what’s interesting will, will change. So what if we had the AI discussion to and you’re going to

hear from Sam, what he’s, what was interesting to him three months ago is not interesting anymore,

because the technology has advanced so much. And so you have to keep up with the accelerating

change. But at the same time, what is not what is not going to change. And those things that are

not going to change is the stuff that you can build a great business around. So great software,

can you build a great software with chat GPT? Yes. So a lot of our companies are just playing

with tools and playing with models so that they can increase their productivity for themselves,

they may not be in the AI space, but they’re going to, they know that they need to keep up

with the increase in productivity, similar to what the internet, we know that when the internet

happened, you needed to become a web company. We knew that when, when mobile came around,

you needed to start getting on mobile, we knew that when cloud came along, every single company

will need to have a strategy around AI and ML, even if you’re not an AI ML company. And then

there’s going to be situations where three months from now, whatever you thought was interesting was

not. And I think you should ask Sam when he thinks any of these technologies can actually

win the international math Olympia competition, because that requires a different

thought process than reiterating what has been said in the past and the corpus of what is

searchable on the web. And I think his answer will surprise you. It’s much faster than you think.

Much faster than you think. I think he will say it’s much faster than what do you think? How far

are we from AGI? I don’t know. That’s a question you can ask him. That is dissatisfying. Alfred,

thank you so much for joining us. Thank you. That’s it. Thanks for listening, everybody.

And special thanks to Make sure to check out their site at

slash StrictlyVC. Have a great weekend, and we’ll see you back here next week.