Sequoia’s Leone Talks Hits, Misses and What’s Next on Sand Hill Road

Photograph by Noah Berger/Bloomberg

Doug Leone, a partner at Sequoia Capital, speaks at a conference in San Francisco last year.

Even for legendary Silicon Valley firm Sequoia Capital, which is celebrating its 40th anniversary this year, venture investing is a guessing game. It requires traversing the globe to meet scores of entrepreneurs working on wacky projects, and placing bets on the most promising people and ideas, often based on little more than a hunch.

That formula has generated fortunes for Sequoia — from the IPOs of Apple in 1980, Cisco and Yahoo in the 1990s, Google in the past decade and more recently, LinkedIn. There have also been plenty of misses. In the Internet IPO parade that started last year, Sequoia was noticeably absent from social-media high-fliers Facebook, Zynga and Groupon. Whether it refused to pay up, didn’t see the potential, or got passed up in favor of other investors, Sequoia counts those as just a few of the deals that got away.

But unlike many rivals on Menlo Park’s Sand Hill Road and a slew of late-stage investors, Sequoia resisted the temptation to invest at inflated prices — the types of arrangements that now have some shareholders facing big losses.

According to 24-year Sequoia veteran Doug Leone, the firm’s not about to start now. The general partner emphasized that point in an interview this week as he reflected on the IPO mania of the past year.

“There’s a number of companies clearly that we wish we had invested in either at the early or at the moderate stage,” Leone said. “And there’s a whole bunch of companies that we’re glad we did not chase at the very high stages, either to buy a poster for our website or because we actually thought that investing in those stages would generate a return that would satisfy our own investors.”

Leone called the long-awaited Facebook IPO a “reality check” for the investors and entrepreneurs who bought into the hype of the $100 billion valuation. While he wouldn’t talk about specific companies, he said those that raised capital at multi-billion dollar valuations prior to Facebook’s IPO have a lot of work to do to prove that those numbers make sense, especially as they look towards going public.

“There are such things as revenue, growth and profitability that the buy side looks for,” he said. “There are still plenty of momentum investors looking for a quick and easy return. That said, there are some exceptional companies that probably do warrant stretching on valuation.”

Leone also sounded off on the banking process, which has come under fire since Facebook saw its stock drop 27 percent in its first two weeks on the market. He’s more concerned about the opposite situation, when a stock jumps too much out of the gate. When that happens, it means the bank mispriced the deal, leaving too much money on the table. He’s right to be concerned, because Sequoia is an investor in Palo Alto Networks and Kayak Software, which are both heading towards the public markets.

“The first trade should be no more than 20 to 30 percent from the IPO price,” he said. “I tell that to the bankers so we have a clear understanding of what success means going in.”

There can be exceptions, Leone said. In LinkedIn’s case, it was the first U.S. social-networking company to go public, making the market more difficult to gauge. LinkedIn shares more than doubled in their debut.

“If it’s the first after a dark period, you have to cut some slack because no one can judge demand,” he said. ServiceNow, another Sequoia company, gained 37 percent in its opening day last week.

As for what’s changed in the venture industry in recent years, Leone said that startups are growing more quickly because Web technology makes it easier to get products to market and build a customer base. Companies have less time to dither, for fear of being surpassed by a competitor or even a clone. So Sequoia is helping its startups hire the most talented people at the earliest stage.

“Being that speed and velocity are very important, we need to help companies locate the first five, six, 10 engineers,” he said. “We need to make sure that we do a whole bunch of things to help companies really get launching in the right trajectory as quickly as possible.”

–Ari Levy and Serena Saitto

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