Decrypt the growth formula of Sequoia seeds

Full chain sniper, seed aiming.

Three years have passed, what is the result of Sequoia China's seed fund?

The answer may be a set of data: more than 13,000 entrepreneurs have been connected; more than 170 early-stage companies have been invested, many of which have grown to the growth stage, many of which have become unicorns with more than 1 billion US dollars...

But this is not the most important. The three-year period is too early to measure any fund, not to mention that for Sequoia China, which is in charge of nearly 300 billion yuan equivalent in scale, the success or failure criterion of seed funds is the same as that of an independent angel fund. Naturally different. Just as Shen Nanpeng, the global managing partner of Sequoia Capital, has repeatedly emphasized Sequoia's goal-"to be the earliest and most important investor in top high-growth companies." The ultimate intention of seed funds is to leverage this goal.

From this point of view, although the size of the seed fund is relatively small, its mission is quite large. It wants to help Sequoia "get the first shot."

What is more worthy of reference is another set of indicators: in the past three years, the proportion of projects that Sequoia Seed has entered as the earliest institutional investor is about 70%, and the average investment amount is only about 2 million US dollars. The round investment ratio reaches 70%. They are still going to an earlier incubation stage, looking for potential entrepreneurs from the industry, university laboratories, and research institutes to help the latter setup businesses.

After three years of actual combat, the significance of seeds to redwoods has become clearer. Shen Nanpeng said that on the one hand, “early entrepreneurs need not just a check, but also important post-investment assistance from investment institutions like Sequoia.” On the other hand, China’s entrepreneurial opportunities are not It is mainly concentrated on the traditional consumer Internet, "from new materials, new energy, medical and health, software and hardware, and new consumption, there have been very early good seedlings, and a large number of young people have seen entrepreneurship."

In other words, the seed fund must not only help Sequoia to reach the “0” or even “-1” stage of entrepreneurship and help entrepreneurs, it must also become Sequoia’s watchtower for new entrepreneurial opportunities and maintain the entire organization’s commitment to this The sensitivity of the wave of technology.

"In terms of quantity and quality, the results of seed funds in recent years have indeed far exceeded our original expectations, and we have become more and more aware of the importance of seed investment." Shen Nanpeng said.

Self-revolution and differentiated existence

Sequoia's label does not need to be repeated in the past 50 years, it has captured almost any key company in the wave of the times. Sequoia China interprets the law of victory of this classical institution even more extreme. However, a result that is not unrelated to China’s overall venture capital trend is that in the past 16 years, the most representative Chinese cases of Sequoia have been Meituan, Dianping, ByteDance, Pinduoduo and other new mobile Internet eras. Economic company.

The distinctive labels of seed funds are cutting-edge, geek. To some extent, this is closer to the positioning of Sequoia when the United States was the born-the founder of Sequoia, Don Valentine, was one of the founders of National Semiconductor.

In the summer of 2018, when the Sequoia Seed Fund was founded, three major directions were announced: TMT, consumption/service, and healthcare. This seems to be consistent with Sequoia China's main fund. However, data provided by Sequoia shows that investment in cutting-edge technology and corporate services account for 80% of seed funds. Specifically, such as AI pharmaceuticals and synthetic biology in the medical and health field; SaaS, open-source/cloud-native, low-code, and security in the enterprise service field; chips/semiconductors in the hardware field, as well as new materials, new energy, photovoltaics, etc., basically covering The hot spots of technology in recent years.

This is the result of Sequoia Seeds for three years and the motivation for its creation.

In 2018, when the seed fund was established, although many people considered it to be a downturn in China’s venture capital industry, Guo Shanshan, one of the seed fund leaders and partner of Sequoia China, felt that 2018 was a very good year. "If the seed was established two years earlier, it would be even better." Another person in charge of the seed fund, Zheng Qingsheng, a partner of Sequoia China, explained this: "In those two years, we could clearly see the rise of SaaS companies in the United States, and the technological opportunity came at that time. "

Therefore, when the seed fund was founded, it was aimed at the coming wave of technology.

This can also confirm the advantages of the so-called "globalization" fund. Earlier in 2016, Shen Nanpeng launched the Hong Kong technology entrepreneurship platform "Hong Kong X", in which unicorns such as the mobile energy storage company EcoFlow Zhenghao and the CMOS image sensor chip design company Siteway were born. The carbon-neutral and chip market they are facing has become an absolute hot spot in the industry a few years later, driving their valuations to rise.

Due to the early start of research in the To B and technology fields, Sequoia Seeds has completed the layout ahead of the trend in many industries. Many investors in the technology field said that when they entered the edge computing, network security and other subdivisions, many entrepreneurs said: "Sequoia has talked to us a few months ago." AI pharmaceutical industry Xing Kangyuan, Blue Lake in the field of enterprise services, Tai Chi in the field of graphics computing, Zhian in the field of XDR network security, and Suspended Mirror Security in the field of DevSecOps are all investments that Sequoia Seed has completed before the industry is booming.

Before the formal establishment of the seed fund, Sequoia had many years of early exploration. For example, many people know that it is the investor of Zhen Fund. But unlike a typical angel fund’s infinite bet on “people”, Sequoia Seeds has developed a recognizable style that forms a balance between human judgment and the direction of the industry.

In particular, Sequoia adopted the "method of searching for pictures according to the diagram" that was explored in the VC stage and applied it in the early stage. They will establish mapping based on the three clues of entrepreneurs, data, and channels, first determine which industries and nodes the sudden change will fall on, and then arrange investors to go to nodes with hopeful changes to scan for suitable companies or entrepreneurs. Zheng Qingsheng said that whenever they find that a certain technology or product is discussed more often, they will investigate the upstream and downstream of the industry and related technologies.

This is how the mobile payment company Opay, which has become a unicorn, came out of this way. In 2019, Sequoia noticed the trend of the overseas market, hoping to find a Chinese technical team with e-commerce and operation experience, and move the business model that has already run in China to emerging markets. According to this standard, Sequoia Seed found the founding team of Opay. After the two reached a consensus, Opay's parent company split the former to raise funds separately, and Sequoia Seed became Opay's first external investor.

Look at the general trend of the industry first, and then look at the people this is a strategy that combines the essence of angel and VC investment. In theory, it can reduce blindness and enhance certainty. Therefore, judging from the results, Sequoia seeds tend to be selected logic, which is more like the VC's "don't know to invest", but the entry time is earlier.

To achieve selection in To B's early investment, a professional investment team is needed to build awareness in the frontier field.

The Sequoia Seed Team requires investors to have both "breadth" and "depth" at the same time. The breadth is that today's technological innovation that can generate great value can no longer come from a single point of breakthrough, but requires cross-disciplinary collisions. This requires members to have an understanding of each field of To B, and the basic disciplines must pass; the depth lies in In order to “discover trends in the industry one or two years ahead of time” and seize opportunities when “high-potential” talents come out to start businesses, members must “become KOLs in the industry”, be academically sensitive, and establish contacts in all links, “reach The degree to which you can often talk to senior experts".

Therefore, when forming a team, Sequoia Seeds recruited early "experienced hands", and a considerable part of them were "specialized hands" in some vertical fields. In Guo Shanshan's words, these are investors who "extremely love and advocating science, and have enthusiasm and level to keep up with the industry leaders". They are observation posts that wander through all aspects of the industry. Shan China is more sensitive to the new direction of responsibility".

The first point of building cognition is to build trust with early entrepreneurs, which is particularly important for a fund that is anchored by technology. During the interview, many early-stage entrepreneurs mentioned that the most annoying thing in communicating with investors is that they need to “populate science” first. This is rarely seen in the Sequoia Seed team. The founder of Tai Chi Graphics, Hu Yuanming, said that Zhang Yao, the Sequoia seed investor he was connected to, is a technical background. “Can understand projects and communicate with us in technical language. This is an attribute that is difficult for other investors to find. ."

Mutation and evolution

It is generally believed that seed depends on people, VC depends on things, and PE depends on numbers. Each has its own barriers. Many angel foundations say that their killer feature to resist VC attacks is a set of decision-making mechanisms specifically designed for very early projects. "We can decide whether to invest or not in a week, and it will take a month for VC, and the project will not last long ago." An angel investor once said.

This is also the dilemma of most funds in expanding rounds. Sequoia will face this kind of dissatisfaction.

In the VC stage, any project of Sequoia will go through at least two decisions, but for seed funds, this is not necessary. "Many TS terms, such as liquidation, repurchase, and bottoming, actually follow the logic of PE for principal protection." Guo Shanshan said that investing in the seed stage must fundamentally change this mode of thinking: "In the early stage, it is an investment project. The upside, future surprises, and expectations of failure must also be made, rather than avoidance by terms."

Under this logic, Sequoia Seed investors tend to be the entrepreneur's "partner" in communication, rather than just asking the company for data. An entrepreneur in the security field said that during the previous financing, investors asked him: "I invested so much money for you, which day will you give me a hundred times the return?" He found it very absurd. Later, I met the partner of Sequoia Seeds and talked to him about entrepreneurial ideas, industry knowledge and previous experience. "Many people will say no idea is too quick, no idea is too early' to the outside world, but they will actually ask you for some unreasonable data and expectations. Only truly far-sighted investment institutions will unite their words and deeds."

Sequoia Seed has had a set of independent decision-making processes since its establishment: "one-off meeting" and "one-page TS". This TS is only one page and can be understood without the help of a lawyer. The simplification comes from the summary of the "really important things" by Sequoia's partners: "We have simplified the content that is purely at the negotiation level and has no impact on the nature of business." Guo Shanshan said.

One of the reasons why Cyber ​​Kunlun CEO Zheng Wenbin chose Sequoia Seeds is "very high efficiency." When talking to Zheng Qingsheng about the project for the first time, Zheng Wenbin also made appointments with several investment institutions, but Zheng Qingsheng made an appointment for him that evening to see another partner the next day. After talking the next day, he just came out of the coffee shop and walked to the elevator, Sequoia Seed Fund investor Li Yannan chased it out: "Don't go now, the amount is okay, so it's set."

While making quick decisions, Sequoia Seeds does not want to lower the standards. Zheng Qingsheng said that they still only vote for the one that has the hope of becoming the head of the subdivision track. "The competition among excellent companies is fierce, and there is not so much room for investment institutions. We will respect the wishes of the founders, the best It's a one-time spot."-This is another point that Sequoia Seeds is different from most angel funds: What they want is not a net-style and relying on the market beta-style success, but a selection of earlier markets.

But a subjective reality is that the current partners in charge of seed funds involve multiple stages of investment. How will they overcome the thinking habits accumulated over the years?

Guo Shanshan said that this matter may not be as difficult as imagined. "Our ultimate professional aspirations are investors, not confined to a certain stage." After removing the psychological barriers, all we have to do is to learn and practice ten thousand. The rule of hours. Zheng Qingsheng is motivated by his belief in new trends. Even if the project is not commercially successful, it is an exploration of emerging directions and has substantial significance for the industry.

Both partners mentioned that a good early investor is a species that is optimistic about the world. Therefore, when recruiting seed funds, it will care whether the candidates are curious and sensitive to people; internally, young investors are encouraged to shoot more and freely choose the industries to cover according to their interests. Seed fund investor Zhang Xinyuan's first project at Sequoia in 2019 came from the field of privacy computing that was uncertain at the time. A partner encouraged her: "If you recognize this is a big trend, you have to gamble." Six months later, privacy computing has become a very hot segment of the field, and the number of tablets has also grown into one of the leading companies.

In addition, there may only be a simple truth: God pays for work. Sequoia Seeds has a fixed IC meeting time every week, but in fact, the decision is made every day. Investors may hold a zoom meeting for partners and entrepreneurs at any time; Zheng Qingsheng sets aside every Tuesday, colleagues You don't need to make an appointment with him, just arrange the project meeting directly. During the interview, many entrepreneurs said that their impression of Sequoia Seeds was "particularly diligent": "You send an email at 12 o'clock in the night and an email at 7 o'clock in the morning, and you will get a reply quickly, and they feel like they don't sleep. "

Outside of the "human" level, Sequoia Seeds tries to use the front, middle and back-office mechanisms and technical capabilities to maximize the scientificity of decision-making. Before investors meet with entrepreneurs, the middle and back-office departments will cooperate with the former to obtain sufficient background information. For example, Sequoia's data and operations team will collect the technical and business dynamics of various industries, the dynamics of various funds, and the new trends of technology giants and mid-level and high-level companies.

These are all weapons used by Sequoia to resist the uncertainty of the seed stage. Guo Shanshan said, “We need to see the key role of personal ability and color to get in touch with excellent projects in the first time, but in selecting projects and helping the company grow, organized and professional operations can continue to maintain a high success rate. Be brave when it's time to take a risk, and be more determined when it's time to give up."

Meaning outside the context of business

In the past two years, when investors of Sequoia Seed went out to talk about projects, they often encountered some questions: "Does Sequoia invest in small projects?"

For a long time, the market's impression of Sequoia is that it has a big business and a big deal should be done. Early-stage entrepreneurs naturally have concerns about this image: if they take Sequoia's money in the first round, who will they look for next?

In fact, this is more or less a misunderstanding caused by the market's excessive attention to a big deal. Whether in the United States or China, whether it is Google, Apple, Cisco or Meituan, Dianping, Vipshop, New Industry, Betteni, etc., these projects that have made Sequoia famous are all-round A or even the first round. Of investors. From this perspective, the existence of seed funds is itself a correction for market positioning. "We are obsessed with the early stage," Guo Shanshan emphasized. "We like and are good at participating in the process of a company's growth from small to large."

But there is an original question that remains to be emphasized: why must Sequoia invest in seeds?

According to the usual logic, when a VC fund has a huge asset management scale, the common practice is often to migrate to the later PE, pursuing faster exit and more predictable returns. Seed investment is more time-consuming and laborious than VC, and the uncertainty increases sharply. This seems to be a thankless thing.

From the war slightly speaking, Sequoia, which has VC, PE and even secondary market capabilities, has no reason not to include seeds in the entire chain. If you think of investment as AI computing, algorithms are investment strategies, computing power is the team, and ultimately driving both is always data-asset-side information. Getting through this chain means that there is information input at all stages of investment, which will feedback to stronger computing power and more accurate algorithms.

To give full play to the effect of the entire chain, it is necessary to open up synergy at different stages. Guo Shanshan said that the most difficult aspect of the fund's broadening round is not the ability to move forward or backward, but the entire team agrees that "an institution can invest in different stages." Sequoia's solution is to divide different BUs at the executive level, and open them all at the partner level to realize the mutual transmission of cognition at different stages.

Today, Sequoia Seeds has formed a mechanism for delivering projects to VCs. The most representative projects such as Blue Lake, a product design collaboration platform, Opay, a financial technology platform for emerging markets, Taosi, a big data platform, and Sequoia have all followed from the seed to the latest round. The later investment experience is also feeding back the early investment: in the investment of AI medicine, Sequoia has invested in some large drug development companies in the later stage and noticed that they are all developing internal AI capabilities, so it pays attention to the early companies of AI medicine. . From a post-investment perspective, in a field from early to late, it is natural to strengthen the collaboration between the invested companies.

When more and more opportunities are born in cross-sectors rather than in a single industry, cooperation at different stages becomes particularly important. Before Sequoia Seed entered the AI ​​pharmaceutical field, this industrial form located in the overlapping area of ​​healthcare and TMT was once difficult to obtain value recognition. The main reason was that it was difficult for investors in a single field to place bets. In order to cope with this, Sequoia has set up a group of investors in the TMT and medical direction. The cross background allowed them to discover the seed-stage Xingkangyuan and Jitai Medicine.

As for the angel investment industry, the arrival of Sequoia offers a new possibility. Previously, the genetic defect of many angel funds was that in the early stage when the project needed the most help and support, the angel investors could provide almost only advice. However, platforms like Sequoia can provide mature services-hardware is difficult. Sequoia has set up four incubators in Beijing and Shanghai to provide office locations and laboratory conditions, help with talent settlement and business management; it is difficult to recruit people. Sequoia has "joint school recruitment" to match excellent graduate resources, as well as one-on-one executive recruitment; it is difficult to develop supply chains and customers. Sequoia has post-investment activities such as Customer Day, and start-ups directly connect with the core resources of major companies.

Many companies have mentioned that there are two important reasons for choosing Sequoia seeds: brand and resources. An early-stage functional food company in Hangzhou, with the help of Sequoia, obtained rent-free treatment from the industrial park; another AI pharmaceutical company, at the medical and health industry summit held by Sequoia, docked with a number of leading drugs The executives of the factory.

Since last year, along with the melee of the entire primary market, the VC funds that have always been considered the most crowded before and after rounds A and B have been most squeezed. And this may be another important industry value that the Sequoia Seed Fund can provide: When the hunting ground becomes crowded, why not take a step forward and start with sowing?

Even though it has grown into a giant elephant, Sequoia still does not sit on the ground. Just as Zhou Kui, a partner of Sequoia Capital China Fund, mentioned in an interview before that we must maintain a sense of crisis at all times: "If Sequoia has secrets, it is driven by the sense of crisis. We are very worried about losing the trust of entrepreneurs, and we are also very afraid. Did not catch the next innovation opportunity."

It is understood that this year's sequoia seeds will be shot more often than in the past three years, with more than 70 shots in the first half of the year alone.

But in Shen Nanpeng's view, the Sequoia Seed Fund has also been given a sense of being out of business.

"Seed investment is indeed risky and more investment." Shen Nanpeng said that in this sense, Sequoia also regards seed investment as a "semi-public benefit" job, helping more people to achieve it through entrepreneurship. Ideal and create social value. "If we can focus, provide better services, and build up our ability to choose seed-stage entrepreneurs, then we can also achieve a very satisfactory result in both public welfare and business."

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