Investment firm Sequoia Capital has no shortage internal programs for the founders it supports. The idea is to help its startups not just with their affiliation with Sequoia, but by helping them from the ground up with everything from storytelling to recruiting strategies to give them an edge over the competition.
Now Sequoia is using some of that knowledge for a longer, seven-week program called Arc, which it uses to attract more promising founders. The idea is to invest a total of $1 million in each company that meets the firm’s criteria, after which Sequoia gathers the startups both in person and virtually, before bringing them back together to present what they’ve learned to the partnership, as also. potential customers.
Currently, 17 startups are graduating from the program in Europe, and about the same number will be accepted into the US and Latin American program this September. (Beginners can apply here until July 22.) To learn more, we spoke today with Sequoia partner Jess Lee, who is leading the initiative this fall. We also spoke with Lee about whether Y Combinator might see Arc as a competitor, deal terms startups should never accept, and more. Our conversation has been lightly edited for length.
TC: The Arc is the product of Sequoia’s in-house programs.
JL: That’s right: There’s a lot that goes into building an amazing company, and what we’ve tried to do over the years, over many programs, is boil it all down to fundamental company-building ideas like culture, hiring, product, customer obsession, and the business model, and [we’re] packing it into an Arc.
You have received thousands of applications for the Europe program. Who reads all those submissions?
All Sequoia investors in the early team read them. We talked to many, many founders who applied and ended up with this awesome class.
Each of these teams receives 1 million dollars. What amount of equity does Sequoia earn for its equity? 10%? Moreover.
We have flexibility around terms. What you say will be quite typical for some people for whom this is their first inspection. Then there are people who are already in the process of raising their seeds, and we’ve invested $1 million in that round; [others] even opened their last round to join the program. So there’s definitely a little range. However, most companies are early stage or seed.
The program uses the word “outlier” to describe what it wants to fund, but Sequoia doesn’t seem to mean “outlier,” meaning it’s looking for founders from non-traditional backgrounds.
We’re really looking for founders who want to build long-term, transformative, category-defining companies. . . which create a new market. There’s no one we’d rule out, but it’s more about the scale of the ambition.
What is an example of Arc’s European team creating a new category?
A really fascinating one for me Selection options. The founder is Martin Gould, who I think ran a 100-person product organization at Spotify. He is quite experienced. And he observed that Spotify did so well at narrowing down, understanding your tastes, what you might like, fixing the paradox of choice. Now she tries to do this for different categories of books, food destinations and travel.
What kind of time commitment is involved on both sides for Arc participants?
The first week is in person and the last week is in person in the Bay Area. And then in the fourth week we will go on a group field trip together. In Europe we went [Sequoia portfolio company] Klarna in Stockholm; The location of the Americas program is TBD. In between, it’s about an hour and a half, three days a week, where usually one of the Sequoia partners teaches the concept and framework, or a founder or operator in the field shares real examples of how they’ve built theirs. the company. Fridays are usually time for the founders to get back together for what we call a “council of peers” where they just go into their groups and share a little bit of what they’ve been doing.
It’s week seven for this European group, which means they’re almost done. Has Sequoia offered further funding to any of these startups?
It’s not a fundraising project, so no one is waiting at the end. It’s not a fundraising demo day.
Speaking of Demo Day, I was recently reminded that Sequoia was an investor in Y Combinator many years ago and had a direct stake in the business. It still is.
We’re not LP anymore, but I think we were many, many years ago; that is definitely true.
Arc seems to be competitive with YC. Do you think it could strain that relationship?
I actually think it can be quite complementary. YC is fantastic at getting you up to speed as well as helping with fundraising. I think our program is more about building a long-term, fundamental company, and I can totally imagine someone going through both.
Backing up a bit, the market has changed. A lot of “structure” is put into transactions where there was none before. What are some of the conditions that Sequoia is best suited for? What are some terms you would advise your startups to never accept?
Wearing my former founder hat as well as my Sequoia hat, I’d say structure is best avoided. Even a twist in pure terms is probably better because you can wrap yourself in structure and tie your hands.
Another way to look at this is that 2021 was just an anomaly. The multiples, the public stock market, the stimulus, it was just an anomaly. If you look at companies and kind of wipe 2021 valuations off the map and look at your trajectory in 2019 or 2018, maybe that’s a better way to look at it. . . I think our revenues are actually somewhat correlated with that, based on the analysis I’ve seen.
Meanwhile, some founders may wonder why they’re forced to hold back on spending at a time when they see Sequoia and many other companies continue to raise. billions of dollars in capital investment.
Venture firms have been around for decades. Each fund traditionally has a 10-year life cycle, and the idea is to ride out these market cycles, highs and lows.
We are [closing] our growth and venture funds now, and they’re right on time. We raise them every two to two and a half to three years. So there was no real acceleration.
What we did was change our structure a bit. We added Sequoia Capital Fund, so venture and growth funds are now sub-funds of Sequoia Capital Fund, and Sequoia Capital Fund can hold public companies and is designed to allow us to break that 10-year cycle. [where] you have to give your [investors their] distributions and instead allow us to manage our LPs’ money over time in companies that coalesce over time and are truly generational. We did some seemingly backwards math and found that if we actually managed our LPs [shares] and: [they hadn’t cashed out these shares upon receiving them]we would come back for much more.