There is no shortage of internal programs for the founders of investment firm Sequoia Capital that support it. The idea is to help its startups not only perfect their involvement with Sequoia, but also help them with everything from storytelling to hiring strategies to lend a hand to their competitors.
Now, Sequoia is using some of that knowledge in a long, seven-week-long program called Arc that it is using to bring in more promising founders. The idea is, broadly speaking, to invest $ 1 million in each company that meets the firm’s criteria, after which the Sequoia startups will share what they have learned in partnership before personally and practically putting them together – with potential customers.
At the moment, 17 startups are finishing the program in Europe and roughly the same number will be welcomed to a program in the US and Latin America this September. (Startups can apply here until July 22.) To find out more, we spoke today with Sequoia partner Jess Lee, who is leading the initiative this fall. We talked to Lee about whether Y Combinator could see Arc as a competitor, the terms of the contract that startups should never accept, and much more. Our chat has been lightly edited for length.
TC: Is Arc an increase in Sequoia’s internal programs?
JL: That’s right. There’s a lot to build an amazing company, and what we’ve been trying to do for many years, across multiple programs, has been reflected in the concept of building a company based on issues like culture, recruitment, products. Customer obsession, and business model, and [we’re] Packing that in the arc.
You have received thousands of applications for the Europe program. Who reads all the applications?
All of Sequoia’s investors in the initial team are reading them. We’ve talked to a lot of people, a lot of founders who applied and ended up with this great class.
Each of these teams receives 1 million dollars. What size partnership does Sequoia receive in exchange for its capital? Is it 10%? More?
We have flexibility around the terms. What you said will be quite common for some people for whom this is the first check. Then there are some people who were already in the process of raising their seed round, and so we put $ 1 million on that round; [others] Even opened their last round to join the program. So there’s definitely a little bit of a range. Although most companies pre-seed or seed.
The program uses the term “outlier” to describe what it means, but Sequoia doesn’t seem to mean “outlier” which means it’s looking for founders from obsolete backgrounds.
We’re really looking for founders who want to build long-term, transformative, division-defined companies. . . That carved out a new market. There’s no one we’ll dismiss, but it’s more about the scale of ambition.
What is the example of a European team of arcs that is creating a new division?
The choice option seems really interesting to me. The founder is Martin Gold, who ran a 100-person product company on Spotify. He is quite experienced. And he noticed that what Spotify has done so well is to narrow down – by understanding your tastes – to fix the paradox of choice, whatever you like. Now he’s trying to do it for different sections across books, food destinations and travel.
For arc participants, what kind of time commitment is involved on both sides?
The first week is private, and the last week is private in the Gulf. And then in four weeks, we would go on a group field trip together. In Europe, we went [Sequoia portfolio company] Clarna in Stockholm; The location of the American program is TBD. Of these, about one and a half hours three days a week, usually one of the Sequoia partners teaches an idea and a structure, or an founder or operator in the field shares practical examples of how they create them. On Fridays, the founders have time to get back together for what we call ‘peer boards’, where they simply join their group and share some of what they do.
This is the seventh week for this European team, which means they are almost finished. Did Sequoia offer more funding to any of these startups?
This is not a fundraising program, so no one is expecting a check in the end. This is 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 owned a direct partnership in the business. Is it now and that incident?
We are no longer LPs but I think we were many, many years ago; This is certainly true.
Looks like Arc is competitive with YC. Do you think it can stress that relationship?
I actually think it could be quite complementary. YC is great at giving you speed as well as helping you raise funds. I think our program is more gear towards long-term, foundation company building, and I can totally imagine anyone going through both.
After a while, the direction of the market has changed. Many “structures” are being introduced into deals where it was not before. What are some terms with which Sequoia is the most comfortable? What are some of the conditions that you would advise your startups to never accept?
Wearing my former founder’s hat – as well as my Sequoia hat – I would say it’s best to avoid structures. Even a down round with clear terminology is probably better, because you can get wrapped up in the structure and get your hands tied.
Another way of looking at all this is that 2021 was just an anomaly. Multiplicity, public stock market, stimulus – it was an inconsistency. If you look at the company and delete the 2021 rating from the map and see your trajectory from 2019 or 2018, it might be a good way to look. . . I think our returns are actually somewhat related to the analysis I saw.
Meanwhile, some founders may be wondering why they are cutting their costs at a time when they see Sequoia and many other companies raising billions of dollars in investment capital.
Venture firms have been working for decades. Each fund has traditionally had a 10-year life cycle and the idea is to go through these market cycles – high and low.
We [closing] Our growth and enterprise funds are now, and they are at the right time. We increase them every two to two and a half to three years. So there was no real acceleration.
What we have done is to change our structure a bit. We’ve added Sequoia Capital Fund, so Ventures and Growth Funds are now subcontractors of Sequoia Capital Fund, and Sequoia Capital Fund can hold public companies and is designed to let us break that 10-year cycle. [where] You have to give yours [investors their] Distribution and instead let our LPs manage the money over time in companies that merge over time and are truly of the true generation. We did some math on the back and saw if we could really manage for our LP [shares] And [they hadn’t cashed out these shares upon receiving them]We would go back a lot more.