VC Theory in the Era of Excess Capital: Sequoia's 'Compounding' Mindset and How to Bet on Founders
"Why is venture capital (VC) broken?".
Sequoia Capital partner and one of the firm's representative investors, Roelof Botha, addressed this question head-on in recent lectures and podcasts.
What he speaks of is not merely investment theory, but three structural changes: "excess supply of capital," "scarcity of successful companies," and "cultural evolution through generational change." This article, centered on Botha's remarks, unravels how Sequoia pursues "long-term value creation" within a "broken" industry.
1. Excess Capital and "Return-Free Risk"
1-1. Capital Increases, but "Great Companies" Do Not
Botha says the following.
"There is too much money in the venture industry today, and not enough excellent companies."
Currently, $150 to $200 billion is invested annually across the VC industry.
However, only about 20 companies per decade actually exit (via IPO or acquisition) with a value of over $1 billion.
Botha points out, "Many people misunderstand VC as a 'lucrative industry,' but the reality is 'return-free risk'."
1-2. The Industrialization of Venture and Its Limits
VCs in the 90s were "small groups of artisans."
However, they have now become massive organizations, introducing "industrial processes" such as marketing, recruiting, and data analysis.
While Botha affirms this, he says, "Ultimately, it is the founder's imagination and tenacity that determine success."
2. Sequoia's Strategy: Long-term Holding and "Partnership Culture"
2-1. The New Structure of the "Sequoia Capital Fund"
Sequoia established the "Sequoia Capital Fund" in 2022.
This is a new mechanism to enjoy compounding growth by holding stocks long-term rather than selling them immediately after an IPO.
Botha explains, "Instead of rushing for dividends, we accompany them on the time horizon of the 'next great company'."
This strategy reportedly generated an additional $6.7 billion in returns over the past three and a half years.
The phrase, "Our job is not 'EXIT,' but 'COMPOUND'," is symbolic.
2-2. Partnerships Across Generations
Since founder Don Valentine, Sequoia has valued a "culture that does not end with one's own generation."
Botha says.
"We receive it 'for free' from the previous generation, and we pass it on 'for free' to the next. That is our creed."
Through this philosophy, the firm has realized three generations of leadership transitions over more than half a century.
It has become a rare entity that perpetuates the "organization itself" rather than just the company.
3. Founder Theory: It Is "Difficult Geniuses" Who Change the World
3-1. It Is "Exceptional and Difficult" Founders Who Succeed
Sequoia founder Don Valentine reportedly told a young Botha the following.
"We make money when we deal with 'exceptional and difficult people'."
Founders who 'reject conventional wisdom,' like Steve Jobs, are the ones who change the world.
Botha emphasizes, 'They see an "uncomfortable reality" and have the power to rewrite the world.'
3-2. 'Lack of imagination' is the investor's failure
Botha himself speaks of his experience missing out on early investments in Twitter and Yelp,
reflecting that 'investment failures always begin with a lack of imagination.'
While praising the 'power to envision the future' of his mentor, Michael Moritz,
he says, 'The essence of VC lies not in numbers, but in the ability to believe in the future.'
Conclusion: It is not 'capital' that is broken, but 'vision'
The venture capital industry is indeed saturated and buried in excess capital.
However, what Botha has shown is not mere criticism, but a path to renewal through 'long-term, creation, and succession.'
'We are not an industry that distributes money. We are an industry that nurtures the future.'
Sequoia's history may be proof of the most ideal form of capitalism—a 'creative community that transcends generations.'