Conversation with Sequoia Capital's Roelof Botha: AI development is overheating; rapid rise does not equal success.

Source: "Lessons from 20 Years of Venture Capital: Roelof Botha (Managing Partner at Sequoia Capital)"

Organized & Compiled: Daisy, ChainCatcher

Editor's Note:

In the context of the rapid development of artificial intelligence technology, AI investment continues to heat up, and the decision-making logic of venture capital is also constantly changing. In an exclusive interview with The Generalist podcast, Roelof Botha, Managing Partner of Sequoia Capital, shares his thoughts on judging the current market stage, the risks of AI investing, and how Sequoia can deal with decision biases internally.

He reflected on his experiences in crisis management at PayPal, pointing out that in an environment with ample capital, companies are prone to strategic loosening. At the same time, he also explored how to assess the long-term potential and market limits of early high-growth companies, as well as the importance of adhering to investment discipline in specific situations.

This conversation provides an entry point to examine the AI startup cycle from a venture capital perspective, covering practical experiences in risk control, psychological biases, and investment strategies.

The following content is a整理与编译 of the interview.

TL;DR: (too long, didn't read)

1. From an overall market perspective, there is no systemic bubble. Of course, in certain areas, such as the artificial intelligence sector, there is indeed a phenomenon of overheating.

2. The accelerated growth of companies is part of a larger trend, not an occasional phenomenon.

3. The rapid growth of startup projects in the early stages does not necessarily indicate a foundation for long-term success; attention must be paid to market limits and sustainability.

4. When investing, if you only look at the early growth curve, it is easy to misjudge the future ceiling. Early investors must consider: can this model truly become mainstream behavior?

5. Rapid growth does not equal success.

6. Capital surplus can easily lead to a slackening of corporate strategies, while limited resources can instead stimulate the greatest level of innovation and execution.

7. People can easily be influenced by the information they first encounter.

8. Sequoia reduces the interference of cognitive biases on decision-making through institutionalized processes (such as horizontal comparison of investment projects, publicly identifying psychological biases, etc.).

9. Long-termism and collective judgment are the core principles that enable Sequoia to maintain rationality in volatile markets.

Current market and investment rationality

Mario: Do you think there is a bubble in the current market?

Roelof: By my standards, I don't think we are in a bubble period right now. To me, a bubble means that asset prices are generally inflated across various sectors, and that is not the case now. For example, the U.S. real estate market, whether residential or commercial, is still overall weak. We have an internal tracker at Sequoia that updates every Monday, tracking the enterprise value and revenue multiples of about 690 publicly traded tech companies. From this statistic, the overall level is currently around the 60th percentile of the past twenty years. In other words, there is no systemic bubble in the overall market. Of course, there are overheating phenomena in specific areas, such as artificial intelligence, but overall it is not the case.

Mario: Besides the weekly tracking reports, what other ways do you have to remain rational when evaluating investments?

Roelof: In addition to market multiple tracking, we also have a tool that records all completed investment cases of the current fund. This allows us to continuously review the projects we have recently invested in and compare them with past investments. Humans naturally tend to make relative comparisons in decision-making. If you only look at the projects encountered in the past month, the standards can easily be skewed by the current environment. However, if you broaden your perspective to the entire investment cycle of the fund, or even longer-term, you can more accurately assess the absolute quality of a project—whether this company has the potential to become a "legendary company." Sequoia has been established for over fifty years, and the companies it supports account for more than 30% of today's NASDAQ market capitalization, which also requires us to hold ourselves to the highest standards at all times.

Mario: With the rapid development of artificial intelligence, are more and more companies standing out?

Roelof: Indeed, the time it takes for companies to grow to a considerable scale today is shorter than ever before. However, this is not a sudden new phenomenon, but rather the result of continuous evolution over the past few decades. From semiconductors to computer systems, to the internet, to mobile internet, and now to artificial intelligence, each technological leap has lowered the barriers for businesses to reach users and accelerated the speed of product promotion. Especially today, with over 5 billion people connected to the internet globally, most of whom own smartphones, this means that new services can almost instantly reach the global market. Coupled with the vast accumulation of data, this provides rich fuel for the development of AI. Therefore, the accelerated growth of companies is part of a larger trend, not an isolated occurrence.

Mario: In the context of the current rapid development, is the biggest challenge for investors determining the ceiling of opportunities?

Roelof: That's right. First, it's about determining the upper limit of market size. For example, flash sale e-commerce (like Gilt, Rue La La) was extremely popular fifteen years ago, and the growth curve at that time was very steep and impressive. However, it turned out that the flash sale model did not become a mainstream consumption method but was limited to niche markets. When investing, if one only looks at the early growth curve, it is easy to misjudge the future upper limit. Therefore, early investors must consider a question: can this model truly become a mass behavior? Secondly, there is the issue of competitive barriers. Being a leader does not necessarily mean winning in the end. For instance, Google was not the first search engine, and Facebook was not the first social network. In many technological fields, it is often the second or third entrants who summarize the experiences and lessons of their predecessors and ultimately achieve surpassing success. Therefore, when we invest, we not only need to assess the market size but also evaluate whether the company has a deep enough moat and whether it can maintain its leading position.

Mario: You mentioned the emergence of SPV (Special Purpose Vehicle) investments, small amounts of self-investment, and large amounts of external fundraising in the AI field. Is this a sign of a bubble?

Roelof: This phenomenon is mainly concentrated in the AI field. My point of view is that even if the overall market is not a bubble, certain areas may be overheated. Furthermore, I worry that this reckless investment approach could undermine market health, especially for the startups themselves. Looking back at my personal experience, PayPal faced huge financial pressure in 2000, and it was precisely because "burning money" was restricted that the team focused on innovation, optimizing the business model, and cutting costs. Excessive financing can cause companies to lose this sense of crisis, become complacent, and be detrimental to building a healthy long-term business.

Risks and Misjudgments Behind High Growth

Mario: In reality, can founders remain disciplined and rational after securing massive funding?

Roelof: Very rare. Those who can truly achieve this are often founders who have experienced significant crises and life-and-death moments. For example, Airbnb's Brian Chesky faced a near-collapse crisis during the pandemic in 2020. This experience gave him a profound understanding of capital and risk. I believe that people like him, even if they obtain ample funding in the future, can maintain caution and discipline. However, for the vast majority of founders who have not experienced similar hardships, it is very difficult to resist the temptation of complacency brought by abundant capital, relying solely on rational self-discipline.

Mario: It seems that only by experiencing pain can one truly understand the lesson.

Roelof: That's right, I'm doing it myself. In 2000, when I was at PayPal, we had a monthly loss of $14 million and the company had only seven months of cash. Initially, we spent a lot of money on expansion, but when the market crashed and funding channels closed, we were forced to move quickly. During that time, we squeezed expenses, solved online payment fraud, and adjusted our revenue model. Since then, our revenue has grown rapidly for three consecutive years. This experience has taught me that when resources are constrained, innovation and execution can be stimulated at the maximum. That's why I often advise entrepreneurs to ask themselves, if you only had 12 months of cash flow left, what would you make today? Such assumptions can go a long way in clarifying what really matters and avoiding wasted resources.

Psychological Biases in Decision-Making and Coping Mechanisms

Mario: When did your interest in decision psychology begin?

Roelof: My interest comes from multiple aspects. First, my father is an economics professor, and I grew up influenced by that. In college, I majored in actuarial science, a discipline that requires making predictions over decades, which trained me to think about problems on a very long time scale. Most people, like accountants, are used to looking only at data from the past year. When I got to the Stanford Graduate School of Business, I took a course in organizational behavior, where I systematically studied cognitive biases (heuristics and biases). Since then, I have started reading a lot of books on this subject. Later at Sequoia, we not only introduced recognition of biases in team discussions but even required that every investment memo explicitly list potential psychological biases, such as: "Am I overly anxious because I haven't invested in a while? Am I too close because I know the founder?" By making biases explicit, we can greatly reduce their hidden impact on decision-making.

Mario: This method of active identification of bias is equivalent to adding a layer of protection for decision-making.

Roelof: Exactly. If you can openly discuss biases within the team, like someone admitting, "I think I might be a bit biased on this case," then others in the team can participate in the judgment more rationally, thereby collectively reducing the impact of biases. We always believe that the team is stronger than the individual, and collective rationality can remedy the blind spots brought by personal emotions.

Mario: What do you think are the most common decision-making biases that we should be wary of?

Roelof: There are two particularly important points. The first is the anchoring effect. People are easily influenced by the information they encounter initially. For example, six months ago you looked at a company that was undervalued, and now it has tripled in value, so you instinctively resist investing. But the right question should be: Given today’s conditions, is this a good entry point? Rather than getting hung up on past prices. The second is loss aversion. People often exit too early when they have gains, fearing the loss of existing profits, instead of continuing to hold onto assets that have the potential for further growth. This mentality can lead to missing out on true long-term compounding opportunities. To counteract this tendency, we specifically established the Sequoia Capital Fund, which allows us to hold shares of excellent companies long-term after they go public, rather than distributing them to LPs immediately at the IPO.

Mario: Sequoia's establishment of a long-term fund is, to some extent, a way to correct the shortcomings of human nature through institutional means.

Roelof: That's right. Establishing mechanisms is a way for us to combat our inherent weaknesses. Relying solely on individual will is not enough; we must enhance the rational level of collective decision-making through structured design.

Investment Review and Long-Term Mindset

Mario: What are some cognitive biases or mistaken decisions that have impressed you during your investment experience?

Roelof: Yes, we had the opportunity to invest in the early rounds of Twitter, but ultimately chose to pass. One reason was our skepticism about the company's growth data at the time, and our failure to sufficiently understand its network effect potential. In hindsight, this was actually an error of over-reliance on short-term quantifiable metrics while neglecting the possibility of long-term nonlinear growth. This is also why we later emphasized in our internal education the importance of valuing both quantitative data and qualitative trends.

Mario: The companies that truly change the world often have unimpressive data in their early stages.

Roelof: That's right. Legendary companies are often filled with uncertainty in their early stages, and their growth paths are not linear, even appearing somewhat chaotic. If we only rely on traditional financial metrics, we often miss them. Therefore, identifying early potential requires a combination of data, trends, founder characteristics, and broader market insights.

Mario: In the current AI investment craze, how do you view the rapid growth of startups? What risks are behind it?

Roelof: The growth rate of companies today is indeed astonishing. Some companies have generated hundreds of millions in revenue in just a few months. But the question is whether this explosive growth is sustainable. First, we need to assess market capacity. In some fields, the ceiling is inherently low, and growth will quickly slow down once a certain scale is reached. Entering when valuations are already extremely high poses significant risks. Second, there is the competitive landscape. Being a leader in the early stages does not mean maintaining that lead in the long term. Competitors are constantly emerging, and user stickiness and network effects are the true moats that can withstand shocks.

Mario: That is to say, rapid growth does not equal success.

Roelof: Absolutely correct. A fast growth rate is a signal, but it must be evaluated comprehensively in conjunction with multiple factors such as market size, moat, profit model, and team execution ability. Otherwise, one can easily fall into the trap of blindly chasing high growth.

Mario: In such an environment, how does Sequoia maintain calm and rational decision-making?

Roelof: We have several internal principles. First, always adhere to "discount future value rather than retrospectively assessing past prices." Even if a project was cheap in the past and has now tripled in price, if it still looks reasonable from a long-term value perspective, we will not miss the opportunity due to psychological barriers. Second, extensive comparison. For each new investment decision, we not only compare with the current case but also conduct a lateral comparison with all investments throughout the fund's lifecycle to ensure standards do not decline. Furthermore, openly discussing potential biases. Each investment memorandum requires the person in charge to list their possible psychological biases, such as whether they are too eager due to not having made a move for a long time. Through collective discussion, these biases can be made explicit, thereby reducing their implicit impact on decision-making.

Mario: It seems that Sequoia places a high value on self-reflection.

Roelof: That's right. We believe that only by continuously examining ourselves can we maintain a high level of decision-making over the long term. The market environment changes rapidly, and any moment of complacency can lead to disastrous consequences. For fifty years, Sequoia's sustained success has relied on this culture of continuous self-iteration.

Mario: What advice would you give to young investors or entrepreneurs?

Roelof: Stay curious and stay humble. Curiosity drives you to constantly learn new things, while humility reminds you to always be aware of your limited understanding. Don't be complacent because of short-term success, and don't be discouraged by short-term setbacks. Truly great endeavors are born from continuous trial and error.