Sequoia Doubles Down On Seed Investing To Hunt For The Unicorns Unique To Downturns

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Jess Lee, a partner on Sequoia’s early stage investing team, is also leading the firm’s Arc program — a seven-week bootcamp on company building — for pre-seed and seed startups.

Jamel Toppin for Forbes

For all the evangelizing by tech investors that a downturn is the best time to start a company, prospective founders aren’t necessarily taking the bait. Already noticeably fewer companies are starting up, according to Jess Lee, a partner on Sequoia Capital’s early stage investing team.

Nevertheless, Sequoia is betting that now is a worthwhile time to move further into seed investing. The heavyweight Sand Hill Road firm announced Wednesday a new $195 million seed fund, and plans in 2023 to run three batches of Arc, its version of an accelerator, up from two last year.

“We have found across the vintages of Sequoia that companies built during these periods of uncertainty are often the most legendary ones,” Lee said in an interview with Forbes. The firm’s 2009 seed check into Airbnb, a year after it proclaimed “R.I.P. Good Times,” figures famously in the annals of Silicon Valley lore, for example.

The level of uncertainty this time around, however, is “much higher,” Lee admitted — even compared to 2000 or 2008. Questions of inflation, the war in Ukraine, and ongoing U.S.-China tensions have made it hard for venture capitalists to chart a clear path forward. “An unprecedented mix of different factors are all colliding at the same time,” she said.

The downtick for more mature tech companies has hit Sequoia especially hard compared to its peers, owing to a strategy shift in 2021 spearheaded by the firm’s new leader Roelof Botha to establish an evergreen fund which allowed it to hold stock in portfolio companies after they went public. Some of its banner IPOs like DoorDash and Unity are now down more than 70% from their peak stock prices. Add on top of that the collapse of FTX, which caused Sequoia to mark down some $200 million in investments to zero, and the storied firm has been dealt a share of blows in the last year.

Lee said that she believes the firm is making a growing proportion of its investments at the earliest stages, where companies are most insulated from the throes of the public market. Therein likes the opportunity for Sequoia in seed.

Yeah, there’s a bunch of downsides, but I think this is a better time to build.

Sequoia partner Jess Lee

“We are trying to stay the course and just find really talented outlier founders,” Lee said. Sequoia’s idea of an “outlier” does not have so much to do with unique or underrepresented backgrounds as much as an exceptional vision. Lee cites Mark Zuckerberg and Rippling’s Parker Conrad as examples of the kind of appetite the firm is looking for. That’s a key criteria for the 15 to 20 pre-seed and seed companies that it accepts out of thousands of applications for Arc, a seven-week program which it debuted last year to teach founders the tenets of company building.

At the start of the program, the firm cuts a $1 million check out of its seed fund to each company, taking a small stake whose size depends on the stage of the business. But Sequoia’s own goal is not to take significant ownership in the company. The firm did not lead or co-lead any subsequent funding round for the 30 startups which went through Arc last year, and plans to continue operating this way, Lee said.

By maintaining a blanket policy for all participants, Sequoia averts concerns of “signaling risk,” in which follow-on investments into some startups could harm the reputation of the others. In this way, Lee argues that Sequoia provides a “signaling advantage” instead: “We found that for the companies that do participate in Arc, after the class wraps it increases their odds of their next round happening.”

Last year, the firm hosted one program each in Europe, where founders spent half a day sitting with Klarna CEO Sebastian Siemiatkowski, and the United States, where the group went to Disneyland to learn from theme park executives (they made time for one ride too). “The goal is to see an example of what greatness looks like,” Lee said. Sequoia plans to expand the American version to run twice a year, and has opened applications for the first program, which begins in March.

Whether for Arc participants or the seed companies into which it will lead investments in this year, Lee said founders brave enough to start companies in these turbulent times will be endowed with one massive advantage: hiring. “The first ten hires are the DNA of a company — they set the tone and the culture,” she said. “Now is a better time to recruit than ever before. That’s why we’re leaning in.”

Lee, who herself launched a fashion shopping startup called Polyvore in 2008, speaks from experience in saying the downturn led her to build a more capital-efficient company (Polyvore sold to Yahoo for $230 million in 2015). “We couldn’t buy our way to acquiring users — we had to figure out how to actually have customers who loved our product,” she said. “Yeah, there’s a bunch of downsides, but I think this is a better time to build.”

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