What We’re Reading (Week Ending 26 March 2023) - 26 Mar 2023
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 26 March 2023):
1. The Age of AI has begun – Bill Gates
I’d been meeting with the team from OpenAI since 2016 and was impressed by their steady progress. In mid-2022, I was so excited about their work that I gave them a challenge: train an artificial intelligence to pass an Advanced Placement biology exam. Make it capable of answering questions that it hasn’t been specifically trained for. (I picked AP Bio because the test is more than a simple regurgitation of scientific facts—it asks you to think critically about biology.) If you can do that, I said, then you’ll have made a true breakthrough.
I thought the challenge would keep them busy for two or three years. They finished it in just a few months.
In September, when I met with them again, I watched in awe as they asked GPT, their AI model, 60 multiple-choice questions from the AP Bio exam—and it got 59 of them right. Then it wrote outstanding answers to six open-ended questions from the exam. We had an outside expert score the test, and GPT got a 5—the highest possible score, and the equivalent to getting an A or A+ in a college-level biology course.
Once it had aced the test, we asked it a non-scientific question: “What do you say to a father with a sick child?” It wrote a thoughtful answer that was probably better than most of us in the room would have given. The whole experience was stunning…
…The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone. It will change the way people work, learn, travel, get health care, and communicate with each other. Entire industries will reorient around it. Businesses will distinguish themselves by how well they use it.
Philanthropy is my full-time job these days, and I’ve been thinking a lot about how—in addition to helping people be more productive—AI can reduce some of the world’s worst inequities. Globally, the worst inequity is in health: 5 million children under the age of 5 die every year. That’s down from 10 million two decades ago, but it’s still a shockingly high number. Nearly all of these children were born in poor countries and die of preventable causes like diarrhea or malaria. It’s hard to imagine a better use of AIs than saving the lives of children…
…Any new technology that’s so disruptive is bound to make people uneasy, and that’s certainly true with artificial intelligence. I understand why—it raises hard questions about the workforce, the legal system, privacy, bias, and more. AIs also make factual mistakes and experience hallucinations. Before I suggest some ways to mitigate the risks, I’ll define what I mean by AI, and I’ll go into more detail about some of the ways in which it will help empower people at work, save lives, and improve education.
Technically, the term artificial intelligence refers to a model created to solve a specific problem or provide a particular service. What is powering things like ChatGPT is artificial intelligence. It is learning how to do chat better but can’t learn other tasks. By contrast, the term artificial general intelligence refers to software that’s capable of learning any task or subject. AGI doesn’t exist yet—there is a robust debate going on in the computing industry about how to create it, and whether it can even be created at all…
…Although humans are still better than GPT at a lot of things, there are many jobs where these capabilities are not used much. For example, many of the tasks done by a person in sales (digital or phone), service, or document handling (like payables, accounting, or insurance claim disputes) require decision-making but not the ability to learn continuously. Corporations have training programs for these activities and in most cases, they have a lot of examples of good and bad work. Humans are trained using these data sets, and soon these data sets will also be used to train the AIs that will empower people to do this work more efficiently.
As computing power gets cheaper, GPT’s ability to express ideas will increasingly be like having a white-collar worker available to help you with various tasks. Microsoft describes this as having a co-pilot. Fully incorporated into products like Office, AI will enhance your work—for example by helping with writing emails and managing your inbox…
…Company-wide agents will empower employees in new ways. An agent that understands a particular company will be available for its employees to consult directly and should be part of every meeting so it can answer questions. It can be told to be passive or encouraged to speak up if it has some insight. It will need access to the sales, support, finance, product schedules, and text related to the company. It should read news related to the industry the company is in. I believe that the result will be that employees will become more productive.
When productivity goes up, society benefits because people are freed up to do other things, at work and at home. Of course, there are serious questions about what kind of support and retraining people will need. Governments need to help workers transition into other roles. But the demand for people who help other people will never go away. The rise of AI will free people up to do things that software never will—teaching, caring for patients, and supporting the elderly, for example…
…For example, many people in those countries never get to see a doctor, and AIs will help the health workers they do see be more productive. (The effort to develop AI-powered ultrasound machines that can be used with minimal training is a great example of this.) AIs will even give patients the ability to do basic triage, get advice about how to deal with health problems, and decide whether they need to seek treatment.
The AI models used in poor countries will need to be trained on different diseases than in rich countries. They will need to work in different languages and factor in different challenges, such as patients who live very far from clinics or can’t afford to stop working if they get sick…
…In addition to helping with care, AIs will dramatically accelerate the rate of medical breakthroughs. The amount of data in biology is very large, and it’s hard for humans to keep track of all the ways that complex biological systems work. There is already software that can look at this data, infer what the pathways are, search for targets on pathogens, and design drugs accordingly. Some companies are working on cancer drugs that were developed this way.
The next generation of tools will be much more efficient, and they’ll be able to predict side effects and figure out dosing levels. One of the Gates Foundation’s priorities in AI is to make sure these tools are used for the health problems that affect the poorest people in the world, including AIDS, TB, and malaria.
Similarly, governments and philanthropy should create incentives for companies to share AI-generated insights into crops or livestock raised by people in poor countries. AIs can help develop better seeds based on local conditions, advise farmers on the best seeds to plant based on the soil and weather in their area, and help develop drugs and vaccines for livestock. As extreme weather and climate change put even more pressure on subsistence farmers in low-income countries, these advances will be even more important…
…New tools will be created for schools that can afford to buy them, but we need to ensure that they are also created for and available to low-income schools in the U.S. and around the world. AIs will need to be trained on diverse data sets so they are unbiased and reflect the different cultures where they’ll be used. And the digital divide will need to be addressed so that students in low-income households do not get left behind.
I know a lot of teachers are worried that students are using GPT to write their essays. Educators are already discussing ways to adapt to the new technology, and I suspect those conversations will continue for quite some time. I’ve heard about teachers who have found clever ways to incorporate the technology into their work—like by allowing students to use GPT to create a first draft that they have to personalize…
…For example, there’s the threat posed by humans armed with AI. Like most inventions, artificial intelligence can be used for good purposes or malign ones. Governments need to work with the private sector on ways to limit the risks.
Then there’s the possibility that AIs will run out of control. Could a machine decide that humans are a threat, conclude that its interests are different from ours, or simply stop caring about us? Possibly, but this problem is no more urgent today than it was before the AI developments of the past few months.
Superintelligent AIs are in our future. Compared to a computer, our brains operate at a snail’s pace: An electrical signal in the brain moves at 1/100,000th the speed of the signal in a silicon chip! Once developers can generalize a learning algorithm and run it at the speed of a computer—an accomplishment that could be a decade away or a century away—we’ll have an incredibly powerful AGI. It will be able to do everything that a human brain can, but without any practical limits on the size of its memory or the speed at which it operates. This will be a profound change.
These “strong” AIs, as they’re known, will probably be able to establish their own goals. What will those goals be? What happens if they conflict with humanity’s interests? Should we try to prevent strong AI from ever being developed? These questions will get more pressing with time.
But none of the breakthroughs of the past few months have moved us substantially closer to strong AI. Artificial intelligence still doesn’t control the physical world and can’t establish its own goals…
…No matter what, the subject of AIs will dominate the public discussion for the foreseeable future. I want to suggest three principles that should guide that conversation.
First, we should try to balance fears about the downsides of AI—which are understandable and valid—with its ability to improve people’s lives. To make the most of this remarkable new technology, we’ll need to both guard against the risks and spread the benefits to as many people as possible.
Second, market forces won’t naturally produce AI products and services that help the poorest. The opposite is more likely. With reliable funding and the right policies, governments and philanthropy can ensure that AIs are used to reduce inequity. Just as the world needs its brightest people focused on its biggest problems, we will need to focus the world’s best AIs on its biggest problems.
Although we shouldn’t wait for this to happen, it’s interesting to think about whether artificial intelligence would ever identify inequity and try to reduce it. Do you need to have a sense of morality in order to see inequity, or would a purely rational AI also see it? If it did recognize inequity, what would it suggest that we do about it?
Finally, we should keep in mind that we’re only at the beginning of what AI can accomplish. Whatever limitations it has today will be gone before we know it.
2. I’m working hard so that I’ll never be poor again – Thomas Chua
My friend shared how many of her colleagues in sales are caught up in the toxic culture of pursuing sales at the expense of their integrity, relationships, health, and mental wellbeing.
A common justification was “I’m working hard so that I’ll never be poor again.” Having come from poverty fuelled their desire to accumulate wealth.
In spite of myself being from a less well-to-do background, she wondered why she doesn’t detect similar traits.
It hasn’t always been this way.
I used to put the pursuit of wealth as my number one priority. And it can be seen in everything I do.
Even my scholarship and university entrance essays began with this quote: “I was born poor, but I will die rich.”
This quote stuck in my head for some reason. I guess it was the idea that I could change my fate despite not being able to change my birth…
…As we progress through life, it’s important to recognize that what’s useful in one stage may no longer be useful in another.
The hunger to generate wealth is definitely essential when one is living in poverty. It requires one to delay gratification—not just on spending, but on sleep, relationships and putting all your energy into learning and value-adding the world, in exchange for money.
There’s nothing wrong with hard work and the pursuit of wealth. In fact, it should be applauded.
The concept of having “enough” is highly subjective, but for many high income earners who came from poverty and have the means to comfortably live, it never seems to be “enough”.
They seem to be stuck in the phase where they’re perpetually unsatisfied unless they bring in more sales, make more money and become even wealthier.
There is a price tag for everything. Especially when you are no longer struggling to get out of poverty, it becomes toxic to pursue wealth at the expense of everything else.
It is a shame, because these individuals have worked hard to overcome their disadvantages in life – monetary, social, and cultural capital – but still hold the belief that they must sacrifice everything to escape “poverty”.
They are so focused on achieving wealth that they fail to stop, reflect, and realize that what used to work for them may be preventing them from living their best lives.
3. AT1 Bonds: when to abandon your fund manager – John Hempton
This leads me to the issue of the day – the Swiss financial regulator’s (FINMA’s) decision to simply cancel (“write-down”) about $17 billion in Credit Suisse Additional Tier 1 bonds (the so-called AT1s).
Now had I had a cursory look at the AT1s I would have thought that they were traditional bank preferred shares – that is they ranked ahead of common equity. I might have even traded them on that basis.
Fortunately I did not – because if I had I would have been wrong.
These were not ordinary preference shares ranking ahead of common equity. They were fixed income instruments that in times of stress ranked behind common equity.
Indeed I had never really ever considered the possibility of such an instrument – but that was only because I never read the documents.
The documents were not hard to find. They were on Credit Suisse’s website.
The document (which I have preserved here) makes it’s unusual nature right up-front. The Credit Suisse page linked above refers to these in bold letters as “Low-Trigger Capital Instruments”.
This does suggest a low trigger.
And boy is it a low trigger – the whole prospectus is dedicated to explaining how tough it is for these notes and their unusual character.
This is my favourite line:
Furthermore, any Write-down will be irrevocable and, upon the occurrence of a Write-down, Holders will not (i) receive any shares or other participation rights in CSG or be entitled to any other participation in the upside potential of any equity or debt securities issued by CSG or any other member of the Group, or (ii) be entitled to any write-up or any other compensation in the event of a potential recovery of CSG or any other member of the Group or any subsequent change in the CET1 Ratio, Higher Trigger Capital Ratio or financial condition thereof. The Write-down may occur even if existing preference shares, participation certificates and ordinary shares of CSG remain outstanding.
So there it is. And I have to repeat the prospectus: “The Write-down may occur even if … ordinary shares of CSG remain outstanding”.
Yep. It is there in plain English. You own these and you rank behind common stock.
4. CEO/ CIO Letter: MoneyOwl CEO Discusses Credit Suisse & The Banking Turmoil – Chiun Ting Weber
Banking is a confidence game and banks are, by definition, highly levered. No bank has the cash to pay all its depositors all at once. To make a return, a bank has to take some of the money you deposit with it, to either lend it longer-term for interest income or to buy assets to earn a return. Under the Basel regulatory requirements, the official regulatory Tier 1 capital (highest quality capital available to absorb losses immediately) requirement is at 8% of risk-weighted assets (the riskier the bond your bought, or the entity you lent money to, the higher the risk weight on that asset). A bank won’t be an attractive investment for its shareholders if the regulatory capital is set too high.
What this means conceptually is that a bank can fail if it has bad assets that, when marked down, can wipe out 8% of capital. In a full-blown crisis, it isn’t difficult for that to happen. It was the case with sub-prime mortgages during the 2008 Global Financial Crisis (GFC) engineered into leveraged packages of mass destruction, the now-defunct Collateralized Debt Obligations or CDOs. But in reality, even if you had a 14%, Tier 1 ratio, as CS had; and even if you had been pronounced to be meeting capital ratios by a regulator, as CS had been; all this means nothing when client confidence is shaken. All it takes for a bank run is for depositors to suspect that you have a lot of these bad assets. Even the Swiss National Bank’s (SNB) massive SFr50 billion liquidity line to CS announced just a few days ago was insufficient, hence this drastic move…
…The determination and speed at which the regulators are moving should give us comfort as investors that another full-blown GFC is highly unlikely. Volatility from bank turmoil thus presents opportunities. No matter how bad the gyrations are, we can expect a good recovery in time – except that we do not know when, or how bumpy the road would be. But even if we go through something like the GFC, we know that the stock market always recovers from a crisis and goes up in the long run. I think you would agree with me that looking back, the GFC was an excellent opportunity for wealth-building for disciplined, long-term investors…
…Having an investment philosophy you can stick with anchors you through the ups and downs of market turbulence, and rewards you with healthy returns over time. Except where you have an urgent need, the worst thing you can probably do is to panic-sell, and turn a temporary decline into a permanent loss. The second worst thing is to “take profit” and try to wait to the right time, because the right time will never come psychologically, and you would have totally missed that big ride-up when the recovery comes on fast and furious. The way to have a great investing journey, including during turmoil, is to be disciplined in our mindset and look beyond the concerns of today, to the long-term potential of the markets. I strongly recommend that you invest in MoneyOwl’s low-cost market-based investment solutions in a regular savings plan (RSP), if you haven’t already started investing.
5. How the Swiss ‘trinity’ forced UBS to save Credit Suisse – Stephen Morris, James Fontanella-Khan and Arash Massoudi
The emergency call from the Swiss establishment came at 4pm on Thursday.
Colm Kelleher, a rambunctious Irish banking executive who has been chair of UBS since last April, had been planning to celebrate St Patrick’s Day on Friday before watching Ireland play England at rugby on Saturday at a pub in Zurich. He was hoping to see his country win a clean sweep, or “Grand Slam”, in the Six Nations Championship.
But even before he took the call, he knew his chances of enjoying an entertaining weekend were slim. The chaos engulfing crosstown rival Credit Suisse, which had become the basket case of European banking after three scandal-ridden years, was now in overdrive.
A day earlier, a SFr50bn ($54bn) liquidity backstop from the Swiss central bank had failed to arrest a crisis of confidence in the lender, whose shares had plunged after Ammar Al Khudairy, the chair of its largest investor Saudi National Bank, bluntly replied “absolutely not” when asked if it would put in any more money…
…On Wednesday, the so-called “trinity” of the Swiss National Bank, regulator Finma and the minister of finance summoned Credit Suisse chair Axel Lehmann, who was in Saudi Arabia for a conference, and chief executive Ulrich Körner for a call.
In the same meeting where they authorised the SFr50bn backstop, they also delivered another message: “You will merge with UBS and announce Sunday evening before Asia opens. This is not optional,” a person briefed on the conversation recalls.
Kelleher found out his weekend plans were ruined on Thursday afternoon. The trinity called UBS and ordered the group to find a solution to save its ailing peer from bankruptcy…
…Keller-Sutter, the finance minister, was a key figure throughout the negotiations, including co-ordinating with foreign officials and regulators in the US and Europe.
She was under extreme pressure from global regulators, who had been demanding faster and more decisive action to stop panic spreading in markets. In particular, the US and the French were “kicking the shit out of the Swiss”, says one of the people advising UBS. Janet Yellen, the US Treasury secretary, had several conversations with Keller-Sutter over the weekend.
Negotiations over the deal were initially “fairly friendly” but as time progressed the trinity started becoming more aggressive, pushing a transaction that Credit Suisse was vehemently opposed to.
UBS was also reticent. Executives made it clear that it would only participate in the rescue of its rival if the price was cheap and it indemnified them from a raft of regulatory probes into Credit Suisse’s culture and controls.
“They [UBS] were always going to try to kill us on price. And we were always going to try to get a premium,” says a person close to Credit Suisse.
By Friday evening, when it was revealed that UBS was exploring a state-mandated takeover, Credit Suisse had lost another SFr35bn in client deposits over the preceding three days, according to a banker involved in the deal, and international banks from BNP Paribas to HSBC were cutting ties. Regulators concluded that it would probably not be able to open on Monday…
…In response, on Saturday evening Kelleher called his counterpart at Credit Suisse from outside a restaurant to tell him UBS was prepared to offer $1bn in stock for the whole group, about SFr0.25 a share, far below the SFr1.86 closing price on Friday.
The government then informed Credit Suisse it would introduce emergency legislation to strip both sets of shareholders of the right to vote on the deal.
Credit Suisse was outraged and refused to sign. It was opposed to the CDS clause because the optionality of walking away from the deal would have killed it once it was made public. Such a condition would have led to chaos, say people with direct knowledge of the negotiations…
…Under pressure to get a deal done before the end of the day, the trinity started to ramp up pressure on both sides, threatening to remove the Credit Suisse board if they did not sign off.
On the other side, UBS was lent on to increase its price and reluctantly agreed, ultimately boosting the offer to $3.25bn in stock. But in return it negotiated more support from the state, including a SFr100bn liquidity line from the SNB and a government loss guarantee of up to SFr9bn, after it had borne the first SFr5bn itself.
The final terms were still so favourable to UBS they were “an offer we couldn’t refuse”, a person on the negotiating team told the FT. An adviser to Credit Suisse described them as “unacceptable and outrageous” and a “total disregard of corporate governance and shareholder rights”…
…In order to make the deal more palatable for Swiss citizens and the bank’s equity investors, the government also decided to impose losses on SFr16bn of Credit Suisse’s additional tier 1 (AT1) capital bonds. While these are designed to take losses when institutions run into trouble, normally they are not triggered if shareholders receive money as part of a takeover.
However, the small print of the bond documentation allowed Swiss authorities to disregard the normal order of priority and wipe out bondholders.
“AT1 holders were sacrificed so the finance ministry could try to save some face with international equity holders after denying them a vote on either side of the transaction,” says one of the bankers advising on the takeover.
6. Everything you need to know about AT1s – TwentyFour
Additional Tier 1 bonds (AT1s) are part of a family of bank capital securities known as contingent convertibles or ‘Cocos’. Convertible because they can be converted from bonds into equity (or written down entirely), and Contingent because that conversion only occurs if certain conditions are met, such as the issuing bank’s capital strength falling below a pre-determined trigger level…
…AT1 bonds have three basic features.
The first, and in our view most crucial feature, is the loss absorbing mechanism, which is ‘triggered’ when the issuing bank’s CET1 capital ratio falls below a pre-determined threshold. Typically this trigger is either at 5.125% or 7% CET1, depending on the national regulator. Once this trigger level is hit, the notes are automatically converted into equity or written down in full, depending on the terms of the individual bond documentation.
Second, regulators require bank capital to be permanent (i.e. perpetual) in nature, so AT1 bonds have no final maturity, and instead they are callable with regulatory approval. AT1s typically have ‘non-call’ periods of between five and 10 years, after which investors generally expect the issuer to call and replace the AT1s with a new issue. If the bonds are not called, the coupon resets to an equivalent rate over the underlying swap rate or government bond…
…There is another important regulatory element investors need to consider, which is that a bank’s solvency is ultimately at the discretion of its national regulator (or the European Central Bank for EU banks). If a bank runs into serious trouble, regulators can declare a Point of Non-Viability to try to protect depositors, stem the losses and prevent contagion.
We have seen that European banks generally have CET1 ratios in the mid-teens; we think it is highly unlikely any regulator would let a bad situation carry on long enough for a bank’s CET1 ratio to fall to 7%, let alone 5.125%, so in practice it is likely that a bank’s Point of Non-Viability would occur with capital levels higher than the trigger levels embedded into AT1 securities. This is why it is important for investors to pay attention to the individual capital requirements set by national regulators for each bank, and to scrutinise annual stress tests very carefully.
7. Doug Leone – Lessons from a Titan – Patrick O’Shaughnessy and Doug Leone
Patrick: [00:10:54] I spent a lot of time talking to your partner, Ravi, about demons and the demons that are in certain people for whatever reason and the ways that those demands can motivate or drive entrepreneurial-type people to enormous success. And one of the things that Ravi told me was that you are extremely good at sussing out a person’s core motivation via listening, ironically, given Don’s note to you. And I’d love you to talk a bit about that skill and why you think it’s so important to understand someone’s core motivation.
Doug: [00:11:28] First of all, what we look for founders, we also look for Sequoia partners, investors, young people. The same set of traits use the word insufferable, use the word he doesn’t listen, she doesn’t listen or he’s belligerent, she’s belligerent. Those that other people may view as a negative, we actually view as a positive because in order to get something done in life, you can’t just walk down Main Street and be a sweetie pie.
We look for outlier people, whether it’s founders or investors, and outlier people do extraordinary things. Outliers. What do I mean by that? Extra-driven for whatever reason. Maybe Daddy told them they weren’t good enough and they want to show Daddy how good they are. Maybe they have a twin brother. Twins have a way of competing with one another. They love one another, but they compete one another. Maybe they failed miserably in their first startup, they’re embarrassed and so on. So we look for those things.
And sometimes, believe it or not, genetics. I’ve actually met some people that I’m now convinced they were just wired that way. And I try to look for that for the simple reason that I view that to be the greatest advantage, but could be the greatest weakness, if not channeled appropriately. So want to look for it to see if it’s there because I like to be it there, then I look to see what it is and whether it’s on the right side of this good versus bad trait. And thirdly, because once we understand it and then that’s a good side, then how do we channel it, complement and make sure this incredibly wonderful insecure, scared because that’s what we all are when we’re coming up, how do we help them as if we were their brothers to achieve maximum type of success.
So I dig for that. I just really want to understand what makes this person tick. And to me, the greatest question is why? Why, why, why? When someone says I was recruited by. I hear, I was lazy-ass sitting down. I got a call from a recruit. I have nothing better to do. I got suck to listen to something. I got sweet-talked, then I talked to a company that made me an offer. I wasn’t too happy on my job or a little bored and I went.
To me, that’s what I was recruited by sounds like. A converse of that, of course, is I was sitting on a job, I saw an opportunity in a market segment that I didn’t know existed. I call 7 or 8 companies. I realize this is the leading company. I call the companies or I found a way to get a meeting. I sold my way in. I got an offer. I negotiated. I took a job and I went. Wow, what an answer. So those are little things I look for when I interview people.
Patrick: [00:14:18] In addition to asking why in lots of different ways, are there other favorite questions or topics that you find yourself returning to over and over again as you’re getting to know people?
Doug: [00:14:28] I want to know the upbringing. I want to know what kind of kids they were, their journey through life, their maturation through life. I’d love to ask whether they have a sibling, to describe 3 adjectives for their sibling, their close sibling and 3 adjectives that describes them by comparison. I don’t really care about the sibling, but you start learning things.
I love asking the setup question of where would you get your best reference. And they’re eager to tell you that complete set of question because the next question is, where would you get your worst reference and why? And again, I’m not looking to nail anybody. We’ve all had journeys that are up and down, very few of us have had a linear journey. But just understanding, looking for self-awareness because self-awareness means breaking problems down to first principles and meaning using your experience to solve a new problem. While we love best athletes, if we find best athletes with a little of experience and first-principle thinking, that’s a home run, and we look for that…
…And the trick for me, I never understood when the father is an alcoholic or as an abuser and the son becomes an abuser because I have to tell you, I’ve had some tough rides, but I made a promise to myself that if I ever became someone, I would not do one to others as I was done to. I thought it was disgusting. I thought it was very upsetting. And when you’ve come to Sequoia, when I was running it, I made sure everybody respected the people that feed us. You better put your plate away, you better say thank you and so on because it starts at the foundational layer.
And if you do that right, then the culture starts being right. And if you share your winnings and if you just don’t talk to talk, we are a team, we are this. No, you have to share the dough appropriately. And in my case, I never called us a family. I thought family is bulls***. I’ve got members in a family I have to endure forever. Can’t get rid of it.
I tell people, we are high-performance and pick your noun. We’re a performance team. If you don’t believe in sports, production, a movie and maybe the investors are the actors, maybe the investors are the goal scorers. But you know what we need, we need trainers. We need coaches. If you’re a movie, we need a director, a producer or a makeup artist. And it takes everybody. And so just believing internally, that’s what we need, and incorporating into the investment business into what I think is the most fabulous culture of any partnership in the investment area is really our secret sauce…
…Patrick: [00:28:29] Speaking of your passion for go-to-market, describe what you’ve seen the very best at that do consistently? Is it working from the product towards the customer’s need? Is it working backwards from the customer? Are there other things that you’ve seen and recommend over and over again of the very best of this?
Doug: [00:28:46] So I’ve actually have given a name for this cycle called the merchandising cycle. And I explained this to founders. It starts with product management. What exactly are we building? If truth be known, it starts with vision. But if the vision is wrong, we’re all going home, assuming we’re some place in a ballpark.
It’s not some product management, what are we building? To product marketing, how do we position it? How do we tell the story? How do we have the 3 words for describing what we do? How do we have the 30 seconds, 2 minutes? And everybody can do with 10 minutes. Very few people can do the 3 words. And then how do we do the demand gen? How do we do the sales? And wherever that cycle is broken, it looks like a bad salesperson. This guy can’t sell.
Actually, the truth of the matter is if you’ve got product market fit, even shady salespeople can sell. When we first invested in ServiceNow, we had the BT prior to Frank Slootman coming in, in sales, and they were selling like crazy. So that was my lesson. And so for me as a Board member, I have to debug the merchandising cycle.
Product can’t sell. Why? There’s not enough leads. Oh, well, I know to fix that. Why don’t we get some more BDRs. Then you can talk to the BDR guys. Here, you can have 5 BDRs. Well, then they start fessing up. Well, it’s not really a BDR head count. It’s that the message isn’t playing right.
Well, I knew that, but it nice you admit it, let’s go back to product marketing. What’s the message? Is that the right message? Is that the wrong message? And that’s based on the product we’re building. This is the product management. And so I work very hard at debugging upstream this merchandising cycle, so we can figure out what the real problems are. And as I think about it, take these rocks out of the river so that dam water can flow as fast as possible. And once you do that and once you know that 2 or 3 sales reps can sell something and you have your first 4 or 5 sales that don’t include the CEO, those are telltale sign that you can start ramping. And so that’s what we do. That’s what I do as a Board member.
The thing I can’t do is the black magic. If you don’t have the right vision, if you’d — I’m not close to product market fit, I will tell you, Doug Leone or any other people in venture, I’m not going to help you. Black magic is reserved for founders. Everything else is mere mortal stuff. That’s what we can do. And we’re probably the very best in the world at Sequoia in doing that.
Patrick: [00:31:10] What are the components of great positioning for a product?
Doug: [00:31:15] Simplicity, crystal clearness, something a mere mortal can understand. If you can describe it and you can understand it you’re out to lunch. Singularity of purpose. When I go to the store, I buy a pencil because I want to write. I don’t want a pencil because I want to write, I scratch my back with the tip. It doesn’t work like that.
Singularity of vertical market early on because you want to be narrow. You have no resources. You’ve got to be narrow. Oh, we are chasing these 4 vertical markets. It sounds good. But in order to do that, you have to have marketing that talks for different languages for 4 markets. And maybe you have to have engineering that develops different features for me. A little company can’t do that. So be it the bull’s eye as sharp as you can and then starts to expand in concentric circles when you get your legs under you in that vertical market. That’s what I look for in position.
Patrick: [00:32:10] If you think about the, what I’ll call, mediocre positioning, you’ll know if there’s amazing positioning because you’d be able to see the things flying off the shelves. And you’ll know if there’s terrible positioning and that the danger is somewhere in the middle, like it’s kind of working. What have you done historically when you see that and you see founders start to build upstream the demand gen and the sales org is on top of mediocre positioning. That seems like a very dangerous spot for a company to be in.
Doug: [00:32:37] So keep in mind that we, as Board members, our job is to make these founders very capable and successful. You lose the founder, you lose the soul of a company. There’s no question about that, okay? And telling the founders cuts a little bit of the pinky. And you want founders with 10 fingers and 10 toes. But there are certain times where the thing is soft, the rails, that it’s worth a small piece of the pinky to get back in the right direction.
First, what I try to do instead of telling I like showing. So let me give you an example. Your VP of Marketing stinks. If I say that, it means nothing to a founder. But if I say, I’d like you to meet these 3 VP marketing from other companies. Let me tell you what happens 9 times out of 10, they come back and they say, “Holy s***, the guy we have or the gal we have is nothing like this guys.” So try to show, not tell. Build trust, which doesn’t get build day 1. It really gets build with the first time to see founders in a pension. He understands you’re there to help them out.
So once you have trust, which is really the foundational layer, it’s the grease that makes all business runs. And once the founder understands maybe of a little of experience that complements his incredible talent. And once you show the founder without telling the founder, and once in a while, you have to tell because maybe you don’t have the time to show, but you better do that once a year.
It’s very rare. That’s what you do. Those are the actions that you take. And you want to come out of that in the win-win. You want to come out of that with an enlightened founder who’s extremely happy and better in his role rather than having achieved your goal of a new VP of Marketing with the founder feels like these needs were cut off.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have a vested interest in Microsoft. Holdings are subject to change at any time.
