So, how does Sequoia work? Here’s an interview with Roelof Botha and some answers.nn1. Whatu2019s your deadly sin?nSequoiau2019s Roelof Botha said he only invests in companies that let consumers indulge in one of the seven deadly sins . He rattled them off with alarming familiarity. u201cYou donu2019t want to be the site that people should use,u201d Roelof said. u201cYou want to be the site they canu2019t stop using.u201dnn2. Whereu2019s the real money?nVenture capitalistsu2019 focus on the size of our companyu2019s addressable market made us realize that half of our potential revenues lay in the eight markets weu2019ve already opened. u201cWhatu2019s the rush to open Orlando,u201d a VC asked us, u201cwhen you still havenu2019t cracked 1% share here in Silicon Valley?u201dnnGood question. A startup with 18 months of cash is like Val Kilmer in the opening stick-up scene of Heat, with only 80 seconds to get the bearer-bonds from an armored car; as a detective on the scene later marvels, u201cthey ignored the loose cash.u201d Thatu2019s the way to be about your addressable market: not just greedy, but disciplined. Time is short.nn3. What are your unit economics?nThe financial statements we look at every month donu2019t tell us what a small business will look like when it grows up: sure we need to account for all sorts of fixed costs like how much we spend on engineers or maps, but what really matters is whether we make more money from a customer than it costs us to get and serve that customer. So to see if a business works on a large scale, VCs first want to understand it on the smallest scale.nnFor us, this meant explaining what Redfin made this summer on a single home purchase, with a per-transaction account of what we spent on marketing to get customers ($27), on local data ($153), on customer service ($2,906) and so on. We also calculated how much annual revenue we got for every monthly unique visitor.nnWe knew our margin before, but hadnu2019t broken the numbers down into their most easily handled form. This is important. Numbers are just numbers if they arenu2019t simple enough to act on; a linebacker with a simple playbook can react rather than think during the game. Knowing that the big number is how much we spend on our customer-service team refocused us on making sure we hired the right team and invested in its happiness .nn4. What are the explanatory events?nA money-raising deck mostly consists of graphs with lines going up and to the right, scrunched two to a page to make the lines look steeper. The only reaction we expected to our version of these slides was awe. But Roelof asked us to annotate each graph with what statisticians call an explanatory event. What change in our business had caused revenues to shoot up? We claimed that publishing agent reviews had sent conversion through the roof. But when we dug into the numbers, we found the real explanatory event was a change in our service a month before u2013 unlimited home tours . Making a simple picture of a business trend and then correlating that with a big decision helps you understand what levers really move your business. When there are no explanatory events, youu2019re just getting lucky.nn5. Why canu2019t you grow faster?nThe most important question venture capitalists ask is what prevents your company from growing faster. At first, I thought it was a demand disguised as a rhetorical question, asking Redfin to raise projections beyond what we could deliver. But when I got testy, Greylocku2019s David Sze said, u201cWeu2019re not asking you to lie.u201d He just really wanted to know what the rate-limiting factor was.nnWe cycled through a few lame answers: u201cWe prioritized margins over growth.u201d u201cWe wanted to be realistic.u201d Then Redfinu2019s Sasha Aickin quietly pointed at the headcount line of our projections and said our rate-limiting factor is probably how quickly we can hire top-notch real estate agents. Everyone nodded. We got back from that meeting and began thinking about scaling agent hiring .nn6. What are the accelerating effects?nItu2019s easy to grow 300% in your first year or two, when youu2019re starting with nothing, and people first hear about your service. What separates a potential colossus from other businesses is the capacity to keep growing at that rate in years four, five and beyond. When Reid Hoffman looked at Redfin, his primary question was whether there were u201caccelerating effects,u201d where growth begets more growth. For Amazon, the product reviews and personalization history it captured from its first users accelerated its second stage of growth. For Facebook and Twitter, the community itself constantly recruits new users. For companies like Zappos and hopefully Redfin, itu2019s word-of-mouth about our customer service. This line of thinking made Redfin focus on our most sustainable competitive advantages: not the usability of the site itself, but the data we gather from visitors to that site, and the rave reviews we get from those visitors who become clients.nn7. Whatu2019s your secret sauce?nOne of the godfathers of venture capital is, we were told, obsessed with secret sauce; the man apparently hasnu2019t put mayo on a ham sandwich in 20 years. So in preparing for a meeting with him, we tried to think of technology that only we could build. Previously Iu2019d always thought this challenge was silly. Grinders like me believe in the lunch-meat not the sauce; we just try to focus on the right problems , and run faster than our competitors. In this view even Google, if it stopped coding for a year or two, would be caught. But while Redfin has gotten far by being relentlessly incrementalu2014letting users filter property searches by pools or parking spacesu2014the pressure on us to do something proprietary helped us prioritize game-changing features that weu2019d put off in the past. We hope to come up with Something Big in 2010.nn8. How do you win?nThinking constantly about world domination can give you a little vertigo. The way I usually get through my day is by limiting my horizon to serving the next few customers, or increasing revenues in the next few months. Which means that even though the story of how we win should be etched on the inside of my eyelids, itu2019s more often at the back of my mind, as a nagging doubt that Iu2019m focused on the wrong thing.nnBut the essential job of a CEO is to tell that story, to everyone who will listen, making it better all the time. If you are raising venture capital, that story is by definition highly improbable, involving such an absurd overthrow of the order of things that itu2019s almost embarrassing to say out loud. Rehearsing the whole narrative naturally focuses you on the holes in the plot.nnJust try, for example, to say with a straight face how Redfin wins: we get the best data , and build the best real estate website (maybe). We hire our own real estate agents and pay them to focus on customer satisfaction, not sales (thatu2019s a little weird but sure, why not?). Customers appreciate the difference, and en masse fire the traditional agent who has been sending them a bottle of wine every Christmas for 10 years, giving us 20% of all high-value real estate transactions (no way!).nnWay.nnSource: http://www.techcrunch.com/2009/11/18/good-question-the-eight-best-questions-we-got-while-raising-venture-capital/

So, how does Sequoia work? Here's an interview with Roelof Botha and some answers.1. What’s your deadly sin?Sequoia’s Roelof Botha said he only invests in companies that let consumers indulge in one of the seven deadly sins <http://en.wikipedia.org/wiki/Seven_deadly_sins> .. He rattled them off with alarming familiarity. “You don’t want to be the site that people should use,” Roelof said. “You want to be the site they can’t stop using.”2. Where’s the real money?Venture capitalists’ focus on the size of our company’s addressable market made us realize that half of our potential revenues lay in the eight markets we’ve already opened. “What’s the rush to open Orlando,” a VC asked us, “when you still haven’t cracked 1% share here in Silicon Valley?”Good question. A startup with 18 months of cash is like Val Kilmer in the opening stick-up scene of Heat, with only 80 seconds to get the bearer-bonds from an armored car; as a detective on the scene later marvels, “they ignored the loose cash.” That’s the way to be about your addressable market: not just greedy, but disciplined. Time is short.3. What are your unit economics?The financial statements we look at every month don’t tell us what a small business will look like when it grows up: sure we need to account for all sorts of fixed costs like how much we spend on engineers or maps, but what really matters is whether we make more money from a customer than it costs us to get and serve that customer. So to see if a business works on a large scale, VCs first want to understand it on the smallest scale.For us, this meant explaining what Redfin made this summer on a single home purchase, with a per-transaction account of what we spent on marketing to get customers ($27), on local data ($153), on customer service ($2,906) and so on. We also calculated how much annual revenue we got for every monthly unique visitor.We knew our margin before, but hadn’t broken the numbers down into their most easily handled form. This is important. Numbers are just numbers if they aren’t simple enough to act on; a linebacker with a simple playbook can react rather than think during the game. Knowing that the big number is how much we spend on our customer-service team refocused us on making sure we hired the right team and invested in its happiness <http://blog.redfin.com/blog/2009/10/do_the_righ…> .4. What are the explanatory events?A money-raising deck mostly consists of graphs with lines going up and to the right, scrunched two to a page to make the lines look steeper. The only reaction we expected to our version of these slides was awe. But Roelof asked us to annotate each graph with what statisticians call an explanatory event. What change in our business had caused revenues to shoot up? We claimed that publishing agent reviews <http://www.redfin.com/real-estate-agents/jim-holt> had sent conversion through the roof. But when we dug into the numbers, we found the real explanatory event was a change in our service a month before – unlimited home tours <http://blog.redfin.com/blog/2008/11/our_shot_at…> . Making a simple picture of a business trend and then correlating that with a big decision helps you understand what levers really move your business. When there are no explanatory events, you’re just getting lucky.5. Why can’t you grow faster?The most important question venture capitalists ask is what prevents your company from growing faster. At first, I thought it was a demand disguised as a rhetorical question, asking Redfin to raise projections beyond what we could deliver. But when I got testy, Greylock’s David Sze said, “We’re not asking you to lie.” He just really wanted to know what the rate-limiting factor was.We cycled through a few lame answers: “We prioritized margins over growth.” “We wanted to be realistic.” Then Redfin’s Sasha Aickin <http://sfist.com/2005/06/17/interview_sasha_aic…> quietly pointed at the headcount line of our projections and said our rate-limiting factor is probably how quickly we can hire top-notch real estate agents. Everyone nodded. We got back from that meeting and began thinking about scaling agent hiring <http://blog.redfin.com/blog/2009/09/this_is_onl…> .6. What are the accelerating effects?It’s easy to grow 300% in your first year or two, when you’re starting with nothing, and people first hear about your service. What separates a potential colossus from other businesses is the capacity to keep growing at that rate in years four, five and beyond. When Reid Hoffman looked at Redfin, his primary question was whether there were “accelerating effects,” where growth begets more growth. For Amazon, the product reviews and personalization history it captured from its first users accelerated its second stage of growth. For Facebook and Twitter, the community itself constantly recruits new users. For companies like Zappos and hopefully Redfin, it’s word-of-mouth about our customer service. This line of thinking made Redfin focus on our most sustainable competitive advantages: not the usability of the site itself, but the data we gather from visitors to that site, and the rave reviews we get from those visitors who become clients.7. What’s your secret sauce?One of the godfathers of venture capital is, we were told, obsessed with secret sauce; the man apparently hasn’t put mayo on a ham sandwich in 20 years. So in preparing for a meeting with him, we tried to think of technology that only we could build. Previously I’d always thought this challenge was silly. Grinders like me believe in the lunch-meat not the sauce; we just try to focus on the right problems <http://www.caterina.net/archive/001196.html> , and run faster than our competitors. In this view even Google, if it stopped coding for a year or two, would be caught. But while Redfin has gotten far by being relentlessly incremental—letting users filter property searches by pools or parking spaces—the pressure on us to do something proprietary helped us prioritize game-changing features that we’d put off in the past. We hope to come up with Something Big in 2010.8. How do you win?Thinking constantly about world domination can give you a little vertigo. The way I usually get through my day is by limiting my horizon to serving the next few customers, or increasing revenues in the next few months. Which means that even though the story of how we win should be etched on the inside of my eyelids, it’s more often at the back of my mind, as a nagging doubt that I’m focused on the wrong thing.But the essential job of a CEO is to tell that story, to everyone who will listen, making it better all the time. If you are raising venture capital, that story is by definition highly improbable, involving such an absurd overthrow of the order of things that it’s almost embarrassing to say out loud. Rehearsing the whole narrative naturally focuses you on the holes in the plot.Just try, for example, to say with a straight face how Redfin wins: we get the best data <http://www.techcrunch.com/2008/08/22/how-accura…> , and build the best real estate website (maybe). We hire our own real estate agents and pay them to focus on custo
mer satisfaction, not sales (that’s a little weird but sure, why not?). Customers appreciate the difference, and en masse fire the traditional agent who has been sending them a bottle of wine every Christmas for 10 years, giving us 20% of all high-value real estate transactions (no way!).Way.Source: http://www.techcrunch.com/2009/11/18/good-quest…

Please register attendance for Salima Jiwani (s.jiwani@utoronto.ca) for this session. nThank you (My comments on Vimeo would not get posted for whatever reason).