Sequoia’s Roelof Botha Urges Caution for Founders on Valuations

At the recent TechCrunch Disrupt conference held in San Francisco, Sequoia Capital’s global steward, Roelof Botha, delivered a stark warning to startup founders about the dangers of pursuing inflated valuations. Botha’s comments came in light of the Trump administration’s shift towards direct equity stakes in American companies, a move that has sparked considerable debate about the implications of government involvement in the private sector.

During his appearance, Botha responded to a question regarding the implications of the government being involved in investment decisions by quipping, “One of the most dangerous words in the world are: ‘I’m from the government, and I’m here to help.’” His libertarian views were evident as he acknowledged the necessity of industrial policy in a competitive global landscape, particularly against nations like China, which actively use such policies to bolster their strategic industries.

This skepticism towards government intervention was a recurring theme in Botha’s discourse. He expressed concern over the parallels between current market conditions and the funding frenzy observed during the pandemic. While he refrained from labeling the situation a “bubble,” he cautioned that the rapid ascent in valuations could lead to significant downward corrections.

Botha shared a cautionary tale about a portfolio company whose valuation skyrocketed from $150 million to $6 billion in just twelve months, only to plummet shortly thereafter. He emphasized the psychological toll this volatility can take on startup teams, stating, “Nothing demoralizes a team quite like watching a paper fortune evaporate.”

Among his key pieces of advice for founders navigating these turbulent waters was a two-fold strategy. He suggested that if startups do not need to raise funds for at least twelve months, they should focus on building their business. “You’re probably better off building because your company will be worth so much more 12 months from now,” he stated. Conversely, if a company is within six months of needing capital, he recommended raising funds while market conditions are favorable, noting that such opportunities can vanish quickly.

Botha’s insights were further illustrated through a reference to the myth of Daedalus and Icarus, where he warned that ambition unchecked can lead to peril. “If you fly too hard, too fast, your wings may melt,” he remarked, highlighting the importance of cautious growth.

Significantly, Botha announced that Sequoia Capital has launched two new investment vehicles, providing the firm with an additional $950 million for investments. These funds are comparable in size to those launched by Sequoia six or seven years ago. He reiterated the firm’s commitment to early-stage investments, noting that in the past year, Sequoia has backed 20 seed-stage companies, with nine of those investments made at the point of incorporation.

Botha described Sequoia’s investment philosophy as “more mammalian than reptilian,” contrasting their selective investment approach with that of firms that scatter numerous investments without nurturing potential winners. He emphasized the need for focused attention on a smaller number of companies, stating, “We don’t lay 100 eggs and see what happens.”

Despite Sequoia’s historical success, Botha shared a sobering statistic: over the past 20 to 25 years, the firm has failed to recover capital in 50% of its seed or venture investments. His personal journey included moments of vulnerability, recalling how he once cried at a partner meeting after a complete investment write-off. Such experiences have shaped his understanding of the risks inherent in venture capital.

Botha also made a provocative assertion regarding the venture capital industry itself, stating that it should not be viewed as a distinct asset class. “If you take out the top 20 or so venture firms out of the industry’s results, we actually underperformed investing in an index fund,” he explained. With the number of venture firms in the United States having tripled since he joined Sequoia, he argued that increased competition has diluted the quality of investment opportunities.

His overarching message was clear: venture capital firms should remain small and focused, recognizing that only a limited number of companies will ultimately succeed. In a landscape where government involvement is becoming more pronounced and capital is flowing freely, Botha’s insights may serve as a vital reminder for founders to prioritize sustainable growth over superficial valuation increases.