A Conversation with Roelof Botha, Sequoia Capital: AI development is overheated, and rapid growth does not equal success

Venture Capital Perspective on the AI Boom: Roelof Botha Discusses How to Identify False Rises, Penetrate Bubbles, and Stick to Long-Term Value.

Compiled & Edited by: Daisy, ChainCatcher

Editor's Note:

Against the backdrop of rapid developments in artificial intelligence technology, AI investment continues to rise, and the decision-making logic of venture capital is constantly changing. Roelof Botha, managing partner at Sequoia Capital, shared his views on the current market phase, perspectives on AI investment risks, and how Sequoia internally addresses decision-making biases during an exclusive interview with The Generalist podcast.

He reflected on his experience in crisis management at PayPal, pointing out that in a capital-rich environment, companies are prone to strategic loosening. At the same time, he also explored how to assess the long-term potential and market cap of early high-rise companies, as well as the importance of adhering to investment discipline in specific contexts.

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 specific areas, such as the artificial intelligence field, there are indeed signs of overheating.

2. The acceleration of company growth is part of a larger trend, not an偶发 phenomenon.

3. The rapid rise of a startup project in its early stages does not mean it has 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 rise curve, it is easy to misjudge the future ceiling. Early investors must think: can this model truly become a mass behavior?

5. Rapid rise does not equal success.

6. Capital surplus can easily lead to a lax corporate strategy, while limited resources can instead stimulate the highest 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 comparisons of investment projects, publicly identifying psychological biases, etc.).

9. Long-termism and collective judgment are the core principles of Sequoia's 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 it's a bubble period. For me, a bubble means that the prices of all types of assets are generally inflated in all areas, which is not the case now. For example, the U.S. real estate market, both residential and commercial, remains weak overall. We have an internal tracker at Sequoia, updated every Monday, that tracks multiples of enterprise value to revenue for approximately 690 publicly traded tech companies. Based on this statistic, the overall level is currently in the 60th percentile of the last two decades. In other words, looking at the market as a whole, there is no systemic bubble. Of course, some areas, such as artificial intelligence, do overheat, but not overall.

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

Roelof: In addition to market multiple tracking, we have another 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. Because humans naturally tend to make relative comparisons in decision-making. If you only look at the projects encountered in the past month today, the standards can easily be pulled down or raised by the current environment. However, if you broaden your perspective to the entire investment cycle of the fund, or even to a longer term, you can more accurately judge the absolute quality of a project—whether this company has the potential to become a "legendary company." Sequoia has been established for more than fifty years, and the companies it supports account for over 30% of today's market capitalization on NASDAQ. This fact also requires us to always hold ourselves to the highest standards.

Mario: With the rapid development of artificial intelligence, are there more and more outstanding companies emerging?

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, most of whom own smartphones, this means that new services can almost instantly reach the global market. Coupled with the massive accumulation of data, this provides rich fuel for the development of AI. Therefore, the acceleration of company growth is part of a larger trend, not an isolated phenomenon.

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

Roelof: Exactly. The first is to judge the upper limit of the market size. For example, flash sale e-commerce (e.g., Gilt, Rue La La), which was very popular fifteen years ago, had an impressively steep growth curve. But it turns out that the flash sale model has not become a mainstream way of consumption, but has been limited to a niche market. When investing, if you only look at the early growth curve, it is easy to misjudge the upper limit of the future. Therefore, early investors must ask themselves: can this model really become a mass behavior? The second is the issue of competitive barriers. The leader does not necessarily win in the end. For example, Google was not the first search engine, and Facebook was not the first social network. In many technical fields, it is often the second or third entrant who sums up the lessons of predecessors and finally surpasses them. Therefore, when investing, we must not only judge the size of the market, but also evaluate whether the company's moat is deep enough to continue to lead.

Mario: You mentioned that there have been phenomena such as SPV (Special Purpose Vehicle) investments, small amounts of self-investment, and large amounts of external fundraising in the AI field. Is this a signal of a bubble?

Roelof: This phenomenon is mostly focused on the AI space. My view is this: even if the overall market is not a bubble, there may be overheating in some areas. In addition, I am concerned that this flippant approach to investment will undermine the health of the market, especially for the startups themselves. Looking back on my personal experience, PayPal faced huge financial pressure in 2000, and it was precisely because of the restrictions on "burning money" that the team focused on innovation, optimized business models, and reduced costs. Over-financing can cause companies to lose this sense of crisis and become lax, which is not conducive to building a healthy, long-term business.

Risks and Misjudgments Behind High Rise

Mario: In real life, can founders maintain discipline and rationality after receiving massive funding?

Roelof: Very rare. Those who can truly do it are often founders who have experienced major crises and life-and-death moments. For example, Brian Chesky of Airbnb 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 when they secure ample funding in the future, can remain cautious and disciplined. But for the vast majority of founders who have not experienced similar hardships, it is difficult to resist the temptation of complacency brought about by abundant capital, relying solely on rational self-discipline.

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

Roelof: yes, so do I. When I was at PayPal in 2000, 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, what decision would you make today if you only had 12 months of cash flow left? 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: Interest comes from a variety of sources. First of all, my father was a professor of economics, and he was exposed to it since he was a child. When I was in college, I majored in actuarial science, which requires forecasting over a period of several decades and trained me to think on a very long scale. And most people, such as accountants, are used to only looking at the data of the past year. When I arrived at Stanford Graduate School of Business, I took a course in organizational behavior and systematically learned about heuristics and biases. Since then, I've been reading a lot about it. Later, at Sequoia, we not only introduced bias identification into the team discussions, but even asked each investment memorandum to proactively list possible psychological biases, such as: "Am I too anxious because I haven't invested for too long? Am I getting too close because I know the founder?" In this way, making biases explicit can greatly reduce their implicit impact on decision-making.

Mario: This method of actively identifying deviations adds a layer of protection to decision-making.

Roelof: Exactly. If you can openly discuss biases within the team, like when someone admits, "I think I might be a bit biased in this case," then the other team members can participate in the judgment more rationally, collectively reducing the impact of biases. We always believe that the team is greater than the individual, and group rationality can remedy the blind spots caused by individual emotions.

Mario: What do you think are the most common and concerning decision-making biases?

Roelof: There are two particularly important points. The first is the anchoring effect. People are easily influenced by the information they are first exposed to. For example, six months ago you looked at a company that was undervalued, and now it has tripled, so you instinctively resist investing. But the right question should be: given today's conditions, is this a good entry point? Instead of getting hung up on past prices. The second is loss aversion. People often exit too early when they have realized gains, fearing the loss of their profits, rather than holding onto assets that have potential for continued rise. This mindset 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 outstanding companies long-term after their IPO, rather than distributing them immediately to LPs at the time of the IPO.

Mario: Sequoia establishes a long-term fund, to some extent, to correct the shortcomings of human nature through systems.

Roelof: Exactly. Establishing mechanisms is a way for us to combat our instinctive weaknesses. Relying on individual willpower is not enough; we must improve the rationality of collective decision-making through structured design.

Investment Review and Long-term Mindset

Mario: In your investment experience, what are some cognitive biases or poor decisions that have left a strong impression on you?

Roelof: Yes. For example, we had the opportunity to invest in the early rounds of Twitter, but ultimately chose to pass. One of the reasons was our skepticism about the company's growth data at the time, and we did not sufficiently foresee its network effect potential. In hindsight, this was actually an error of over-relying on short-term quantifiable metrics while neglecting the possibility of long-term non-linear rise. This is also why later in our internal education, we placed great emphasis on valuing both quantitative data and qualitative trends.

Mario: Companies that truly change the world often have unimpressive data in the early stages.

Roelof: Exactly. Legendary companies are often full of uncertainty in their early stages, and their growth trajectories are not linear, sometimes even appearing chaotic. If you only apply traditional financial metrics, you will often miss them. Therefore, identifying early potential requires a combination of data, trends, founder traits, and broader market insights.

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

Roelof: The speed at which the company is growing today is truly amazing. Some companies have made hundreds of millions of dollars in revenue in just a few months. But the question is whether this explosive growth is sustainable. First, assess the market capacity. In some areas, the ceiling itself is not high, and growth slows down quickly when it reaches a certain size. If you enter at a time when valuations are already extremely high, the risks are enormous. Secondly, there is the competitive landscape. Leading in the early days doesn't mean you can stay ahead for a long time. Competitors are constantly emerging, and user stickiness and network effects are the real moats that can withstand shocks.

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

Roelof: Exactly. Fast growth is a signal, but it must be comprehensively evaluated in combination with multiple factors such as market size, moat, profit model, and team execution. Otherwise, it is easy to fall into the trap of blindly chasing high growth.

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

Roelof: We have several internal principles. First, always adhere to "discounting future value rather than looking back at past prices." Even if a project was cheap in the past and has now tripled in price, if it still makes sense in terms of long-term value, we will not miss the opportunity due to psychological barriers. Second, conduct broad comparisons. Each time a new investment decision is made, not only should it be compared with the current case, but it should also be compared horizontally with all investments throughout the entire fund cycle to ensure that standards do not decline. Furthermore, openly discuss potential biases. Each investment memorandum will require the person in charge to list any psychological biases they may have, 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 great emphasis on self-reflection internally.

Roelof: That's right. We believe that only by constantly 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 has been able to achieve sustained success precisely because of 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 the limits of your knowledge. Do not become complacent due to short-term success, nor discouraged by short-term setbacks. Truly great endeavors emerge from continuous trial, error, and correction.