Business Lessons from Jess Lee (Sequoia Capital)

Jess Lee is an investing partner at Sequoia Capital and the former chief executive officer of Polyvore (a fashion web site allowing users to create shareable collages of clothing and interior designs). Before being CEO at Polyvore, Lee was a Product Manager at Google. She started her career at Google by working on the shopping engine Froogle before becoming product manager of Google Maps.

“In the early days of a startup as a founder you are really focused on building your product. If you have built a product before you know you must measure a lot of aspects of the product. You will measure your conversion funnels, you will instrument your product to capture all the analytics and the event data and you will carefully build a system to measure the health of your product.”

The first phase of a startup’s development is about proving “the value hypothesis” and the second phase is about proving “the growth hypothesis.” Lee is saying that startups that can apply modern telemetry and analytics systems during these discovery processes have a vast competitive advantage. Simply put, businesses that have these telemetry and analytics systems can run more experiments more quickly and are more often are able to make decisions based on fact rather than just guesses. If a competitor can measure and manage their business better than a startup can manage its business, the founder of that business is in deep trouble.

Even though Lee talks about the importance of data and analytics she makes it clear that there are still aspects of product development that are an art. Lee describes it this way: “The best consumer companies reinvent the way we live. The art is in understanding the user, creating a kernel of delight, and having the resilience to ride out the storms.” The venture capitalist and entrepreneur Sarah Tavel has said something quite similar:

“Ultimately when evaluating an early stage company, I say it’s a combination of art and science. The art is understanding how products work, the science is knowing how to measure it. The earlier the company, the more it is about art, which in this case is assessing what I think of the product and the use case.”

Lee specifically refers in the sentences in bold above to one key business process called a “conversion funnel” which is a way of describing how often visitors abandon, pause or continue on a given path toward the objective of the business. By deeply understanding a consumers’ journey through a funnel, a business can maximize the number and quality of the visitors who eventually become customers and the products that they buy. Breaking down each step in that journey and running many experiments related to that experience are an essential part of almost any modern business. One essential element of this work is the application of the scientific method to business processes (i.e., build, measure, learn, alter/reject and repeat).

The value of modern data science systems has resulted in a huge shift in the skills needed by businesses today, which is reflected in this salary pyramid depicted below. Professions like machine learning engineer and data scientist are commanding substantial salary premiums because they help businesses add new value for customers.

salary1

“As your company grows your focus as a founder shifts from not to just the day-to-day of the product but the day-today of the company and the organization. Your product becomes your company. The same rigor you applied to your product, you must apply to the company. What you are trying to do is build an operating system for your company, the same way you tried to build a system for your product.” “Culture is a huge competitive advantage.”

Lee is saying that as the business grows it becomes important to “instrument the business.” Accounting, human resources, product development and other systems are must be created by the founders and key performance metrics (KPIs) chosen. As an example, as a business grows what was once done on spreadsheet will eventually need to be upgraded in sophistication, so the business can scale. A founder must also devote time and effort to building a strong culture since that culture will determine what employees will do when they want answers to questions and no one is there to answer them. Simialarly, the team that founder can hire will determine the nature of the business that they build. Since recruiting and hiring the right people is essential, the amount of time that should be devoted to those processes is greater than most people believe. The best founders know this instinctively, while others must learn this lesson the hard way. For example, a bad early hire can be hugely distracting and harmful to a business. You may say “well that is obvious.” Well I suggested that until you have actually experienced this you will underestimate the impact of a bad hire.

“If I have a slightly better innate understanding of a customer that might give me a competitive advantage.”

The best missionary founders have the advantage Lee describes in the previous sentence. They want to solve a problem they deeply understand because they share the customer’s core problem. They have less need to rely on third party research and can make more informed decisions. The best founders maintain “beginner’s mind” when it comes to solutions and approaches. The best example from my own life of this is my friend the cable TV and wireless pioneer Craig McCaw. From the very first time I met McCaw I knew that he was a savant about what customers want and potential solutions to their problems. He truly “thinks different” than other people when he handles a product or encounters a service. One interesting aspect of his personality and working style is that McCaw has dyslexia and so he views the world in a very different way. This has been a huge business advantage for McCaw over the years.

“A lot of people spend time pitching the solution, but they don’t really explain the problem, and it should be so crisp and clear what the problem is you’re solving that the solution almost just floats from that.”

If a founder can’t describe the problem and the solution to that problem in a few declarative sentences they have not given enough thought to these critically important aspects of the business. The Jeff Bezos idea that people must write a memo before a meeting is an interesting example of this principle in the real world of business.

Lee also believes, like Jeff Bezos, that everything should start with the customer and most specifically the customer’s problem. Bezos puts it this way:

“There are many ways to center a business. You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer focus is by far the most protective of Day 1 vitality. Why? There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it, and I could give you many such examples. Staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight. A customer-obsessed culture best creates the conditions where all of that can happen.”

4. “I look for the ability to explain complex things simply. That applies to so many things. It’s your elevator pitch when you’re talking to investors. Your ability to communicate to your team, and even more important than that though, to be able to run an all-hands and explain to your team where you’re going and how you’re going to get there.”

Being a founder is hard to do well if you don’t know how to sell. A founder’s sales skills are put to the test in many settings. Founders must sell to investors, potential employees, employees, suppliers, distributors, the press and customers. As just one example, employees know when an all-hands is poorly run or a founder does not understand the issues facing the company. Often the problem is that the presenter has not done a good job selling the ideas. Lee has made some very interesting statements about the fact that she is an introvert CEO:

“I don’t think I quite fit the traditional mold for what a CEO is supposed to be like. Personality-wise, a certain set of skills, being introverted—none of those things are your classic CEO. Figuring out how to lead in my own style, authentically, has shaped me tremendously. I have a lot of 1:1 conversations with people, which means that I have more time to get know someone better, or time for them to tell me if there’s a problem.”

I have found over the years that there is no one successful type of CEO. All of these successful CEOs vary in many ways except for one common factor: they all surround themselves with people who complement their skills and weaknesses. Ray Dalio explains this need to surround yourself with smart people particularly well.

“I look for a founder who has unique insight.”

The job of a founder is to try to create product or service which is sufficiently unique that constraints are placed on other businesses which who desire to provide a competing supply of those goods or services. What this means is that the essential task is defining how a business can be unique. Creating a business strategy is fundamentally about making choices. It is not just what a business does, but what it decides not to do, that defines an effective strategy. Harvard Business School Professor Michael Porter argues that doing what everyone must do in a business is operational effectiveness and not strategy.

Unique insight is what leads to innovation which will be the source of both new value and an ability to capture that new value via a sustainable competitive advantage. Unique insight means “thinking different” in the manner of Sara Blakely, Oprah Winfrey, Steve Jobs, Bill Gates, Wang Laichun, and Jeff Bezos. They all found unique answers to these questions: What aspects of the business which people mistakenly believed was a rule will the business break that creates new value? What methods exist that no one has seen before? The people who most often create unique compelling offerings for customers are true fanatics. Jim Sinegal of Costco is just such a fanatic.

The importance of sustainable competitive advantage to a business can’t be emphasized enough. Making the same product as your competitors and expecting to earn a profit greater than your cost of capital is a triumph of hope over experience. If a business sells pizza in a strip mall they do not want lots of competitors who make essentially the same pizza in that same mall or even in the same neighborhood. Every business is the same since the supply of alternatives will determine the pricing power of the business. Sometimes a person will say that some sustainable competitive advantage does not matter, but it usually mean that they are trying to sell investors a story that covers for the facts that they are not earning a return on capital.

7. “Consumers can be fickle — in love with a service one day and over it the next.”

A business that obtains product/market fit can lose it as quickly as it is attained. The same factors and forces that build a business up can quickly tear it down. Word of mouth can tear apart product/market fit unpredictably and suddenly.

8. “Startups are really hard. I know that from personal experience. A million variables have to line up for things to work out, and sometimes it feels like everything that could have gone wrong is going wrong.” “The average exit time for a successful startup is eight years. There’s no real overnight success. Pick an idea and a co-founder that you’d be excited to be married to for at least eight years.”

Every business faces a dynamic environment and the best entrepreneurs that I know are like a skilled pilot of an airplane in that they “fly” the business though what is essentially turbulence. Each business is what is called a complex adaptive system operating in a nested fashion and in an interconnected way with other complex adaptive systems. A full explanation of the previous sentence would be a good topic for another blog post. What I can say is that everything in business has many interconnections that create processes that feed back on themselves making the world unpredictable with certainty. This is what makes business and life fun and challenging.

Acquiring skill in an activity like creating or investing in a startup with feedback cycles that are measured in years is particularly challenging. This places a premium on a person’s ability to learn vicariously. Charlie Munger believes:

“How do some people get wiser than other people? Partly it is inborn temperament. Some people do not have a good temperament for investing. They’re too fretful; they worry too much. But if you’ve got a good temperament, which basically means being very patient, yet combine that with a vast aggression when you know enough to do something, then you just gradually learn the game, partly by doing, partly by studying. Obviously, the more hard lessons you can learn vicariously, instead of from your own terrible experiences, the better off you will be. I don’t know anyone who did it with great rapidity. If we had been frozen at any given stage, with the knowledge hand we had, the record would have been much worse than it is. So the game is to keep learning, and I don’t think people are going to keep learning who don’t like the learning process.”

“There are some classic things that pretty much all VC’s look for, like a very large market, a founding team that’s capable. I also look for grit because it takes a really long time to build a great company. You want someone who can weather the storms and who can go through the ups and downs.” “It’s almost irrational to start a company because the odds are so bad. You need to have a lot of grit.”

Getting through the inevitable problems that arise during what Scott Belsky calls “the messy middle” between the initial days of a startup and eventual success of the business will require grit. Angela Duckworth, a professor of psychology at the University of Pennsylvania believes: “Grit isn’t how intensely, for the moment, you want something. Instead, grit is about having what some researchers call an ‘ultimate concern’ – a goal you care about so much that it organizes and gives meaning to almost everything you do.” You will know grit when you see it and can work to create more of it in yourself. That also is a good topic for another blog post.

“If I could help the next generation of entrepreneurs and founders, and help them maybe shave off a day here, not make a mistake that I made, or just advise a little bit, I would feel great about that.”

Being able to take pleasure in helping others achieve their dreams is an attribute you will inevitably find in the best venture capitalists. Of course, an investor should roll up their sleeves and work side by side with the founder when appropriate, but it is, in the end, the founder’s mission. Helping another human being know and do more can be a very satisfying thing. For this reason the best venture capitalists tend to be great teachers.

“You can read a lot about management best practices, but there’s no replacement for actually doing it.”

People learn best when they are doing something in the real world. The best way to become an investor is to invest. The best way to become a manger is to manage. These things are true because the most important aspects of an activity in business are not teachable solely in a classroom. Warren Buffett is a huge believer in the value of real world experience in business, He said once: “Can you really explain to a fish what it’s like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value.”

As an example from my own life, in the late 1990s I was asked to find a venture capital firm that might be a good fit for co-investing with the private equity firm Eagle River where I was partner. I met with several venture capital firms in Silicon Valley and we decided that Benchmark was the best fit for us. I stated flying to San Francisco each Monday from Seattle and staying in a hotel all week. I learned more about business and investing during this time than perhaps any time in my life. The experience of attending Benchmark partner meetings was like being in a greatest business classroom in life. I attended one about a year ago and it reminded me of how fun and enriching those meetings can be. Watching how the partners analyzed an investment and people was the very best type of case study possible. The way they interacted as partners and people was highly educational and fun to observe. I felt like I was watching a professional basketball team play every time I was in a meeting in their offices. I have maintained many friendships from that period that I treasure still.

“You learn from people, so find the best people and observe them.”

Many people have a limited view of what a mentor relationship should be, which is unfortunate.. The original mentor was described by Homer as a “wise and trusted counselor” named Athena. Odysseus made him the guardian and teacher of his son Telemachus which creates an image of an older and more experienced person mentoring someone who is younger person. This language from an academic paper describes a traditional mentoring relationship:

“Mentors help their proteges by providing two general types of behaviors or functions: career development functions, which facilitate the protege’s advancement in the organization, and psychosocial functions, which contribute to the protege’s personal growth and professional development. The presence of a mentor is associated with an array of positive career outcomes: Proteges receive more promotions, have higher incomes, and report more mobility and career satisfaction than non proteges. Mentoring has also been found to have a positive impact on organizational socialization, job satisfaction, and reduced turnover intentions.”

Athena’s relationship with Odysseus is representative of only one type of mentor relationship. In short, a hierarchical model of what a mentor can be vastly limits the scope of what can be gained from a mentor. Mentors as broadly defined are everywhere, if you know how to find them. Andy Rachleff makes the point with an example from his own life:

“My best mentor was actually a classmate of mine from business school who I recruited to be my partner at the firm that preceded Benchmark Capital. His name is Bruce Dunlevie. And he has the best judgement of anyone I’ve ever met. And is the best ability to influence people of anyone I’ve ever met. And he’s my exact opposite. Which I think is really valuable in a relationship. I think that’s true in my marriage, my wife and I are very different. She’s had a tremendous impact on me. But watching the way that Bruce was able to influence people had an enormous impact on me and made me realize how much better I could be if I could influence in a way that didn’t feel like there was a lot of overhead or push. And I can’t tell you how much better that made me. How much more confident it made me in what I do. I owe a tremendous amount of my success to someone who’s my peer in terms of age. He’s only two years older than I. But he’s the best mentor anyone could ever have.”

To illustrate my point about peer mentoring relationships further, I will write about two examples from y own life that some people would not think of as a mentoring relationship.

The first nontypical mentoring relationship developed while I was working as a consultant in Seoul Korea in 1983. Soon after I arrived in Korea I met a young expatriate named Ken Jennings. During his lunch break Ken liked to visit the electronic component and computer markets in an area of the city called Cheonggyecheon. He spoke excellent Korean and so tagging along with him allowed me to understand how the PC hardware far better. The clone of choice in Korea at that time was an Apple II.

Ken has a way of digging into topic after topic via self-education. He is one of those people Charlie Munger had in mind when he said that the smartest and most successful people are “learning machines.” That his son would later become the famous Jeopardy Champion of the same name was not surprising in many ways. Both the father and son love to learn.

The second nontypical mentoring relationship that impacted me involved an entrepreneur named Dan Kohn who was the founder of NetMarket. This business was initially conceived while he was studying at the London School of Economics. The business started out selling goods like CDs and books for various offline stores on the Internet using non-digital payments. But in August of 1994 NetMarket sold Sting’s CD “Ten Summoners Tales” to a customer in Philadelphia using a credit card over the Internet. The New York Times characterized this as: “apparently the first retail transaction on the Internet using a readily available version of powerful data encryption software designed to guarantee privacy.”

NetMarket was purchased by CUC International and Dan like most new college graduates started looking for a job. I was working at a company called Teledesic that managed to convinced Dan to move to Seattle and become the 5^th employee. I have written about my Teledesic experience on this blog previously. The Internet was in its earliest days. Dan taught me about the Internet in much the same way Ken Jennings taught me about Apple clones. Once Dan brought me up to speed we started learning learned new things about the Internet together. Dan is now Executive Director of the Cloud Native Computing Foundation.

Neither of these two important relationships in my life involved an older person many people associate with a mentor relationship. Ken was my peer and Dan was significantly younger. Both were mentors for me. I would like to think I was a mentor for both of them too on other topics since the best mentoring relationships are reciprocal. I have had many mentors like Ken and Dan over my life and I expect that I will have any more. The key to starting these relationships is being ready to give to the other person or more likely giving of yourself first. Most mentoring relationships are mutually beneficial rather than top down.

How do I close this post? How about a quote from Sarah Tavel

“Find a great mentor. I was incredibly lucky to get hired by Jeremy Levine at Bessemer. Not only is Jeremy one of the best investors out there, he also has that rare quality that he invests in the people around him. Jeremy went out of his way to teach me the craft of venture – many times, it would have been easy for him to do something himself, but I wouldn’t have learned if he had. He asked me to do it, and then gave me feedback on what I’d done. But it’s important to note here that there was a symbiosis to the relationship: I didn’t just take from Jeremy, I gave too in the form of sourcing deals, giving him leverage on diligence, etc. Don’t expect a mentor to just give you value – you need to be able to tit for tat.”

End Notes

Videos on Jess Lee:

https://www.youtube.com/watch?v=EgPL7-WyC1o

https://www.youtube.com/watch?v=bRisoL4DDPc

https://www.youtube.com/watch?v=cwjZHFMdgLk

https://www.youtube.com/watch?v=AWePL14y6ZM

https://www.youtube.com/watch?v=KYFrKL7yT9Q

https://www.youtube.com/watch?v=A61oWJfnAuo

https://www.sequoiacap.com/people/jess-lee/

https://www.youtube.com/watch?v=KYFrKL7yT9Q

Reading about Jess Lee:

https://www.fastcompany.com/3053789/this-ceo-actually-encourages-her-employees-to-go-out-and-start-their-own-c