Sequoia Capital’s Greg McAdoo on Consumer Web and Cleantech Trends, Boston Vs. New York, and Recruiting at MIT

9/27/11Follow @gthuang

Is there anything worse than a Silicon Valley VC coming to Boston to poach talent from the startup ecosystem?

OK, that’s not really what Greg McAdoo is about. The Sequoia Capital partner was in town last weekend, in part for the Startup Bootcamp event at MIT (and related meetups), which featured talks by a number of founders backed by Sequoia, including Drew Houston of Dropbox (an MIT alum), Paul English from Kayak, and Nathan Blecharczyk of Airbnb.

McAdoo is a busy guy, serving on the boards of Airbnb, Bump Technologies, Clustrix, Greplin, Loopt, Achates Power, and other firms. He has been with Menlo Park, CA-based Sequoia since 2000 and is involved with the Y Combinator seed-stage startup program. He was also involved with Sequoia’s investment in Isilon Systems, now part of EMC, the whole story of which we know well.

We met for coffee on Saturday, and I got a download of McAdoo’s thoughts about the startup ecosystem and what he was hearing from local entrepreneurs—ideas on everything from smartphone security for enterprise to the prospects of nuclear fusion for energy production. I also took notes on his advice to entrepreneurs (which I found particularly insightful), and some important trends in consumer-tech and cleantech startups in Boston, New York, San Francisco, and beyond.

While Sequoia isn’t about to open an East Coast office, McAdoo says, there is certainly enough going on—think raw talent, ambitious entrepreneurs, and a few company investments—to draw its partners out here regularly.

Here are some highlights from our chat:

Xconomy: People talk about the consumer tech ecosystem, or lack thereof, in Boston and other cities vs. Silicon Valley. But you’re telling me there’s a bigger trend going on than whether or not we have enough role models here.

Greg McAdoo: There are a host of applications that appeal to folks that live in dense urban centers. The big shift is towards a startup community in urban centers. That, by the way, affects the San Francisco Bay Area every bit as much as the New York metropolitan area or the Chicago area. Whereas the suburbs of the Bay Area have a very well established startup community, I think everybody’s on equal footing to some degree in that major urban centers don’t really have that startup community. They used to many years ago.

If you wanted to get a consumer Internet startup off the ground in 1995 or ’96, you needed to have fabulous product sensibilities and a wonderful front end engineering and design team. But if you were building anything at scale you also had to have some hardcore technologists in the back end and be able to rack and stack servers. Fast forward to 2011, and much of that back end expertise is provided by service providers—cloud guys like Rackspace or Amazon. Also some of the hardcore back-end technology is open source software now. So you don’t have to worry about being in SoHo in New York and trying to get the caliber of engineer that you may or may not be able to get there. You can rent them, if you will, by buying services from the cloud.

X: So how does that bode for Boston’s startup future? And how does it compare with New York, say?

GM: To the extent that density matters, New York will have a bit of an unfair advantage. In theory, Boston will have perhaps easier access to talent. Not that there aren’t lots of smart technologists in New York, but you have demand for them from lots of big hirers, whereas in Boston you have some demand but not nearly the same. To the extent that Boston may or may not have been a center for consumer services, it has an opportunity to matriculate into that now that it probably didn’t have 10 years ago.

New York’s a special case—we’re in 10gen and a couple other companies there. The density of early-stage companies justifies spending a little more time there right now.

X: We’re starting to see a lot more VCs spending time in New York, as well as founders moving to New York from Boston.

GM: That’s a new thing. When I was here last year, we talked to founders. [Some] said, “Cambridge isn’t really where I want to put my startup.” I asked, where do you want to put it? Invariably it was somewhere in Silicon Valley. Maybe a few people said, “We’re looking at New York.” But now it’s anecdotally 50-50 [New York and Silicon Valley].

X: What’s driving that? And from a Boston-centric view, how do we keep our best startups here?

GM: Some of it is just PR. You’ve got some really great startups, and oh, by the way, over the last 20 years you’ve built some really great companies here. I think the folks at Akamai would argue they built a pretty good team. Part of it is an education process. The other part of it is, a lot of the ecosystem in the Valley is almost accidental just because of density, but not all of it. You do have stakeholders in that community who proactively cultivate advisors and the rest of the ecosystem to make it easier. I don’t like to use the word “incubator,” because I don’t know what that even means anymore, but this idea of providing very early mentorship to companies—having something like that in the Cambridge area and doing a little PR around the fact that, hey, there’s existence proof, you can do it here, could go a long way towards keeping people here.

X: Let’s talk about the connections between Sequoia Capital and MIT…

GM: There’s a long history of MIT grads being part of Sequoia portfolio companies. What’s interesting about it is that you’d think the preponderance of those companies would be the hard tech companies that come in narrow verticals. To be sure, there are some—a couple in stealth that I can’t talk about. But Dropbox, while it’s a very hardcore technology company, is more of a consumer services company. So clearly there’s something in the gene pool at MIT where there are consumer services sensibilities. Kayak, obviously, is a consumer company as well.

X: What is Sequoia doing proactively to reach MIT students and entrepreneurs? What else besides things like being part of Startup Bootcamp here?

GM: Well, this is an important part of what we do. One of my partners or I will come out at least once a year and we’ll do a meetup like we did last night. And we’ll get several dozen of the area entrepreneurs, or people who are curious about getting companies started, and we’ll answer questions. Nothing’s off-limits. The idea is twofold. At some level we’re introducing ourselves to a community that may not know as much about us, even in the Internet age. But even more importantly, it gives us an opportunity to speak very candidly about what it means to get a company off the ground and to give a 360-degree view of that from the perspective of guys who, many of us, have started and run companies—and some have been successful and some have not, so we can talk very candidly. It’s a lot of hard work and it doesn’t always work.

On a partner level, we have some MIT grads, and we have connections that are informal to various profs within MIT. On an institutional level, I don’t think we have anything formal, but I can’t think of any institution, even Stanford, where we have a [formal relationship]. We get requests to come out here and speak from time to time. Oftentimes we talk to professors about students of theirs that are thinking of starting companies that are looking for coaching. Usually that’s an informal conversation.

X: So what’s your advice for entrepreneurs? What are you looking for, and what are you telling them about how to stand out from all the early-stage noise right now?

GM: A couple of things. It’s kind of like what folks tell writers if they want to be great writers. You want to write about something you have some connection to. You want to start a company that you have some connection to. The tension is that you don’t want to be so much from the market you’re participating in that you’re tainted by the biases and limiting beliefs in that market. We love folks who found companies and have a deep intuitive understanding of the challenges and opportunities in the market but aren’t limited by the incumbent beliefs in that market.

Oftentimes we’ll back a founder who’s not directly from the market but they have a connection—to start a company and build a product that doesn’t come from the market but comes from the customer community. Isilon is a wonderful example of that. Paul [Mikesell] and Sujal [Patel] came from RealNetworks and they were buyers of storage. They knew very little about being a storage company, and it was to their credit because they built one like no other one we’ve seen in 20 years. That authenticity can sometimes be missing from founders.

The other thing is, there has to be alignment between the type of company you’re building and the type of market you’re targeting. It’s perfectly fine to build lifestyle businesses. But if you want to build a really big company and you’re focused on a market where not a lot of money changes hands, it’s very difficult to get the flywheel going that builds a truly large, enduring, profitable entity. Also understanding the dynamics before you come and talk to us.

The third area is we don’t expect you to have all the answers. By definition, it could be years before any of us have all those answers. We expect that you as a founder have done the due diligence to know that it’s worth your time. There’s usually one or two first-order questions that when put ourselves in the founder’s shoes, we say, we would have asked that question. As a founder, you want to have those questions answered.

A broad example is a misalignment between, “I want to build a big, long-enduring company,” and focusing on a market, if it’s a consumer business, where only a small portion of the population could really participate. Or if it’s an enterprise market, we’ll talk to folks who are solving very meaningful enterprise problems, and they’ll have even talked to one or two very, very large companies, and we’ll dig into it and find out that out of the Global 2000, only the top 20 care about this. We don’t want to be in the position of identifying those sorts of issues. What it tells us is the founder has not answered his or her own questions terribly well.

X: Switching gears, can you talk about what seems like a mass exodus of venture capitalists from cleantech and alternative energy investing?

GM: A lot of people want to talk about cyclical reasons why cleantech is less attractive than it was two or three years ago. To be certain, there are some cyclical things that are different now, but I sit on the board of a cleantech company [Achates Power]. They make an engine that is considerably more efficient than traditional engines. And there’s more demand than there was three years ago.

What’s happened is the realization that it’s a complex ecosystem that’s almost defined by legacy relationships. Very different from a networking business or other businesses where venture has been successful in building companies. So I think the slowdown in investing has less to do with cycles. It usually takes a venture business about three or four years to figure out whether or not broadly what they’re doing is working. And we’re about three or four years into a broad push into cleantech. Folks are saying, it’s not as easy to get the first dollar of revenue into these companies; raising money is not as easy as we thought; they tend to be more capital intensive; there are different team building challenges here. There’s a little bit of a sobering of the market.

X: What are the lessons learned from this?

GM: There were a lot of mistakes made in the investment community. Venture has never been a great source of funds for pure manufacturing businesses where the output is a commodity. The definition of a commodity is you differentiate on price. A lot of the cleantech companies, at the end of the day, they produce fuel, silicon-based [solar cells], and then what do they run afoul of? Major shifts in the cost infrastructure, whether it’s access to very low-cost silicon, or in the case of liquid fuels, artificial movements in the oil price that create short-term periods where petroleum products appear cheaper than they really are.

We’ve tended to stay away from those categories and focus on the equivalent of the router. Something that leverages a lot of IP and the equivalent of software, and is more of a lever, an enabler in the ecosystem. It’ll still take a while, but we see a potential to build some pretty big and interesting companies, but most importantly, big gross margins. Which is something you wouldn’t have said about most cleantech investments over the last three or four years.

X: So how does it play out from here? You’re still optimistic, it seems.

GM: One thing I want to emphasize is that we don’t have more oil and energy resources today than we did three or four years ago. This is my value-added comment for the day. We don’t have fewer consumers globally looking for those resources. If we had a challenge three or four years ago, we have a bigger challenge today. And if it was hard for the traditional incumbent companies to address those challenges, it’s no easier today. The opportunity to leverage venture into that community was greatly overstated three or four years ago. But it existed then and it exists to a greater degree today. At some point, the decline will catch up with the secular trend, and we’ll have some reasonable balance in the cleantech venture business. It’s not going to go away.

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com. Follow @gthuang

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