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The Knowledge Project
How to Win by Being Right and Contrarian: Lessons from Zappos to DoorDash
02:16:14
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- [00:00]
Alfred Lin
One of the things that we talk about at Sequoia is you can't just be better, you have to be different too. Whether you want to be conventional or contrarian, you have to be right. If you're right and conventional, it's probably a less interesting solution. But if you're right and contrarian, you probably won't be able to make a lot more money because nobody's going after that opportunity. I often find that it's interesting. There are people who just want to be contrarian. But if you're contrarian wrong, that's not a great situation. I try to put things in these two by two matrices of right and wrong and conventional and contrarian.
- [00:45]
Shane Parrish
Welcome to the Knowledge Project. I'm your host Shane Parish. In a world where knowledge is power, this podcast is your toolkit for mastering the best what other people have already figured out. Today's episode will transform how you think about building and scaling transformative companies. My guest is Alfred Lind, one of Silicon Valley's most successful operators, turned investors after meeting Tony Haich at Stanford over a pizza arbitrage scheme. Alford went on to help build and sell Link Exchange to Microsoft, then scaled Zappos from startup to its $1.2 billion acquisition by Amazon as the COO and CFO. Now he's one of tech's most influential people. Like a lot of outliers, Lyn struggled in school, preferring to hack solutions together than follow instructions. Sound familiar? That changed with one of his teachers who made him realize the importance of enduring impact over short term gains. Whether you're building a company, scaling operations, or making complex strategic decisions, Alpher breaks down the frameworks and mental models that have guided him through multi billion dollar outcomes. We explore everything from his unique approach to company culture and hiring that help make Zappos legendary, to how he evaluates opportunities at Sequoia to the crucible moments that shaped his decision making philosophy. This conversation goes deep into specific practices around scaling, competing with giants and navigating technological disruptions, while revealing the deeper principles that have guided him through multiple successful chapters in tech. His insights on building and during Impact over short term gains are more relevant than ever. As we enter the AI era and of course we talk about AI, it's time to listen and learn foreign There are too many podcasts and not enough time. What if you could skip the noise and get just the insightful moments, even from shows you didn't know existed? That's what Overlap does. Overlap is an AI driven podcast app that uses large language models to curate The Best moments from Episodes Imagine having a smart assistant who reads through every transcript, finds just the best parts, and serves them up based on whatever topic you're interested in. I use overlap every day to research, guess, explore, and learn. Give it a try and start discovering the best moments from the best podcasts. Go to joinoverlab.com that's joinoverlap.com you've had a remarkable journey from entrepreneur to investor, and I want to know more about this story, but I want to start with some of your early life experiences that changed you and impacted you in.
- [03:31]
Alfred Lin
The future, I guess. I was born in Taiwan to two parents who were both commercial bankers at an early age, from what they tell me, I was always a little. I saw the world a little differently. I did things that a little different. The story that they like to tell about me being different was when I was about two years old, there's a new dresser that was delivered through our apartment in. In Taiwan. And I figured out a way to get to the top by pulling out the first drawer, crawling into it, then pulling out the second drawer, pulling it, crawling into that, and then getting all the way to the top. And when I got up there, I thought I could fly, so I jumped off. And so they left telling that story because they rushed me to the hospital and they were very concerned whether there was any permanent damage and things like that. And my mom kept bringing me back to the hospital again and again. And the doctor said, don't worry, I think he's fine. I think he's fine. And eventually he said, well, is there going to be any problem with, you know, his development? He's like, well, he's either going to be a genius or he's going to be an idiot. He's one or the other. I mean, so that's how my parents would describe me. High variance and high beta. And throughout school and throughout life, I was very much like that. I like to hack things and not do the work. Until one day, and this was in, you know, in elementary school, I just tried to not do the work and hack my way through things and got suspended a few times, one of which was just coming up with a creative idea of taking chairs from the second floor to the first floor. I went down a slide instead of following the teacher's directions, I got suspended for that. And so I didn't ever really like school all that much because it was so rigid until I used to hack my way through things. And one of the teachers that I had, Mrs. Einstein, had this way of teaching where she would put up a problem. She would then have us try to solve that problem or do the assignment and try to understand why she put the reading up there. And I would always bet with her, if I knew the answer or if I knew the conclusion of the lesson, then I wouldn't have to do the homework. She let me get away with that once or twice. And then she said to me once, you're very smart. I've seen a lot of people waste their talents. So do you want to start first or do you want to finish first? And I think I retorted back, saying, well, I'd like to start first and finish first with the least amount of work possible. And then she said to me, that's a great answer for a sixth grader, but what happens in life when there's no finish line? What are you going to do then? And that sort of put me back. And I didn't quite understand it until maybe now, that this whole concept of having an infinite game and thinking through not some thing, some finish line, some goal, but just think about what you want your enduring impact to be and what you want to do, and what do you want to accomplish. And when the world doesn't give you a finish line, we all have the same 24 hours in a day. What do you want to decide to accomplish in that 24 hours? We have an unknown number of years on this planet. What do you want to get accomplished? That sort of shaped the way I sort of started thinking about the world.
- [07:00]
Shane Parrish
Did it hit you then at the time, or was it something you reflected on later?
- [07:04]
Alfred Lin
I think it hit me then, but I don't think I understood it then. And so then that led to a number of explorations on what I did want to accomplish. Why was it important to think about this concept of, like, infinite games? How do you win an infinite game when there are no set rules? You're making the rules for yourself in an infinite game, and the rules change. You get to change some of the rules, the world changes some of the rules. How do you navigate that? And then you quickly realize it's not about winning. In a finite game, chess, there's a winner, there's a loser. In an infinite game, there are a lot of different people in the world. They play the game differently. And in some ways, they're all trying to get on with the world and trying to do the best they can. But some people are more successful than others. And the reason they're more successful, I think, is because they really know what their. Their values are. And they really know what impact they want to have on the world.
- [08:14]
Shane Parrish
What are your values?
- [08:17]
Alfred Lin
Over the years I, I've thought through and this has changed over time, but I think the, the values for me are when you meant when you want to accomplish something. It's about the inputs, it's about the process by which you go about getting the outputs. I think it's very, very important to have that. And I value that clarity of input equal eventually leads to output and focus on the inputs. I value consistent compounding and just getting every single, getting up every single day and just making small improvements every single day and compounding that. I value honesty and truth and just being very direct with people. I don't try to sugarcoat anything. I value, I value people for who they are. My father, I learned this from my father where he, he told me once because I was like, oh, I'm just so much smarter than everybody else because he's a little cocky little kid. And he said, well, actually you can learn anything from, you can learn many things from every single person on this planet. I think I was probably six or seven at the time. And he was, he'd show me all the different people that he learned from and that the collection of these lessons from many, many different people is what you become. And that was a pretty important lesson. So I value people for who they are and trying to learn as much as I can from each individual person. I value family and friends. Pretty important to me. You talked a little bit about work life and work life balance. As you said, for many of us it's work life integration. And if you don't have some grounding with people who see you for who you are, call out when you're not being a good person or you're not doing the things that you said you were going to do. What is there in life besides that?
- [10:36]
Shane Parrish
How do you want somebody to call you out in those situations or how do you call out other people?
- [10:40]
Alfred Lin
The way I do it is try to be fact based and just give examples specifically of what has been working and what has not been working. And that tends to work pretty well. And there are times when Rebecca, my wife, would say, hey, this is not working for us, so what do you want to do about it? You can try to keep going the same way down the certain path or we can try to change it. If we don't like something, we just change it. And it's just much easier to have those kinds of conversations. My son a few days ago was being quite negative about his school and you know, he's start, he's 13, he's going to be 14 this year. He's starting to be like me when I was younger and think that he's smarter than the whole rest of the world and said, hey Atticus, do you want to be, do you want to have a negative attitude? Because you'll spin into this negative spiral. And by the way, if you have a negative attitude, the world just looks worse. When you have a positive attitude, the world just looks better. And we played this, let's use yes and for a bunch of things and let's create options and then you're going through the no but situation and it doesn't work. So let's try to just change your attitude about some of these things. And I thought that was quite an interesting conversation where just by simply changing the framework, he became much more positive.
- [12:14]
Shane Parrish
Hey, I'm Ryan Reynolds.
- [12:16]
Alfred Lin
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- [12:41]
Shane Parrish
Customers on first three month plan only.
- [12:42]
Alfred Lin
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- [13:15]
Shane Parrish
When you talk about inputs versus outputs, what inputs do you think about in life?
- [13:22]
Alfred Lin
Well, I think the inputs I think about are, you know, it depends on what I'm trying to get accomplished. But if the inputs are just thinking about hard work, how do I get up every day? Do I want to stay healthy? Do I get up every single day and work out? I hear that you work out every single day because instead of trying to figure out which days you're going to work out, it's always negotiation with which days. And some days you don't feel like exercising. You just work out every day. I have the same Philosophy, you just get up every single day and do the things that are important. So the inputs I have is I get up every morning, I work out, I look through, I read through my email, and I try to think about what's the most important thing that I have to get right today. What's the most. And think about first order issues. What is the first order issue that I have to solve? What is the first order issue of a company that needs to get fixed? What is the thing that I need to do to influence an outcome for a founder? And that's very, very clarifying. Often we can create a very, very long to do list and then you got to pop up a level and just look at the to do list of what's the most important things I have to get accomplished. Because if you just list all the TO dos, you probably will not be able to get to all of them. And the most important thing might be the last one you list. And so you can't just go down that list and do them one by one. Often it's by popping up a level where you sort of look at the whole list and it's like, okay, well, most of this is not important.
- [14:58]
Shane Parrish
Is that what you mean by first order issue? I think you mean something a little more nuanced.
- [15:02]
Alfred Lin
Some people talk about the most important thing, and I think I think about first order. If I get this problem, I have a problem on my hands. If I get to the first order issue and get to the root cause of that, usually that helps solve that problem. And there are other issues that are not first order. And that concept is quite important. We also sort of navigate that into other situations where, where they are crucible. So as an example, like you have, you have situations where the website's not working fast enough. At Zappos, we had a situation where the website's not fast enough. Is the first order issue that we have too many pictures? Well, we want the pictures. We have lots of photos. Why show those photos? Is the first order issue that we need to trim the number of search results while customers want longer search results. It's like, no, it's none of that. We need to figure out how to make the website go faster. And so we start caching the search results, we start caching things. And so you start developing the technologies that solve the speed issue. But the first sort of issue is that we need to solve this with technology, not with a bunch of either or solutions. That's an example that I learned a long time ago. Another situation is the distribution at Zappos was not flowing well, and we couldn't figure out which process was broken. Was it the picking process? Was the ordering process broken? What was broken about it? And we went and just looked through the flow, and the flow was broken. And so there was too many handoffs across all of these different discrete processes. And so we had to sort of pop up a level and figure out what the flow of from when a customer orders something, when it gets through the distribution center, how it's going to be picked, packed, and packaged and shipped. And when you look at that from a flow perspective, you start thinking about new solutions that allow there to be much better flow throughout the distribution. Then to batch things for picking, batch things for packing, batch things for shipping.
- [17:35]
Shane Parrish
That's what you mean by first order. I want to get into more of your experience, not only at Zappos, but being on the board of some of the companies that everybody has heard of today are being involved. But before we get there, I want to come back to the school for a second. Are there any other experiences that you had during school with teachers that might.
- [17:54]
Alfred Lin
Have impacted you earlier on in junior high school, I was suspended from the computer lab because I built. This was very old. So there are Radio Shack TRS 80s, so we call them Trash 80s today. And there was computer lab. You had to rent time in our computer lab to use the computer. And I built this game. And the central server at the time was literally a floppy drive where all of us saved our programs there. And one day, a bunch of the students in the computer lab all found the game that I programmed and then started playing with it. The teacher and the principal just happened to walk in and saw that we're all playing this game. And I was told that computer lab is valuable time and you should be doing something much more productive than. Than producing a game. So I was no longer allowed to work in the computer lab. And the computer lab teacher was Mrs. Potosa, and she also ran the math team. And she said, well, I'm sorry the principal wants you out of the computer lab, but you should join the math team. And I joined the math team there. And one of the things I was very good at was math. And she told me that if you want to be a leader and you want the team to win, it's not good enough for me to just solve the problems, figure out how to get the rest of the team to perform. And so I started teaching the rest of the math team some of the reasons why I was able to solve some of these problems more quickly than they were. They were very talented, but I had figured out tricks that they had not figured out, and they had taught me tricks that I had not figured out. So we got better and better by riffing off each other. And so I learned the value of teamwork by just being thrown into a situation like that.
- [19:48]
Shane Parrish
You started a company before you joined Zappos, what was that?
- [19:51]
Alfred Lin
I started a bunch of things. I started a lemonade stand when I was younger. Those were not interesting. I started a lawn mowing service in junior high school. I did it myself and realized it was not fun. It was too hot in New York City. So I got the contracts and then asked some of my friends from school if they would help me do the work at a few odd jobs here and there. And it was just never as fulfilling as working at a company from the ground up. When Tony Hsieh left Oracle to start this company that was originally called Internet Marketing Solutions because they were building websites, he asked me to join that company. I said no. Then they found out that they couldn't get anybody to go visit these websites. So he connected all of them and that became Link Exchange. And I joined that company soon after. Sequoia invested in that company, and it was a banner advertising exchange that was one of the largest banner advertising exchanges in 1998, 19. 1998, 99, we sold that to Microsoft for $265 million. And that was quite the experience.
- [21:01]
Shane Parrish
Did you know at the time we were sort of in a bubble or how did you think about it Back in the late 90s, I mean, we had a business.
- [21:09]
Alfred Lin
We had $15 million in revenue. You can kind of tell that we were in a bubble when someone would be willing to buy a company that had $15 million in revenue for $265 million. But also it was the third largest acquisition at the time. So I think when you're in it, you don't realize you're in a bubble, but popping up, the numbers don't make sense. So that's why I think it's valuable to have people who are slightly outside of where you work to keep you accountable. It's like, hey, how does this work? Just by simply asking questions, you get into a situation where like, wait, I can't explain that question. I can't answer that question succinctly. I can't explain it. Maybe that person's question has more insight than I would have expected.
- [21:59]
Shane Parrish
What are some of the lessons you learned from Link Exchange?
- [22:02]
Alfred Lin
Boy, that was so many. There are many, many Lessons because it was the first time we're doing anything that was at scale. And you hear this all the time, that you should hire slowly and make sure you really, really understand who you're hiring for. And often when someone's not working out, it's probably time to let them go. And we always give people too long. And I think the company's velocity didn't, couldn't go any faster because we didn't hire as well as we could have. We didn't let people go when they weren't working out. And those are very, very important things to get right. I often sort of think about the velocity of a company. Velocity. I measure that in two ways. You use the word velocity, velocity as opposed to speed, because speed is just how fast you're going. But velocity also has direction. And think the combination of the two is quite important. But the whole speed of a company, generally it doesn't get any faster unless you're pushing. And the best companies, they keep pushing and otherwise you're just going to go slower and slower and slower. You know, I think building a real business is really important. Many of the companies that were founded in 1998, 99, 2000, they were not real businesses. They had lots of eyeballs, they had lots of users, but that's not really enough. And at Sequoia, we often talk about the fact that we own shares in a company. We don't own shares in the founder, we don't own shares in the product, we don't own shares in their go to market strategy. We own shares in a company and that company needs to have a business one day. My partner, Pat Grady, loves to say that free cash flow equals freedom because eventually it a real business generates real free cash flow.
- [24:05]
Shane Parrish
And the freedom being that, the freedom.
- [24:07]
Alfred Lin
That allows you to not have to raise money. The freedom to allow you to invest in new areas. The freedom to continue to grow because you can invest in growth and invest in new novel technologies and new product lines. The freedom to not worry about the quarterly sort of pace of having to do more and more sales. You just, you, you generate free cash flow and it just generates a lot of freedom.
- [24:33]
Shane Parrish
Let's go back to the push pull thing. You know, you said companies don't generally increase velocity without force. How do you think about the difference between adding force or removing obstacles?
- [24:47]
Alfred Lin
That's a very, that's very, very insightful of you. I think many times applying force is what leaders try to do, which is to apply a forcing function and make you make a choice. And often I think removing obstacles are just as important as applying the pressure to keep going on and on and on. But often when you apply force, you realize where the obstacles are because you butt against that obstacle. And then you realize, okay, I keep butting against this. Maybe I have to figure out a way around it. And my job as a board member is to help you identify obstacles and help you remove it. But sometimes you just need to be pushed against it.
- [25:38]
Shane Parrish
Is there an example that comes to mind when you say that, where you push and it helped you identify an obstacle?
- [25:44]
Alfred Lin
Maybe. In the early days of Airbnb, I think people forget it was much more of a listing service, and it was less of a market marketplace. And if you sort of take the definition of a marketplace, you have to complete the transaction, and you just not only have to complete the transaction, you have to remove as much friction as possible. And so Airbnb in the early days had a calendar, held the money, paid out the money, but there was this big friction. Big, big friction. And it was because there was not enough trust between the host and the guest. And so the early days of the removing of that friction was to get connected through Facebook Connect so you can check someone out, check out their Facebook pages and who they are, and to see if this is an authentic person. But even that checking that out took 24, 48, 72 hours. That's just too long. And you just kept pushing. This is not going to work long term because there's only so many people that can book, travel and wait 24 to 72 hours before they know that they can go there. And so what started out, many great companies start out as a fringe sort of activity, and you have to figure out how to make it more mainstream. Often that is about removing obstacles and removing friction. But you butt against this, and you're like, what's the solution here? And you keep applying. For us, this is going to limit our growth if we don't solve this. And eventually, Brian and the team and the product team figured out that we needed instant book. We needed to figure out how to instantly book people. Well, you have a whole set of hosts now that are used to not accepting guests just because they booked them. So how are you going to remove that obstacle? Well, you start with new host. It's like, let me show you that Airbnb can be trusted. We're going to, as new hosts, we're going to send you some customers, and you should just book them automatically. And eventually, more and more of the hosts realize that instant Book is just the Way to go. And that's an example where you just have to be pushed against that for a bit of time to find the.
- [28:07]
Shane Parrish
Solution was doordash, sort of fringe too, and went mainstream. Didn't they start in like the suburbs or something?
- [28:13]
Alfred Lin
Doordash started more fringe than even the suburbs. It started on a college campus. And the reason we pass on the seed round at Sequoia is we're concerned that the Fritz this is like just something that college students did with their parents money. And then they started out focusing on Stanford and then Palo Alto and they went to other suburbs. And it turned out that that was a very smart thing to do because everybody was going after the cities. And one of the things that we talk about at Sequoia is you can't just be better, you have to be different too. And if it's easy to say and hard to implement, because when everybody is chasing after the cities because conventional wisdom tells you that that's the right thing to do, it's very, very hard to do something slightly, to do something slightly different. But if you just hear Tony and the team talk about their business, you realize that they had way more than just, oh, I'm going and doing something contrarian. They actually had real reasons why the suburbs were actually a better place to start. The value for someone who lives in the suburbs and have to drive 20 minutes to go get their food is higher than someone that can go from their apartment, go downstairs and walk a few blocks and get the food and bring it back home. So that was like pretty interesting. The other one was, well, is there enough density around the suburbs? And it turns out, yes, there is density. You just might not think about it. And they had examples where in Palo Alto, there was University Avenue and there was California street and both of those places, that's where all the restaurants were. And so there's density in where you can go to those restaurants and you can radiate out from there. So it was not as random as any restaurant can be anywhere and any home can be anywhere. And it turned out when you go look and look at the data, small towns all have this. There's the reason why small towns, there's a main street where everything happens. And so then you start realizing that the density problem is not as complicated as you might think. And they won because they were able to take the profits of the suburbs to go into the cities. I often think about that. As you know, there are people who think of the world and they just follow conventional wisdom. And there are people who want to be contrarian. Well, in either case, whether you want to be a conventional or contrarian, you have to be right. If you're right and conventional, it's probably a less interesting solution. But if you're right and contrarian, you probably won't be able to make a lot more money because nobody's going after that opportunity. I often find that it's interesting. There are people who just want to be contrarian. But if you're contrarian, wrong, that's not a great situation. I try to put things in these two by two matrices of right and wrong and conventional and contrarian.
- [31:32]
Shane Parrish
You know, the term I use for that is advantageous divergence.
- [31:36]
Alfred Lin
Advantageous divergence. Tell me more about that. Well, that's it.
- [31:39]
Shane Parrish
It's exactly what you just said. Right. It's not enough to be contrarian, you have to be right. And so you have to diverg from the crowd, but you also have to be correct. Yeah, it sounded like it's kind of the Walmart strategy. Right. Where it's like we're going to go in this area with which has less competition. We're going to get really good at what we do and then we're going to use the, the money or profits or. And we're going to funnel into maybe the more desirable area. Like when Walmart started competing with Sears, they didn't go into cities and Kmart, you know, they went into the suburbs where nobody was, where the contrast I think between their ability and what they were competing against was much higher.
- [32:18]
Alfred Lin
Yeah, and I think that that is, that's what all startups should focus on. You don't want to compete with someone bigger than you head on because they have more money, they have more people, they have more history, wherever they have more abilities. You just want to compete with them where they're not competing.
- [32:38]
Shane Parrish
Double click on that for me.
- [32:39]
Alfred Lin
Well, your example about Walmart, where the example about doordash focused on the suburbs, there's an example about doordash. Where do you want to win McDonald's or do you want to win the top 100 merchants? And it's not just about one or two. Yes, McDonald's is one of the largest merchants, but winning a whole suite of them is actually more valuable. Google the long tail keywords. More valuable than you know, the head. And most of advertising was broadcast advertising. You start from the top and this is a bunch of like long tail keywords. And I think a lot of great companies, whether it's intentional or not, try to do things very differently than what exists Today, Apple, they weren't the first to many things. They didn't make the first personal computer, they just made the user. Their focus was always about the user experience. Whether it was the computer, the phone, the watch. Everything they do is about having a great user experience. That was not the conventional thing that people thought about. It was about in the early days of the PC. It was about processing speed and which processor was the fastest, et cetera, et cetera. When the phone came out, it was about the keyboard. We don't use the keyboard anymore.
- [34:07]
Shane Parrish
The Apple thing is fascinating. So is the BlackBerry thing because they really hung on to that keyboard thing. But I remember when they came out with their new. I forget what the device was called. It was like their Apple Killer. And I used it as a demo and I couldn't figure out how to get on the Internet. And I was like, they're done.
- [34:22]
Alfred Lin
So user experience is so important.
- [34:24]
Shane Parrish
It took a demo to figure out how to use the Internet. Once you figured it out, it was great. But I was like, oh man, this is so not intuitive. Yeah, let's go back to hiring and firing a little bit. Was there any moments sort of at Zappos or earlier with Link Exchange where you thought you had the wrong fit but it turned around?
- [34:47]
Alfred Lin
That's a great way of asking that question. I would say probably not. In the early days of Link Exchange we hired and back to like conventional and, and you know, we hired the conventional right person. We were looking for a marketing person. We were looking for a marketing person that marketed to small and medium sized businesses. They understood the Internet, they fit all the specs that you would have in a job description but they didn't fit the way we operated, they didn't fit the way we value what we valued. And it's easy to sort of limit that down to like they're just a professional marketer and they're mercenary, not a missionary. That's how Tony would tell the story. But at the end of the day, they didn't value what we were trying to build. They didn't have the same values that we had. And which is why when Zappos started, Tony spent a lot of time defining the values. This is Tony Hsieh of Lake Xtrane and Zappos. The values of the company. And it's something that I talked to founders about. If, if you don't have the same mission, you don't have the same values, you don't have the same operating understanding of the company, it's very, very hard to work together and then you know, you're asking someone to change when they fundamentally don't fit to, to the company and how the company works. That is generally the, the issue, then the other issue. On the flip side, on the functional side, when your company is growing really, really fast and you see someone who is growing but they're not growing as fast as the company, every single day, the delta between how far the company is moving or how fast the company is moving versus how fast or how far the person is moving, the delta gets bigger and bigger and bigger, so it gets very hard to turn around. And so we have this concept that a lot of people have at Sequoia. We hire for slope, not intercept. So experience obviously matters, but if you just hire for the experience and their slope is not fast, that's going to become a problem at some point. And so we really, really ask founders to think about what is the person's potential, what is their slope? And we'd much rather bet on someone with high slope and low intercept, because in startups, in companies that are new, the experience is helpful, but you're doing something different and new and you need to reinvent. Bring a playbook over from somewhere else is helpful up to a degree, but usually many of the problems that you need to solve are just different. And that's why you hear a lot of founders talk about first principles, thinking, and don't reason by analogy, et cetera, because you do have to solve the problem a different way.
- [38:01]
Shane Parrish
What's the difference between slope and potential?
- [38:06]
Alfred Lin
Well, slope is just pretty much the same thing, slope and potential, but having a high, high rate of learning, high rate of sort of being able to move fast. And so someone has a lot of potential. They're over here, their potential is up here. That slope, when you draw that line, is pretty high.
- [38:24]
Shane Parrish
How do you gauge somebody's potential? It's like you might be able to do this job and you might be able to grow into it, but coming into it, it's like they're not going to check the boxes, they're going to look different.
- [38:34]
Alfred Lin
The future does not look like the past, but you have nothing else to go on but the past. And you can see whether someone move really, really quick. The previous situation where they promoted three times in the same year at a different company that was moving very, very quickly. Do they have a sense of urgency? You can test for some of these things, you can ask about these things, but yeah, you don't know whether they have the potential to grow into the next stage of the company until you put them in that position often. I think the challenge is the company is moving so fast and you're hiring someone that has done the job before and you know that they can do the job for the next year or two and that's maybe good enough. If you hire someone, you have to let them go in three months. That was a mis hire. There's almost no reason why that person was not going to be able to do the job for the for three months. They either were not a cultural fit, they didn't have the right skills. If they stick around for a year or two, it's usually because they've done the job before and they're picking up a bunch of low hanging fruit. But I look at Tony at Doordash. Many of the people who work for him have worked for him for a long period of time. He likes to grow people from within. He obviously hires from outside as well. But many of the people who've been around the company have been around for a long time. Amazon, many of the senior VPs that were around Bezos had been around the company for a long, long time. Now that Jassy's work, you know, they're now a CEO. He's trying to develop people also for a long period of time. If you, if you look at great companies, they're very, very good at developing talent both from within and hiring from outside.
- [40:17]
Shane Parrish
Is it a red flag if the turnover is too high then is it like a sign that people don't know how to hire? Right.
- [40:23]
Alfred Lin
I think it's a, it's a red flag and you look at it and you don't want to. So the issue with metrics is people start managing to the metrics. And so if you start telling them, hey, your turnover is really high, they start managing to the turnover number. And that's another thing you have to manage the turnover of regrettable. What is a regrettable turnover? Why? You're not able to retain your best people. And if you have unregrettable turnover, then why did you hire these people in the first place? And so if you break the problem down that way you get finer reads on what the issue is with the turnover.
- [41:04]
Shane Parrish
I really like thinking about it in terms of regrettable versus unregrettable turnover. A lot of people when they're hiring, they sort of, we need this job. I want to know somebody who's done it at the next level because that's where we're growing to. So they're trying to like anticipate where they're Growing. And one of the problems that I hear commonly is that people run into, well, that person might have done the 100 million to 300 million growth, but they had a different team than we have. They have a different system, different resources. How do you think about that when it comes to hiring?
- [41:36]
Alfred Lin
My observation is that when you try to hire someone that is from a company that is one chapter or two chapters ahead, they tend to work out better. And part of that is because they're only one or two chapters ahead of you. If you try to hire someone who you're over here and you're trying to hire someone that's 10 chapters ahead, that usually is a problem because you don't know whether they understand the problem a few chapters before. It's been too far away. On your particular point about the system, I do think that if you hire people who are 10 chapters ahead and they have a whole system in place, even though they took it from 100 to 300 in a product division inside of a large, large company, they probably had a lot of guardrails that allowed them to not make a bunch of mistakes. And so you have to dissect whether that operating system works the same way as your operating system. Most startups don't have an operating system. So the thing that you have to sort of assess is how well can this person operate when it's just more nebulous, it's just less clear are they going to put the operating system in place?
- [42:47]
Shane Parrish
Dive into this story behind Zappos from sort of the initial idea in the early days, just high level, 5 minute version to the exit with Amazon.
- [42:57]
Alfred Lin
Maybe from the start Zappos was this is this weird idea. I can't even believe we funded it because this was originally founded by Nick Swimmer. He had called and left a message on our answering machine. This is how old and back we were going in 1999 and Tony and I were running a seed fund, a venture fund, an incubator called Venture Frogs. And Nick said, hey, I have this crazy idea. I'm a webmaster at Autobytel, which is an auto website. I'm the webmaster there. I think it'd be great to just start something for shoes because I went to one store, I couldn't find the right size, went to another store, couldn't find the right color. Once I got a store, they didn't even have the style that I'm looking at. And he had already searched the web and found a whole bunch of websites where people were basically trying to sell specific shoes on The Internet. And we thought it was the craziest idea. And we almost, I think one of us had our finger on the delete button to that voicemail. And then he said that you might think this is crazy, but mail order is already 5% of sales in the US for shoes. I'm like, okay, 5%, still small, but the shoe industry is 40 billion, 5% is 2 billion. And it just wasn't rocket science to understand that shoe that the Internet was going to be bigger than mail order. And so we took a meeting, we decided to make an investment and we, we funded the company $500,000 at a time. When we were at Venture Frogs, I had to then leave to go work at a company called Tell Me Networks. And Tony joined Zappos relatively early on as an advisor and then became co CEO and eventually CEO. But the most important thing back then was because it was an e commerce company. And we were going from 1999 to 2000, it was growing from 2000 to 2001. I was like, oh, we have a situation. And the day after 9 11, the company had 0 on sales. 0. He went from whatever it was, which was small, to zero. And that was the first crucible moment using the term because Sequoia uses terms crucible. And what we're going to do about that sort of shook the company. And we basically went back to basics and we wanted to build a company that was profitable. And so Tony ran the company at break even and continued to grow the company for a long period of time until Sequoia came in in 2004, 2005 to make the first investment. And so most of the company was financed from a small seed round. Tony invested $10 million of his own money, but most of it was financed through being very, very creative, figuring out how to get merchants that we, we ordered from to give us credit and to increase the credit line. We had eventually got a line of credit from Wells Fargo, but the company burned very little cash. And for a company that went from zero when we sold, the company had $1.6 billion in sales that really didn't have a lot of equity. Financing was pretty incredible. You hear about companies raising hundreds of millions of dollars to get to 1.6 billion dol in GMV or in sales. And here's a company that basically raised $10 million and it probably was under capitalized, but it really did highlight that you can build a company by having CAC be profitable on the first order, by being focused on customer service and not focused on marketing.
- [46:57]
Shane Parrish
Talk to me a little bit more about that. Because you didn't have a huge budget for marketing, you had to get, you know, within the first month. You basically had to pay back yourself for marketing. How, how do you think about that? Not only back then and then, what's different now in a world where there's a lot more money and, and maybe all the players aren't rational about how they're spending money to grow.
- [47:20]
Alfred Lin
Back then we thought that that was a, you know, we probably thought it was a curse that we couldn't raise more money because you probably would rather run the business a little bit looser so we can grow a little faster, et cetera. But being tight led us to find solutions that was again non obvious or divergent, to use your term. And the divergent idea we had was if we can only spend money that was profitable on the first order, we needed other ways to grow. And the focus was to become much better at customer service. We noticed that it was much easier to keep a customer and getting that customer to order more than it was to acquire a new customer. And then we just went down the line of what we can do for the customer. We tried to make the website load as quickly as possible. We tried to pick, pack and ship within four hours. The solution to pick back and ship in four hours was to solve a operations flow issue and not batch the the operations which I don't think anybody else figured out in E commerce back then besides Amazon. We decided to work very, very closely with UPS in particular and then FedEx and USPS to figure out how to get the shipping rates as low as possible. We started shipping so that it was five to seven days ground shipping to eventually overnight shipping so that the customer got it the next day. We figured out logistics, reverse logistics. So we're bringing the shoe to your home. We heard lots of reasons why people didn't want to order shoes on the Internet. We knew that before we invested and we knew that we needed to bring the store to your home, have you try it on, and then return the things that you did not, that didn't work for you, you did not want anymore. And by doing all those things, we provided much better customer service. When we, on any given day, the orders that we had, 80% of it was from repeat customers. And we grew the business some with marketing, but the majority by providing great customer service, having high repeat rates, having high LTV and having customers basically tell everybody else how great that business was, how well they were treated, et cetera, et cetera.
- [49:55]
Shane Parrish
I read somewhere and this was counterintuitive when I came across it. So correct me if I'm wrong that your best customers returned the most shoes.
- [50:03]
Alfred Lin
Yeah, that was a very contentious discussion because every this episode is brought to you by Atlassian. Atlassian makes the team collaboration software that powers enterprise businesses around the world, including over 80% of the Fortune 500. With Atlassian's AI powered software like Jira.
- [50:21]
Shane Parrish
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Alfred Lin
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Shane Parrish
Don't search match with Indeed.
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Alfred Lin
Use Indeed for scheduling, screening and messaging so you can connect with candidates faster. Listeners of this show will get a $75 sponsored job credit to get your jobs more visibility@ Indeed.com SBO terms and conditions apply. Every year the return rate would go slightly higher and then went slightly higher. Well, we kept growing. So one way to look at it is, well, it's not really hurting us. And then the other way is, well, the return rates are high and the most expensive process in the distribution center was, was managing the returns. You had the return shipping, you had to open up the boxes, you had to look at the product and figure out whether it, it's ready to go back on the shelf, it's damaged, I need to fix it, or it can no longer be sold again. Because if you put something that cannot be sold again on the website and make it available and that gets ordered, it's freaking going to come back and be returned again. We then did this analysis and this is the type of analysis I really enjoy doing. Like, all right, let's take our best customers and let's take our worst customers and look at their return rates. And it turned out that our best customers at the highest LTVs return the most. And I'm like, that is crazy. How is that possible? Well, it turns out because they understood how to use Zappos, they just ordered more. Yes, they returned more, but they kept more too, because they would be willing to try things. If you never return anything, that means the only thing you buy are the things that you're super comfortable with. You know, the size, you know the style. So we were trying to help people open up the aperture, try new things. So we did this analysis on the extremes and compared them and realized our best customers had the highest return rate. So then you say, well, the board doesn't like the fact that we have such expensive return policy and it's costing us a bunch of money. So then the solution is not to reduce the return policy and make it less liberal. You want to keep the return policy as liberal as you can, but make the cost of processing as low as possible. And so the first order issue there is exactly going back to first order issue. The first order issue is not the return rate. The first order issue is making the return process as cheap and efficient as possible.
- [53:18]
Shane Parrish
It's so counterintuitive. Right. When you think about it, because you actually like. No, we're okay with people returning shoes as long as they're buying more and then they're trying them on at home, which is exactly what we want and sending back what doesn't work.
- [53:30]
Alfred Lin
Yeah, I think we changed the whole industry and originally was just a competitive response. We had a liberal return policy in 30 days. Other people copied 30 days, then it was 90 days, other people copied 90 days, and then we made it 365 days. And not everybody can copy that. Some did, but by doing that, it would put a stake in the ground that we want people to try the Zappos experience and have a great experience.
- [53:57]
Shane Parrish
Why do you think it works for shoes but doesn't seem to get as much traction when it comes to clothing?
- [54:04]
Alfred Lin
No, I think it. It got a lot of traction for clothing. It was an understood problem by the time we got into clothing that you wanted. Wanted to have for high returns. You're going to have high returns, and therefore you need better processing for clothing. I think for clothing, for shoes and for a variety of soft goods, return rates are high because you need to try it on and try it out. I'd also point out that shoes, the difference in sizing really does matter. I mean, you wear a small or a medium, both could probably fit. And you may look more buff when you wear a small and it's loose fitting when it's a medium or whatever size you. You want to use. But for shoes, the difference between seven and seven and a half or 12 and 12 and a half is big difference.
- [54:55]
Shane Parrish
And did you guys do things and I don't. I was never a Zappos customer, so sorry, but like, did you do things where it's like, hey, last time you. You're ordering a 10.5 or 11. Last time you ordered a 10. We're just letting you know as an Effort to, like, reduce returns. Like, maybe you hit the wrong button.
- [55:13]
Alfred Lin
We. We let people know those things. We also let them know that this brand, you're used to buying this brand, like Asics running shoes and Nike, fits a little looser. So you might want to up the size. We had this measure of, like, does this fit true to size or does it fit a little looser or a little tighter?
- [55:32]
Shane Parrish
You guys also had, like, an incredibly unique culture. What went into the thinking behind that?
- [55:38]
Alfred Lin
The culture of Zappos was very special, and it was something that we wanted to preserve, partly because Tony Hsieh had this experience at LinkExchange where we didn't define the values of the company. We started hiring people that were conventionally right for the positions in the job. And one day he woke up and realized the company that he had founded and built was no longer the company he wanted to work at. And he wanted to make sure that the company that had this special culture, that was appos, kept the culture. In the early days, it was not very well defined. What is the culture of Zappos? Well, you know, that was more nebulous in the early days. And then the company grew and people asked, well, what is the culture? We don't have it written down. How do you know someone's a culture fit? Well, does Tony like them? Does Fred like them? Does Alfred like him? After the interview? And I. I don't like the term. The word like. Like could mean so many different things. It was just not well defined. And at some point, Tony decided to just ask the company, what do you think the values of Zappos are? What are your personal values and what do you not like about Zappos? And just parsing through that, we got a lot of responses. And in his book Delivering Happiness, he talks about the fact that we started with 38 different values that you. Yeah, these are all Zappos values, and combined them, shrunk them, and we ended up with 10 core values. The problem with 10 is that there are probably a handful of people that remember all 10. Most people remember the first one or two or three of them, and the first one was to deliver well through service. It was in some sense the most important core value. But we meant it in the way not just to deliver well through service to customers, but also to employees, to our partners, our business partners, and to investors.
- [57:48]
Shane Parrish
You had a different management system as well. Talk to me about, was it holistic management?
- [57:53]
Alfred Lin
Holacracy.
- [57:54]
Shane Parrish
Holacracy.
- [57:55]
Alfred Lin
Holacracy. Yeah. So the management philosophy was different Partly because we wanted to hire people that could just self run and self sustain. And so there was an element of allowing people to do what they love the most and pair them with other people who love other things and make it sort of homegrown. I think Tony's perception of his job was that he was to create. His idea of creating a operating system for the company was to basically build a greenhouse, was his analogy. And he's going to try to help every single person grow as tall and as strong as possible. And so he very much focused on allowing people to focus on their strengths and hire other people for their weaknesses to supplement them.
- [58:54]
Shane Parrish
Is there an ideal growth rate, do you think? Like, can you grow too fast?
- [58:58]
Alfred Lin
The answer depends. I don't. I think the easy. If you're growing so fast and the customer experience starts to degrade, you're hurting yourself. And so, yes, you can grow so fast that it's just a complete mess. You're losing customers because you're not servicing them correctly. And at Zappos, we were very mindful that whatever customer experience that we delivered, it was the best customer experience that we can deliver at that growth rate. And I think if you ask Tony Hsu at DoorDash or Brian Chesky at Airbnb, they would probably say the same thing. It's like, we want to grow as fast as possible with the constraint that we want to make sure that there's a great customer experience.
- [59:44]
Shane Parrish
And maintain the internal culture.
- [59:47]
Alfred Lin
Yeah, and maintaining the internal culture is one way of thinking about it. And you may have to grow the culture over time. You have a company, it's growing. Do you think the culture that was on day one is going to be the culture that's going to work, you know, five years, 10 years in?
- [60:06]
Shane Parrish
It's not the static thing.
- [60:07]
Alfred Lin
It's not a static thing. Cultures should not be static. Every year, you do a strategic plan and a financial plan. You figure out what your next year's revenue is going to be, your hiring plan, your marketing plan, you have all these plans. You should also have a plan for culture and how to grow that. I think the best companies think about that. Like, how does this. How does our company change? How do we grow up? How do we become one year older and better and faster at the same time?
- [60:38]
Shane Parrish
How, when you're having so much success scaling, like going from a million dollars in sales to a billion, do you not sort of get complacent? I think that because you were dominating the market at that point in time, you were the leader, clearly in that.
- [60:55]
Alfred Lin
Space, you're talking about Zappos or.
- [60:58]
Shane Parrish
Yeah, or in general?
- [60:59]
Alfred Lin
Either in general, I think in, in for every company. The, if you read Jim Collins's book why the Mighty Fall, or it's the first sign, is the hubris of much success. And we, you know, at Sequoia, we're just never complacent.
- [61:17]
Shane Parrish
But you actively work not to be complacent.
- [61:21]
Alfred Lin
We actively work not to be complacent at almost every single company to make sure that you're not complacent. Successful companies just think that way. At Sequoia, we talk about you're only as good as your next investment at Sequoia. At Zappos, we talked a lot about. About how easy it is to ruin a good reputation. You just want the next order if that's not good for a customer. You've built all this effort to build a good reputation with the customer. And one bad order on an important order like their wedding day, and you ruin that reputation. And so I think a lot of companies have different ways of thinking about that. And Brian Chesky thinks about what's the next thing? What's the transformation that we're going to create? What is the next thing for the customer experience that's going to be great. Tony Hsu thinks about the next product to power the local economies. What's the next set of people that we're going to help? And I think if you sort of go back in the history of any business, you notice that customers are just enormously impatient. They're enormously unsatisfied. Everything that becomes, that is new and novel becomes standard. And Bezos had this line about how customers are just always, always dissatisfied.
- [62:59]
Shane Parrish
I want to kind of go deeper on that. It's almost like there's a natural entropy to create more sediment inside an organization. Toby Luque, in our interview, used the word sentiment like, you start building up the bureaucracy and entropy being like, that's the natural result of growth and scale. And then you actually have to apply a lot of energy to make sure that it doesn't happen. What are the early signs that you.
- [63:23]
Alfred Lin
See that of sediment? Well, there are a lot of examples of this. The reason I always take a snapshot of when I, when I go into a company for the first time, just see how fast they're moving. And then I tell them, you pro, today is a great day. This, hopefully you will move faster than today. And I hold that as a bar. And if you don't have that mentality, it will start to slow Down. And so what was the sentiment like? The process becomes, instead of making fast, good, fast decisions, the thing that people value is having a good process that slows you down. To make sure you have the right decision, you have to make high velocity decisions at scale. And I look for that. Are we able to make high quality, fast decisions as quickly as possible, or do you let the process determine the decision?
- [64:32]
Shane Parrish
How do you judge a decision's quality?
- [64:35]
Alfred Lin
You can't necessarily at the moment in time, you can think about things at the moment in time as how reasoned, how reasoned, how deep have you thought about the problem? How much research have you done? And you can sort of at least say, well, you researched the problem, you understood it deeply, and you've picked a course. And hopefully that's the right decision. And in hindsight, you can always look back and look at whether those decisions are right or wrong. And I don't think enough companies look at that enough. Instead of projecting next year's revenue and next year's strategic plan, part of the strategic plan should be about looking backwards. What decisions did you get right? What decisions did you get wrong? Why do we need to course correct?
- [65:20]
Shane Parrish
You guys also had an element of, I think it was even specific back before it became popular, but getting 1% better. Talk to me a little bit about that and what it meant. Practically speaking, there are two things at.
- [65:33]
Alfred Lin
Zappos that I pushed very hard and popularized. One was the power of and because I found too many people trying to figure out ways to do either or. And it wasn't like, okay, we're going to ship product more quickly, but the website's going to be slower like those are. You got to do both. And if you think about the little things that we do at Zappos, it was about just compounding 1% every single day. And I used to write on the whiteboard one one plus 1% to the 365. Because if you take a dollar and compound it 1%, every single day, you get this ridiculous result, which is you get 37, $38. And so when I hear about making a leap forward, 1 to 38 is a big leap. And it's on the scale of figuring out what's a 10x idea. It's even bigger than a 10x idea. I hear founders talk all the time about I only want 10x ideas because those are the things that move the needle. And it turns out just simply compounding 1% every single day moves the needle even more than a 10x idea.
- [67:00]
Shane Parrish
Where do people tend to go Astray, Right. So you have a great core product and I'm just imagining you start building up a team, you start getting out of your focus. Where do companies go wrong?
- [67:12]
Alfred Lin
A number of places. If you just look at great companies, they compound at a very high rate for a long period of time in their core business. Google for a long period of time was Search. Amazon for a long period of time was E commerce. And there's a difference, I think there's a difference between Act 2 and category expansion. So in Amazon they went from books to music to electronics to a whole bunch of. They just went category by category. But it was the same real core business which is getting product to the distribution center, pick, pack and ship the products that you want and shipping it to you. And it could be books, it could be music, it could be electronics, it could be shoes, it could be tools, it could be a hammer. But that's one core business. And I think founders start their company because they have novel and compelling insights into the world and specifically for their company. And they like the new shiny penny. I'm not saying that you shouldn't focus on the new shiny penny that is adjacent to your business. I'm just saying that you shouldn't focus on new shiny penny that is like way out, away from your business. Eventually all Companies need an Act 2. AWS was an Act 2 that was very different than the E commerce business. But even the way that Amazon thought about their web services business is like, well, we're very good at building distribution centers. Yet originally the distribution center that we built was for physical things. And here we're building a distribution center for electronic things. For bits like even the way they sort of think about it was quite interesting. They didn't think this is a high margin business. They thought of it as like, okay, this will be a low margin business too. And we like low margin businesses.
- [69:10]
Shane Parrish
That was Bezos's famous quote, right?
- [69:12]
Alfred Lin
Like your margin, your margin is my opportunity.
- [69:15]
Shane Parrish
I like the idea of Act 2 for a lot of companies. Act 2 is the founder steps down, professional management sort of comes in. Talk to me the difference between as you see it, a founder led company and a professionally led company. And I use the word professionally loosely because founders are professionals, but I just want people to get the distinction in their head.
- [69:35]
Alfred Lin
Well, there's a lot, there's a lot being said about the difference between founder mode and manager mode. And I would go back to the. The question is, shouldn't it be and shouldn't you want, don't you want to Be both. I have a concept of fire and ice. The best company is above this huge fire. They have this entrepreneurial spirit and they run hot because the idea is so compelling and interesting. But they also have this icy side. It's just cold facts. It's management. It's about getting to the details. And the best companies have both. And it pains me to see that you have to choose one or the other because the best companies do have. They figure out how to make sure that both are in the company.
- [70:23]
Shane Parrish
What are the different strengths? I guess then maybe that's a better way to think of this question. Between founder mode and management mode, what are the weaknesses and strengths of each? How do they work symbiotically together?
- [70:34]
Alfred Lin
I would say that there are many different modes of a founder or a manager. The beginning days, you're a creator, you're finding zero to one, you're creating something that the world has not seen before. And the mode there is to be a creator. And instead of calling it a founder, you're creating something that the world has never seen. Once you create that, sometimes it gets into, you know, sort of operator mode. And found many founders are fine operating and making their creation better. It's about understanding the inputs and outputs. How do I sort of make this system? How do I make the system better? I create something, I need to sort of go to market with it. How do I systematically make the go to market happen? And you're trying to just operate the thing in a way that sort of scales the business. And many founders are very, very good at the scale. Then you get to a mode where you need to manage. You're trying to figure out resources, resource allocation. And it's like, should I invest a dollar in the core business or should I invest that dollar in a new project? And sort of having a framework on how to make management decisions like that, that's what a lot of companies at scale that the CEO needs to figure out. And then there's just a level of leadership around how do you lead the organization? And think about it from an organizational standpoint. So some of that is manager mode and some of that is founder mode. But let's just break it down to what it is and not talk about one contrast over the other.
- [72:22]
Shane Parrish
Well, I want to go back to something you said earlier about crucible moments. What are they and how do you identify them?
- [72:29]
Alfred Lin
Crucible moments is the term we use at Sequoia for things that are basically very important, type one decisions. And I've had to deal as an operator before Sequoia we didn't call them crucible moments, but I've gone through a fair share of crucible moments. You know, link exchange. Do we want to, do we want to sell the company to Microsoft at Tell Me Networks when we're burning $60 million a quarter? How do we get through that? And how do we pivot the company from a consumer business that wasn't working into an enterprise business? These are decisions that change the trajectory of a company. At Zappos, it was what do we do after 911 when sales went to zero? What do we do during the financial crisis when credit became very, very difficult and we were borrowing $60 million and we had $60 million debt? We did nothing wrong, but we needed to. But the banks didn't have the liquidity anymore. They were calling the loan. And how do you go through these things? At Airbnb, there have been a number of crucible moments as well, one of which started very early on that Brian Chesky talks about a lot, which was the PR crisis with a guest trashing a host. And that led to host guarantees. But there were many of those. There was a fight to win Europe and a competitor called Windu that copied the Airbnb website pixel by pixel. Or DoorDash's decision to go after suburbs and not the cities. They didn't give forgo the cities, but we're going to start with suburbs first. Jordan Ash's decision to focus on merchants and selection over speed. And you know, you can have a situation where you can increase speed of delivery by just having a smaller radius, which then if I only showed you the restaurants that are close to your home, you'll get them faster. But it doesn't give you the breadth of selection that you may want. And these decisions change the trajectory of the company and their choices that many of the times they're one way doors. Once you make this decision, you can't go back. And I think they're very, very important to get right. And so at Sequoia, we have a podcast about it, partly because we want to highlight how do founders and the management teams puzzle through these decisions? And another characteristic about crucible moments is every one of them doesn't look like the other. So you're presented with a new problem and you're trying to figure that out from first principles, how to solve that problem.
- [75:30]
Shane Parrish
That's the second or third time you brought up first principles, thinking, what does.
- [75:33]
Alfred Lin
That mean for me, it means start from a blank sheet of paper and you have a bunch of frameworks that you have that help you sort of triangulate the answer, throw those out. Maybe you need a new framework for this particular situation. You're the king of mental models. To me, they're frameworks. We love them because it instantly helps us think about the world and narrow down the options. Some situations you want to generate more options and more ideas. And in those particular situations, you don't want to narrow your thinking, you want to broaden your thinking.
- [76:07]
Shane Parrish
If we're on a board together and we get a problem, imagine and it comes up and how do you think through that in first principles thinking, like, how would you do that in that setting?
- [76:19]
Alfred Lin
I'll give you an example from Airbnb. When the pandemic hit, you can decide to do a variety of things and there's all these pressures. There's the investors who want you to raise enough capital so that you can go through and weather the storm. There are employees that want to know that they're going to be employed. There are hosts that want to know that even though guests can't travel that they have a non refundable cancellation policy. They're going to get the money. You have guests who want to figure out how to get their money back because they're not traveling. You have a business that went from a business that was growing 20, 30, 40% a year to a business that declines and you lose 80% of your revenue. There's all these pressures. It's a complete mess. And the solution that you had yesterday doesn't work for today because Airbnb before the pandemic was a lot of cross border travel. And today after the pandemic, there is no cross border travel. How do you think about this problem? Where do you start? It's a mess. Everybody is yelling at you from all these different angles. And Brian, just one of the most important things is to stay calm and look at the problem that we have at hand and figure out what the most important problems to solve, first, second and third. And he had principles that he had outlined. We used to have these emergency board meetings and it was just always discussing what's the emergency this week? This week, this week. And then he leveled up and decided to say, hey, we need principals to decide what we're going to do. And he decided that we have a once in a generation pandemic, one in a hundred years that's outside the building. There's nothing that he can do to fix the pandemic, but what he can do is to make sure that Airbnb survives for the next generation. And he had principles by which he wanted to make sure that when we get out of this, we're seen as someone who created Airbnb for the next generation and not something that wasn't going to survive this generation. Then he went to work and he had these great plans of like, we're going to reduce our burn by doing all the things in this order. We're going to cut marketing. Nobody's traveling anyway. Easy decision. We're going to cut contractors. We don't have enough work for them. Easy decision. We're going to have to raise money, and we're going to do it in a way that doesn't burden previous investors. So we're not going to raise money at a low valuation. We're going to raise debt. Why do we need to raise the money to survive this crazy situation where both the guests and the host want their money back? We have $3 billion of capital on the balance sheet at Airbnb, but we have $3 billion or $4 billion of customer deposits. We can give all of that to one side, and one side will be pissed at us. Give it. Also hosts, the guests will be pissed. If we give it to the guests, the host will be pissed, and we won't have a business when we emerge from the pandemic. So he goes out and raised $4 billion, $2 billion of debt. So two plus our three is five. We can cover both sides. And then told both sides, okay, we can pay both sides instead of paying it out. Why don't you just calm down? You'll get this money. You know, you can get this money, and let's see how the system works itself out. And so he had to sort of project confidence and imagine your way out of this thing, and you imagine a solution which is, okay, well, we're in New York right now. Not a lot of people want to stay in their apartments in New York. They're traveling upstate. In San Francisco, where I was, not a lot of people wanted to be in San Francisco. They went to Napa. And so, slowly but surely, it didn't happen in March, it didn't happen in April, but in May. You found resilience in the business model where people started to travel again just in their own backyards, in their own country. And that allowed the company to come out of that. And the thing that he did last was to lay off employees. He knew that the employees were going to have a harder time finding another job during that time, during the pandemic. And so that was the. Just had these principles of how he was going to go solve this problem. Nobody would have told him to do that in that order.
- [81:21]
Shane Parrish
That's an incredible example. Thank you.
- [81:24]
Alfred Lin
And then on the flip side, this is the craziest thing, because Airbnb was the poster child of the number one IPO possibility for 2020, and they had seen their revenue go down 80%. And then they came out of that and then went on to be the number one IPO of that year in December. And DoorDash, I had the opposite experience of DoorDash, which was, boy, they were also trying to go public that year. But instead of being beaten down by the pandemic, they really accelerated during the pandemic and also there, Tony Hsu had a lot of principles behind what he wanted to get accomplished. And it was like anything else during the beginning of the pandemic. It was very, very scary because around the world, there are some places that were completely shut down, including restaurants. And if you shut restaurants down, because of his experience, having worked in a restaurant with his mom, by his mom's side, washing dishes with his mom, he knew that restaurants wouldn't survive. They had less than 30 days of cash, and, you know, that's less than 30 days of cash when they actually are running at full speed. So now they're, they have less cash. The restaurant is shut down for a period of time. People didn't know whether they can order food and it would be okay. As soon as we figured out that the restaurant shouldn't be shut down and the restaurants can remain open for delivery and takeout, he went to full force and making sure that the business could help merchants bridge the gap. You know, this is not something that other companies couldn't have done, but one of the things I, I really respect about Tony and the team is they decided like, these merchants are going to be hurting and we need to help them. And so they proactively went out and uploaded menus from different merchants onto DoorDash and said, Hey, I know you guys are hurting. The only thing you can do is delivery. We're here to help you. We've uploaded the menu, your menu, we found your menu. Whether it's on the Internet, we've got a copy of your menu. We uploaded it, it's ready to go. Just let us know if we can turn it on for you. And that allowed DoorDash to grow very, very quickly during the pandemic. I thought that Doordash was a well run company in 2019, and it was a process by which they, they grew very fast. They probably grew too quickly. The unit economics wasn't great. They had a few hard fundraising rounds for the C and D. They fixed the unit economics. So in 2019, it was a walled oiled machine. And I saw this walled oiled machine pushed to another level in 2020 during the pandemic, when they really did help restaurants when they were in a world of herd.
- [84:34]
Shane Parrish
So the pandemic is a crucible moment for every business.
- [84:38]
Alfred Lin
It was a crucible moment for every business.
- [84:41]
Shane Parrish
What differentiated the founders in Sequoia from the ones who took advantage of that opportunity and sort of came out of it stronger and the ones who didn't?
- [84:58]
Alfred Lin
I think we were. I hate to say this, and it's maybe trite, but going through the pandemic, we all came out stronger. It was a shared experience. Sometimes when you go through crucible moments in crises, you don't have the shared experience. But to answer your question more succinctly, I think there are people who knew that the crisis was an opportunity and then there are those who just thought of it as a crisis. And I think it was Andy Grove that says that good companies get better and they're defined by a crisis, whereas there are a lot of companies that are destroyed by a crisis. And many great companies were defined and they changed the way they did things in a way that they found solutions that you would not have imagined when the crisis didn't happen. And I think the founders that are, they realize they're in a crucible moment. They realize they need to do something differently and they stay calm, they stop, they look around and they figure out, they look around 360 degrees and say, that's the direction I'm going, even though the whole world is revolving around them and it's a complete whirlwind. And they imagined why they should go into that direction. And in most cases, they had to find a different solution, a different product, a different way of operating, and then scale that into that direction. Those are the ones that come out really, really successful. In Airbnb's case, they had to change cross border travel to local travel. They changed to long term stays, they changed to having experiences. In Doordash's case, they simply had to sort of do things that they've never done before. It wasn't a product change, but they had to imagine a different solution. They're not going to wait until merchants call them and say, negotiate a deal. They said, look, we've uploaded your work, your menu onto the website into our app. These are our standard terms. Do you want to Go or not. That wasn't a product that they had designed before the pandemic. Often you need to find a completely different solution to. I mean, they seem so simple after the fact, but at that moment is completely unclear that that was the right decision. But that's why you need to stay calm. That's why you need to look around. You need to stop, look around and find the right direction that you want to go in and then accelerate.
- [87:51]
Shane Parrish
I think that's really an interesting approach, right, where you sort of stop, you don't panic, you evaluate what's going on as rationally as you can in the moment, despite everybody wanting things from you and all this pressure that you probably have from investors. But you also put on yourself to take care of your employees, to take care of your customers, take care of your family, and everybody's worried about the same thing. So you're operating in a very amplified environment to begin with.
- [88:18]
Alfred Lin
Yeah. And the Beth's founders are doing this day to day. But here the timeframes are much, much shorter and much, much more compressed and people's voices are much louder. Just recently, Tony said that it's about many good decisions about sequencing. We all know what we need to do, but sequencing it right is actually what matters. And the sequence of how you do something often determines whether you're remembered or not remembered. In the example that we talked about for Airbnb, there was a sequence of like, what is easiest, what is the values that I have for the company? And let's go through the sequence that most matches the values. So Brian wanted to take care of the employees the most. And so the layoff was the last thing that he did. He tried to do everything else before the layoff. In Tony's case, the sequence was to make sure because he had a heart for merchants, the sequence was take care of the merchants. So there wasn't. It's just when you have these well understood values, it makes the sequencing a lot easier. And often people forget they write down their values for a good reason. Because when you don't have a playbook anymore, all you have left is the essence of what the company is, which is the values of the company. Often that's the essence of the founder, the values of that founder and how they want to operate. But you forget that because it's noisy, lots of people, lots of different parties wanting your time and your attention.
- [90:05]
Shane Parrish
Work from home has become a somewhat contentious topic, but I really want to hear your thoughts on the pros and cons and how you see it.
- [90:20]
Alfred Lin
Pros and cons. I think it's very, very hard to build an early stage company remote. And the reason I say that is unless you, you've worked with each other before, I view, I view there to be a well of trust that is created when you work together in this. You know, the reason why people who have worked together for a long period of time can, like, anticipate each other's movements and what they're going to do next is because they've been around each other for a long time. And as you know, most of our communication is not verbal. There's body language and how you sit, how you react. There's a lot of communications that we miss through work from home. And you just can't read it as well on the screen versus in person because there's only your, you know, on screen. In Zoom, you only have your head. There's the rest of your body that you don't see. And so I think it's quite important for early stage teams to work together. I mean, they don't have an office. They find the coffee shop to work together at. Why do you do that? You can all work from home, but why do you get together at a coffee shop to work together? It's like, it's noisy. There are a lot of people around. There's a reason why you want to do some of these things. And I think, you know, does it mean that every single day I'm more productive in the office? No. There are days when I'm writing a memo. It's probably better if I sit in the office or I'm at home and just cranking. It's also hard, very, very hard to build culture if you're all separate and apart from each other. There's no ritual. Culture is the values. But how do you express those values? They're your behaviors, they're the rituals, they're the narratives that we tell each other. And those things are just a lot harder to do over zoom. So I think all companies should go back to being in the office a certain number of days a week. It doesn't have to be five. I think that we can't put the genie back in the bottle on remote work. But at the same time, you know, we thought the world was going to be different when we were all online. And it turns out we actually enjoy being seeing each other in person. We enjoy having dinner together. I don't enjoy having dinner over Zoom with someone. I enjoy it when we're breaking bread right off, right next to each other.
- [92:51]
Shane Parrish
Do you Believe that you can please both sides. And that's sort of the hybrid model where people are, we're going to work at the office two or three days a week and then you can work from home two or three days a week. Do you believe in that being effective or do you believe you have to pick a predominant one and focus like because your operational back end, your company culture, your cadence, they're all going to be determined by what you pick. And if you pick in the middle, you're probably making trade offs on both sides and not getting maybe the advantages because you don't want to make trade offs.
- [93:25]
Alfred Lin
I think it's best if you take a stance, take a side, hybrid. I would quibble with the fact that hybrid doesn't work at all. I think you can, can be in person, you can be remote, you can be hybrid. You just need the systems around it to make up for the fact that you're going to operate in this way. Every multinational corporation, when they have multiple locations, was doing some form of hybrid, right? You have some people who are in this office, some people in this office, they're connected through telecommunications and some people are on the road. And any company that gets a certain skill, the salespeople in the field, they're not actually at headquarters. And you're having an all hands, those people call in. But when you have an important all hands, you call everybody in. You have an important off site, you call everybody in. And there are just certain things that should be done in person. There's certain things that are okay to do over zoom, over telecommunications, over email. I think that there's a different medium to do different jobs depending on the objective is. And you should understand what the drawbacks and the advantages of each one. At Sequoia, I mean, we take a lot of first meetings over zoom and during the pandemic when we were only doing meetings over zoom, you just never got the right texture for the company, the cadence of the how the company operated. And yeah, we might still take first meetings over zoom, but we're going to meet the team at some point in person.
- [95:13]
Shane Parrish
Did you analyze your investing during that period where you're meeting more over zoom versus more in person when it comes as approaching the investment decision?
- [95:22]
Alfred Lin
Yeah, we can make those assessments. But the hard part is the environment is also different. Right. 20, 21 valuations were nutty. Was it the issue of making those investment decisions over zoom or was it the environments that drove valuations higher? So therefore the returns are going to be more difficult, more challenged, when valuations are higher.
- [95:44]
Shane Parrish
Why do you play when the valuations are higher, when sort of like the game is loaded against you in a way? Why choose to keep playing? Why not back away and then come back when it. When you. The odds are in your favor?
- [95:56]
Alfred Lin
Well, historically, valuations have gone up, but.
- [96:01]
Shane Parrish
If they keep going up, then how does that work?
- [96:05]
Alfred Lin
I think our LPs pay us to make money during good times and bad times. And here's the thing that is most interesting to me. You can decide to shut down, but then you won't get the texture of those companies being developed. And sometimes it's, you got to keep meeting companies, right? Like, so you don't shut things down. You can decide to invest fewer dollars when things are hot, and you could decide to invest more dollars when things are cold. But the market is also smart. So when things are hot, it's usually because something new is happening and things are cold. Maybe it's just not a good time to invest too. If you could identify when it's irrationally exuberant, yes, you decide not to invest in the irrationally exuberant situations. But in 1999, which was one of the. If you go back in history and look at megatrends in investing, you know, I'm 52 years old right now. When I was in junior high school, one of the things I did as a business was to build PCs, clone PCs, because the IBM PC XT AT, they were really expensive. And so there is one that was one megatrend, which is the PC revolution. Then there was the Internet revolution, and then more recently the cloud revolution, the mobile revolution. Right now we're in the AI revolution and the Internet revolution. When I first saw started working professionally after College was the Ad Lake exchange. And then we started investing in 1999. That's when Venture Frog started. And if you decided not to invest in that time, you would have missed out on Google, Salesforce, PayPal, Zappos, OpenTable. There are a lot of great companies that were still founded during that time. And paying market prices for those investments would have been just fine. And you can wait until better than just fine. It would have been better than just fine. You could, you know, but you could wait until 2001 and maybe you could invest in lower valuations. But often in the public markets, you can, you can wait because those companies are available when the multiples are low. In private companies, just because the valuations have come down doesn't mean the company that you want to invest in is looking to raise a round. Maybe in 1999, you wanted to invest in Google in 2001. They happened to be public. You could invest in Google, but if they were private, maybe you wouldn't be able to.
- [98:52]
Shane Parrish
Yeah. John Bragg said this thing in my recent interview with him that I had never fully appreciated, I don't think, which was he had a reputation for overpaying for all of the land he was acquiring. And I said, why do you do that? He's like, well, if we're easy to deal with, people want to deal with us. And he's like, these assets only go for sale once. And he's like, so Maybe it takes 12 years instead of 10 to get our payback, but it doesn't really matter because there's no opportunity 10 years from now to buy it again.
- [99:21]
Alfred Lin
Yeah, I think that's an example for us. It's the same is true in investing in private companies. It's still much better to pick the right company and slightly overpay than to invest in something that is cheap.
- [99:38]
Shane Parrish
You brought up AI as sort of like the next revolution. Where are we going with AI? Where do you see that? And obviously the longer we go out in the horizon, the harder it is to predict. So maybe let's start with what do you see as the next 12 months in AI and where do you think we sort of like, how do you envision sort of 12 months to five years?
- [100:00]
Alfred Lin
It's funny because I think in the history of technology changes in, and I think Bill Gates said this, it's easy. We almost always overestimate what things are going to happen in a year and we underestimate what's happened in 10 years. Yes, it's harder to imagine 10 years out. But in the business I'm in at Sequoia, we are paid to make investments and to hold them long term. And we do have to sort of imagine 10 years out. It's in the next year. These foundation models are getting so good that you can see certain things being automated that we used to do that. We're not going to do as much, but I think the next step after that is if you think about. Lots of people talk about customer service and how we can automate some of the customer service emails or calls and things like that. Okay, let's say we do that. What's next? Well, then you should reimagine the customer experience. And so AI will help us automate some of these things and there's be massive cost savings. But AI should also allow us to reinvent the customer experience and that's why we're very excited about a company like Sierra. They're not just going to help you automate customer service tickets. They're going to help you reimagine what customer service looks like. Just similarly to how what happened in the Internet. You could. And the Internet happened. We could book things. We can book travel on the Internet. We didn't have to call a travel agent. It changed the experience. We could search. That changed the experience. It broadened. You know, I had to imagine where I wanted to go and call someone to get me a ticket or to get a hotel. Now I can search. So my, my imagination could be broadened and that just changed my, my experience of, of travel. And, you know, the, the airlines didn't allow you to change tickets once you bought them because that was in some backend system. They didn't want to open up that system. Now we can change flights on the website. Well, the same will be true with AI, like start with automation, start with new experiences, and the experience will completely change over time. And it always takes a little longer. I mean, I remember we talked about autonomous vehicles probably 10 years ago, and today we have autonomous vehicles working in a few cities. With Waymo, people imagine that that would be solved very, very quickly. But where are we going? I think we're going in a world where many of the problems that we have in the past will get solved through automation. Many of the things, things that many new problems will get solved through AI, because they're going to be as good as we are in doing analysis and being creative and things like that. And so I think it'll be a very, very productive megatrend.
- [103:00]
Shane Parrish
One way to explore this topic is to ask you what you're looking to avoid with AI investments. And I'm thinking maybe something that comes to my mind is it's a wrapper or over chatgpt or something. What are you trying to avoid when it comes to making AI investments?
- [103:15]
Alfred Lin
So the wrapper is a good example of something. It just is just a different user interface on top of a foundation model. But I think we're trying to make sure that something persists. And what if it persists? It has its unique distribution, it's embedded into your workflow, it has true ROI for a long period of time, and it changes the experience. Other things that I'd say we try to avoid is things that are roadkill along the way of a company like OpenAI or Google or Amazon or Meta. So small refinements into what the model doesn't do. Well today, that's just Going to be roadkill along the way. And then I think we're trying to avoid things that are. That sound good, but they're not good businesses. You know, back to, you know, 1999, there were a lot of things that had lots of usage that not had no revenue. And so right now there's a different example where lots of, there's a lot of test revenue, but the churn is very high because people don't stick. So there are a lot of things where you see very, very fast adoption, but the churn rate is very, very poor. So we're trying to avoid those kind of companies.
- [104:38]
Shane Parrish
Do you think Google and Microsoft, like, how, how do you think you compete with them on a foundational model basis? Like they, A, they can scale into enterprise overnight, B, they can spend $100 billion on, on GPUs. How do you think about that? Are we going to end up in a world where there's like only a few foundational models and we're all going to plug into them?
- [105:01]
Alfred Lin
To be honest, I don't know. But I'll tell you this. In the history of technology investing that I've been involved with, if you're afraid of the incumbents, you should just punch out. But in 1999, you could have been afraid for Microsoft because they have lots of money, lots of servers, and yet they didn't win Search. Someone else won Search. Microsoft won the browser war for a hot socket. It was Netscape against Internet Explorer. I don't know many people use Internet Explorer today. Most people I know use Chrome. So this is not a static situation. I think you just have to sort of have an open mind on why you will win. And often the reason why large companies don't win is because they have their own internal issues that slowed them down. So Microsoft, during the Internet, it was the antitrust situation and that slowed them down. They could no longer bundle IE into the operating system and they had to break all those things apart. Google has its own regulatory challenges and so does Microsoft. So I don't presume that they're all just going to win because they have a lot more money and they have more, a lot more capital and they have a lot more people. And besides, if you thought that, then I would be out of a job.
- [106:32]
Shane Parrish
So how important do you see what Facebook's doing then, where they're spending 50 to 100 billion, but they're making it open source?
- [106:39]
Alfred Lin
I think open source is a very, very important aspect of what has happened in technology. And you have these religious fights between Closed and open. And you have religious fights between Apple and Microsoft or Apple and IB let's go back to. And the world is built on. And you know, open source in the Internet days there are lots of things that were built on open source and some of it was closed source and some of it is open source. And I think the same will be true with AI. There are going to be things where you just want to host it on a close source model because you know it has the breadth of functionality and there are things where you can only make it work if you use your specific data, train it very specifically for you and you're going to use open source models for that. And just like, you know, Google built a great business that is pretty closed source on open on open source software like Linux. I think the world of AI is going to be and as well there'll be closed source and there'll be open source.
- [107:53]
Shane Parrish
I want you to imagine for you're in charge of let's say Canada and the US and maybe the UK and I tell you that we are optimizing to be the best in the world at AI. What are the policies that you think about? How do you approach this problem and how do you encourage us to be the world leaders?
- [108:16]
Alfred Lin
I'm maybe overly optimistic about human nature. And so I believe that you want to have as little regulation as possible in the early days. Let people experiment, let people try things and is it all going to be good? No. But if we had over regulated the Internet, it would not have grown to the scale that it is today. And do we have problems on the Internet? Absolutely. And so I believe in sort of having regulation that is more open than not and then slowly close off things that you know is not good or the behavior is not good. Regulators often worry about the fact that if you wait too long you won't be able to regulate it. I don't know if I believe that. And then on the flip side is it's always been and I don't know of a time that is ever worth to fight against technology and to over regulate technology. You could have over regulated the fact that the scribes were going to no longer have jobs because we came with the printing press. You could go all the way back in time like that or figuring out how to have a plow so that you need fewer people to sow seeds because a plow could do the work of three or four people all the way up to a tractor. How have we done trying to regulate or overregulate or control things that sort of make human beings much more productive. That's what we're talking about with technology. That's what we're talking about with AI. And then if you want to start applying regulation, there's maybe a slightly different framework that I would use, which is you want, you know, as an example with the combustion engine. Nobody regulated the engine. We regulated what engines can go on the streets, what can go into a plane. We regulated how it was applied, but in a lab. And people were sort of doing research and trying to make the combustion engine even more powerful, being more fuel efficient. You don't regulate that, you regulate it when it gets in the hands of a consumer.
- [110:40]
Shane Parrish
So that was removing barriers almost. But what about amplifying? What about the push? How do we encourage more? How would you embrace this as a country?
- [110:51]
Alfred Lin
The market is pretty good at pushing when they see opportunity. More and more capital goes into it. More people go into school to. In almost every single technology revolution I've been part of, there are too few people who understand that technology. So when it was the PC industry, there are some people who understand rainfrance. Very few people understand PCs. More and more people, more and more investment went into PCs. More and more people bought PCs, more people started using PCs, more people started building applications of PCs. And so over time there was just a lot more people, a lot more investment in it. People went to school to sort of write software specifically for the PC as opposed to framework, the mainframe. That happened in the Internet. Most people didn't know how to build a website. More and more people learn how to program in HTML and Python and wrote and Linux and learn how to use Linux to build today. And that happened with cloud and mobile. Look, so today we have probably too few people who really, really understand the technology and its application. But you have so many people going into today because they see the future is going to be powered by AI. And so wait a year or two. I bet you there's plenty of push today. That's why the valuations are high for AI companies. And wait a year or two, there's going to be a lot of things that are going to be built. In fact, the hot take is that. But many things will be overbuilt. So maybe we're building too many GPUs for a year or two years out. Maybe there are too many data centers that have GPUs a year or two years out. And maybe those things will get cheap. And when they get cheap, we'll find new applications. When it gets really, really cheap, that.
- [112:45]
Shane Parrish
Would be sort of the history of market. Actually, it's interesting that you brought up don't fight technology. There's a saying in investing, don't bite the Fed. It's sort of the same. Sort of. And then what?
- [112:55]
Alfred Lin
The Fed is way more powerful in many respects than technology.
- [112:59]
Shane Parrish
No.
- [113:01]
Alfred Lin
Well, I think the Fed can constrain or can loosen money supply in a very dramatic way. So it applies throughout the whole economy as opposed to just about technology.
- [113:16]
Shane Parrish
And historically, businesses have cycles. We tend to overbuild when we're optimistic. And then you go through that phase you just talked about. Out of the large technology companies today, who do you think is best positioned?
- [113:31]
Alfred Lin
That's hard. Well, if you want to use. Don't fight the tape. When I started in my technology career, Microsoft was the largest technology company and today they're the largest company. And so they seem to have figured out through their ups and downs how to stay relevant and stay on top. I think Google. Google's having some challenges with their own regulatory issues. And Apple. Don't ever count Apple out, because back to. They weren't the first to come up with the PC. They weren't first to come up with the mobile phone. They weren't. There's so many other mobile phones. They just wait until they can create a great customer experience and then when they do, they pounce. They weren't the first to come up with an MP3 player.
- [114:29]
Shane Parrish
Or a phone.
- [114:30]
Alfred Lin
Yeah, or a phone.
- [114:31]
Shane Parrish
How do you think of Nvidia?
- [114:38]
Alfred Lin
I think Nvidia is a very great company for a variety of reasons, one of which is it went from a graphics processing company to being the way we power all of AI. And they fought for so long about this idea of parallel processing. When the CPU worked a certain way, the GPU worked a different way, and the GPU is now shown to be more powerful. After we sort of got to the edge of Moore's Law, the GPU is winning out because they can process things much more efficiently. But I worry about. They've only had one leader in their whole cycle. I worry about what happens when Jensen decides not to be at the head of Nvidia.
- [115:36]
Shane Parrish
Yeah, that is the question, I guess, right?
- [115:38]
Alfred Lin
I think that's the question a lot of people have.
- [115:41]
Shane Parrish
Jensen's a remarkable sort of CEO.
- [115:44]
Alfred Lin
Jensen's a remarkable CEO and he does things very differently than anybody else. We had him speak at our basecamp, which is our annual retreat for our founders, and he just came out with so many great stories about Nvidia, about his personal Life, but also about his management style that is so different.
- [116:00]
Shane Parrish
I remember being there and that was awesome.
- [116:03]
Alfred Lin
Yeah.
- [116:05]
Shane Parrish
Sometimes you've said in the past that sometimes the path to greater efficiency is doing things sequentially and sometimes it's doing them in parallel. Can you explain that?
- [116:15]
Alfred Lin
Well, I think most people are trained to do things in serial. They take a problem, they break it down into pieces, and they do one piece at a time. Step number one, solve the problem number one, solve problem number two. Because we need the solutions of problem number one to feed into problem number two and they eventually go down the path. And a lot of like, if you're an individual contributor, you just, you write code. You just keep writing the code and you finish the code and you submit it. But if you're managing a team, you need to break down this piece of software into components so that you can give it to your team members. You have all 10 of them working on it as opposed to you write it, write it yourself. And even if you're a really good software writer, you literally have to be a 10x engineer on top of your 10x engineer. So you have to be 100x engineer to do it in the same time frame that 10, 10x engineers can do it. And sometimes it's just more efficient to just break the problem down so that you can put them in parallel and then stick them all together.
- [117:23]
Shane Parrish
How do you think about companies and time span and specifically maybe with an angle towards positioning yourself to rapidly adapt to whatever the future brings versus trying to predict the future and running ahead of it.
- [117:39]
Alfred Lin
I think the consensus would tell you that it's very, very hard to predict the future. And your ability to predict the future is uneven because in the world that you know, you may be able to be very good at predicting the future, but the world is not stationary and the world changes. And in this new world, trying to predict the future when you don't have many facts or many patterns that you can go against, it's much better to have a machine that knows when to pounce than to try to predict what's.
- [118:16]
Shane Parrish
Going to happen, go deeper on that. A machine.
- [118:20]
Alfred Lin
Well, your company is in some sense a machine. And so you're trying to figure out when you should pounce on an opportunity. You're building, you're building, you're building. And you decide, I'm going to take this path now, and you're going to make your company go in this direction because you see the opportunity in this path. Maybe make the example more concrete, perhaps as an example, doordash started with food delivery, but specifically restaurant delivery. And they waited until they figured out an advantage that they could have in grocery. But the mechanism by which to deliver restaurant food and grocery food were pretty much the same. And figuring out when to enter the grocery market had a lot to do. Whether the company was ready, the customers were ready, the market was ready, the grocers were ready. And you can predict that customers want this before they want it, or you can just wait until you see lots of customers bang on the door, writing into DoorDash, hey, can you also get my groceries? And so it's a matter of what do you want to be pushing the customer to do what you want, or do you want the customer to pull you in the direction that they want to go?
- [119:52]
Shane Parrish
It's the biggest risk there that you try to tackle two problems at once. I'm assuming they knew they wanted to get into groceries. So part of the risk at the start is like, if we're focusing on restaurants and groceries, all the time, we're spending on one of those two things, and not all of it, but a lot of it's coming at the expense of the other. Or do you see that as. No, it's not.
- [120:12]
Alfred Lin
It's a very sharp insight that you have. I think the one thing that you'll find is that there are lots of examples that I could use to support your conclusion there. Because before DoorDash happened, there are plenty of other SIR solutions. And most notably, there was GrubHub. That was just the website, and then they passed the order to the restaurant, and the restaurant delivered. And Tony's observation was, that's not deep enough of a solution. And so why was it not deep enough? Well, there are a lot of restaurants out there that don't have their own delivery staff.
- [120:59]
Shane Parrish
Yeah.
- [121:00]
Alfred Lin
And why don't we just.
- [121:02]
Shane Parrish
You're creating problems for them in a way.
- [121:04]
Alfred Lin
Exactly. And so the only restaurants that would be on grubhub's website were all the companies that already had delivery staff available. So what DoorDash did was to expand the market. And by expanding the market, they were very focused on that problem because they're like, really? You'll deliver, you'll take the orders. I cook it, and you'll deliver it for me. I've never heard this before. So you were just, like, educating the market for a period of time because you're just focused on that problem as opposed to. Besides grubhub, which didn't do that, there was Postmates originally. Postmates wasn't just in restaurant Delivery. They were doing anything. They would pick up from anywhere and they would deliver it to anywhere and they would even pick up something from, I don't know, Bloomingdale's or from Walmart. But in that example, there's just too many different things that you could do and it wasn't focused. And even more broadly than that, there was TaskRabbit where you can run errands. Well, one of the errands you can have them run, someone who is on TaskRabbit is to go pick up food from any restaurant. So simplicity of the solution is the reason why I think like you want to start with a very focused problem. It's much easier to tell people this is what doordash does. And then over time you expand that, you expand the remit because you've earned the trust of the customer to allow you to do more things.
- [122:40]
Shane Parrish
One of the problems when you were saying that is like how did doordash find drivers in those early days?
- [122:45]
Alfred Lin
Yeah, it was hard because if you. The one thing that. But if you sort of believed that it was more profitable to transport humans than deliver food, then you would come to the conclusion that Uber and Lyft would get all the drivers and DoorDash would not get any of their drivers. And it turned out that, well, a, there are some people who would prefer to deliver food or a package over delivering people. They didn't want to have to have social interactions. And then there's some people with perfectly fine cars, but they're not perfectly fine cars to transport humans. And so early on we thought it was going to be a problem, but it was less of a problem than we had originally imagined.
- [123:35]
Shane Parrish
One of the problems that I anticipate, or maybe from the outside looking in, I can be completely wrong, is when you sign up a grocery store customer, they want to work with you in a particular way, but it might not be a standardized way. And then you might say yes because you want to sign up that customer. Maybe it's like Albertsons or something, but then you go to the next largest grocery store chain and they want to work with you in a different way. How do you think? Through the standardization, which is like, no, we work in this way versus creating all of these one offs. And I see a lot of startups do this where they want to sign a customer so they'll violate sort of like their standard procedures and they'll create these one off contracts and technical solutions and then they go to and they're trying to get revenue so that they can still exist. How do you think about that trade off?
- [124:20]
Alfred Lin
It's a very, I think it's a, I use, I use the accordion example often, which is, you know, you pull the accordion too far and then you have to push it back in. And you know, at some level, if you are super rigid, you're not going to win your first few customers. So at the very beginning, the accordion is completely folded and you do pull the accordion and you allow things that you may not have allowed, you may not want to allow in that very early days. And then it gets super far stretched and you're like, oh, shoot, I need to standardize a bunch of things. And then first you're not going to go back on these customers or merchants. So you're going to go back, you're going to go into the next inning with a lot more standardization. Or you break up your hundred customers into three Personas or four Personas and try to have four different standardizations. But trying to be overly standardized at the beginning is generally not a great idea. And the, the opposite of that is have a standardized product and then allow customization on the edges. And I think a lot of software companies try to do that. When build a platform, the platform is not changing, you're buying the platform. But on the edges, we lock for customization and you allow, you do it at the beginning. You find other developers who are willing to do the professional services on the side and you can go from there.
- [125:58]
Shane Parrish
It's almost like you earn the right to do standardization when you're sort of trying to be the backend, where you have to accommodate at the start and widen the accordion. And then as you get scale and network effects and more and more benefits to the merchant or partner that you're partnering with, you sort of can more standardize. Is that true?
- [126:17]
Alfred Lin
That is true. And I also just think there's a lot of hubris in thinking that you can standardize at the beginning when you don't even know whether that's the right solution for everyone to standardize on. And so bring some customers, they'll tell you your standardization doesn't work for. It's not only just because it doesn't work for them, it may be that it doesn't work for many people and at least learn from that.
- [126:41]
Shane Parrish
What's the difference between working backwards and working forwards?
- [126:46]
Alfred Lin
So working backwards is this idea that Amazon popularized, which was you start with the vision of the world that you want to imagine and you, you think about if everything goes right, what is this? What is the world that we live in and what does this product become that you're trying to build? And we at Sequoia, we call that the pre parade. And you know, if everything goes right with this company, what does it become? And then you work backwards from there. What, what, you know, one, one year before that, what does it look like? Two years before that, what does it look like? And Amazon popularized by working backwards, meaning that go from the future all the way to today. And I love that concept in a sense, but I've also seen lots of founders struggle to take it from the future, which they have this great vision of the world, and really map it all the way back to today. They map it somewhere five years out, 10 years out, but they can't map it today. And I also tell founders, okay, that's the future that you're aiming for. Here are the realities of today. What does it look like one year ahead, two years ahead, three years ahead, that's working forwards. And if the two don't match it, probably you're not on the same trajectory. And so I believe in having founders work both backwards and forwards. Often when you don't, when you work backwards and you think you have a great plan and then you misexecute and you don't know that you don't, you don't, you're not executing, it's because you haven't worked forwards on what the year 1, 2 and 3 look like to be on that trajectory.
- [128:34]
Shane Parrish
What are the two or three mental models you keep coming back to most when you're making a decision?
- [128:42]
Alfred Lin
Huh? I'm going to ask you that question.
- [128:47]
Shane Parrish
This is your interview. Nobody's here to listen to me.
- [128:50]
Alfred Lin
I want to know what your three, two or three mental models that you use. I think the one that I learned from Amazon is whether this is a type one or type two decision. And, you know, if it's a type one decision, I've learned from Brian Chesky to run out the clock because he can't go back as a type two decision. And you, you know, you just move the move forward, make a call and of course correct along the way.
- [129:15]
Shane Parrish
Type one being irreversible. Yeah.
- [129:19]
Alfred Lin
So if it's irreversible, run out the clock. Meaning, like get all the information, make sure that that's a high confidence decision. Type two, if you can always change it, make a fast decision and keep iterating. That's one model. The other mental model I think about is, you know, working backwards, working forwards. That's also top down versus bottom up is a similar sort of idea. Some problems are better solved thinking top down. Some problems are more easily solved just working bottoms up. Another one generally is to break up hard problems into smaller and smaller bite sized problems and solve each of those individually. And just the way I live my life, this is not a mental model. It's a lot about consistent compounding and just build just every single day doing the little things that sort of improve myself or oneself or the company that I'm working with.
- [130:27]
Shane Parrish
Talk to me how you think through the breaking problems thing because you mentioned and bringing it into smaller problems, solving those and then you get the solution. How do you think of that versus the individual? Like the optimal solution for that particular sub problem might not lead to the optimal solution for the bigger problem.
- [130:53]
Alfred Lin
Yeah. So I think there is local optimization and global optimization. And you're talking about.
- [130:57]
Shane Parrish
That's a much better way to word it.
- [130:58]
Alfred Lin
Yeah. If you want to solve a global optimization problem and you need to pop up and if you're trying to solve a local optimization problem, you want to go down. And so I think the problem first and foremost has to be at the right altitude and then you can break the problem down from there.
- [131:18]
Shane Parrish
Is there an example that comes to mind for your thinking?
- [131:22]
Alfred Lin
If you're trying to climb a mountain and the top down problem is what's the path? So even before you climb the mountain, you're going to plot the path before you get onto the mountain. But once you're on the mountain then you have a path. You're just going one step in front of the other on that path. And if you find that the path is not right, hopefully you've had some backup paths and backup plans that you can go one foot in front of the other. Path A doesn't work well. Path B might be a little better because I plotted the alternative plot to path B. So that's an example of like planning top down on your path and your alternatives and doing a bunch of scenario analysis. And then when you're executing on a day to day period, you just literally just go execute. And I don't see that any differently than a company. You have a plan for the year, you have some scenario planning around it. And so the more scenario plans that you have, the more easily you can course correct. You know you're supposed to be on path A. You decide that you're still going on path A, you're slightly off. Let's go back on path A. Path A turns out not to be the right thing. We're going to pick path B because that's the second alternative. We're going to go right one foot in front of the other, plotting against path B.
- [132:48]
Shane Parrish
We always end these interviews with the same question, which is, what is success for you?
- [132:55]
Alfred Lin
I know that this question was coming and to me success is just the process and having a good process. Because if you have a process that's consistent to who you are and your values and you live that every single day and you get up every day and follow, follow through on that process, you're already successful. You know, lots of people talk about success is not the destination, it's the journey. I think it's just the process before the journey, which direction you're going to go, why did you decide to go in that direction? How fast do you want to go in that direction before you can go on that journey? Hopefully you've planned things out and you have had a process to sort of plan that out. And if you did that right, you know you're going to be successful.
- [133:58]
Shane Parrish
Thanks for listening and learning with us. For a complete list of episodes, show notes, transcripts and more, go to FS Blog Podcast or just Google the Knowledge Project. Recently I've started to record my reflections and thoughts about the interview. After the interview I sit down, highlight the key moments that stood out for me, and I also talk about other connections to episodes and sort of what's got me pondering that I maybe haven't quite figured out. This is available to supporting members of the Knowledge Project. You can go to to FS Blog membership, check out the show notes for a link and you can sign up today and my reflections will just be available in your private podcast feed. You'll also skip all the ads at the front of the episode. The Frontam Street Blog is also where you can learn more about my new book, Clear Turning Ordinary Moments into Extraordinary Results. It's a transformative guide that hands you the tools to master your fate, sharpen your your decision making and set yourself up for unparalleled success. Learn more at FS Blog Clear until next time.