Decoding Sequoia Capital’s Cryptocurrency Bureau: A Woman Chooses ALL IN

On February 18, Sequoia Capital announced the launch of a cryptocurrency investment fund with a scale of US$500 million to US$600 million. This is Sequoia Capital’s first specific industry fund since its establishment in 1972.

But how did this happen? Why did Sequoia Capital take a big leap from a traditional first-tier dollar fund to try to lead Web3 investment?

The answer is simple, someone is driving and leading, her name is MICHELLE BAILHE.

To a certain extent, she changed Sequoia Capital.

In September 2020, after MICHELLE jumped from private equity firm Hellman & Friedman to Sequoia Capital, she began to actively lead Crypto investments and led the investments in FIREBLOCKS and FTX.

In the words of someone at Sequoia Capital, Michelle Bailhe is truly ALL IN CRYPTO!

Another similar partner is Shaun Maguire, who led investments in projects such as DeSo, ParallelFi, and Faraway.

Therefore, Sequoia Capital's current investment in the crypto field is mainly led by Michelle Bailhe and Shaun Maguire, followed by Alfred Lin, Ravi Gupta and Konstantine Buhler, who also prioritize Crypto.

At present, some of its portfolios and responsible persons are as follows:

Michelle Bailh (FTX,Fireblocks)

Shaun Maguire(DeSo, ParallelFi,Iron Fish,Faraway,Strips, and more seeds in stealth)

Alfred Lin (FTX)

Mike Vernal (Starkware)

Ravi Gupta (Fireblocks)

Roelof Botha (Squarenow Block)

Andrew Reed (Robinhood)

Stephanie Zhan(stealth seed, Brud acquired by Dapper Labs)

At least in the second half of last year, Sequoia Capital did not plan to set up a dedicated crypto fund. In Maguire's original words, "We don't want the lessons of crypto to be siloed just in a crypto team" , but this possibility was not ruled out at the time.

Perhaps inspired by a16z, dedicated crypto funds have become increasingly popular, and Katie Haun, former head of a16z Crypto, believes that it is impossible to succeed in crypto investing if you only work part-time and without a dedicated team.

We don’t care about Maguire’s background, but we are curious about her views on Web3/Crypto investment. For example, she is particularly concerned about the company or founder’s ability to tell stories, and believes that the potential of WEB2 entrepreneurs to transform into WEB3 is underestimated. Some of the content comes from past podcast interviews.

According to the Crypto cycle model deduced by Sequoia, it is currently in the second stage.

Storytelling skills

“Storytelling is an underrated art in most companies, especially in technology. The difference between great companies and legendary ones is the story they tell about how they make people’s lives better.”

In Michelle's opinion, the ability to tell stories is a core competitiveness that is seriously underestimated.

In her words, humans are a storytelling species, and a story is more useful than other information.

Michelle's father is a film producer, so she understood from a young age that having technology and products alone is not enough, but also requires people to understand her.

For example, Google's success, from a very early stage, told a story about how to make life better, rather than simply saying that we are a big company that everyone knows.

Google's first Super Bowl ad was about searching in the search box, "How to study abroad in France", "How to date a girl", "How to assemble a crib"...

What the reader has in his mind is a beautiful life story, not a boring product.

At present, there are two main narrative logics: one is to tell the story from the perspective of the company to arouse curiosity; the other is to tell the story of the company from the perspective of the founder, such as Steve Jobs, Bill Gates and Elon Musk.

In the field of Crypto, Michelle praised SBF, the founder of FTX.

At the Sequoia meeting, she said one of the reasons she liked SBF was that he was a great storyteller, which is important for creating truly legendary companies.

In addition, SBF's "clock speed" is amazing, and any question you ask, he may have thought about it from a hundred angles. Michelle rated SBF as one of the top three "outstanding talents she has ever met".

WEB3 Investment

Michelle said that Sequoia Capital is focused on investing in the next era of technology. Next, it will focus on two things. One is to continue to invest in and support great entrepreneurs in the Web 3 and Crypto fields. Second, there is one thing that is seriously underestimated by the public, that is, WEB2 entrepreneurs turning to WEB3, just like turning from PC desktop to mobile, and there will be very successful cases of transformation.

Michelle shared a little story.

At Sequoia's base camp event, all the founders camped together overnight. Among them, founders from three different fields, namely games, consumption, and live shopping, all talked to her about NFTs. This made her think that these companies might all turn to Web3, just as they turned to mobile, and those that do not do so will be left behind.

How to pitch a project?

Michelle admitted that she found most of her investments on Twitter, and then took the initiative to contact them through Twitter private messages , such as contacting relevant personnel of FTX. And she believes that the most important thing she can do for the companies she has helped is to introduce them to the right people at the right time.

For Sequoia Capital, there is a question of whether venture capital in the WEB3 era will impact traditional VCs such as Sequoia. This seems to be a self-revolution. Various cases such as Constitution DAO provide a new investment paradigm.

Michelle believes that VC, like all biological systems, must either evolve or die, and Sequoia Capital will always be paranoid.

Sequoia Capital has been building a long-term model in which it does not have to sell shares or tokens just because a company goes public, which is a difficulty in traditional venture capital.

If LP wants to obtain liquidity, the fund will sell stocks (tokens), etc. This will hurt the founders to a certain extent, especially at certain critical moments; and after the stocks or tokens are sold, the relationship between the two may end, but the founders actually need long-term help. As a VC, Sequoia Capital is not "passive money" but a real business partner.

(Note: In October 2021, Sequoia Capital announced the establishment of a single, permanent fund called Sequoia Fund in the U.S. and European markets, changing the organizational model of traditional funds and no longer setting up a duration for them. Sequoia can hold public stocks for a long time after the company's IPO and seek the best long-term returns for LPs, most of which are non-profit organizations and donation funds.)

What advice would you give to someone wanting to enter the industry?

Michelle said very sincerely, "If you feel there is a space in your life, even though a lot of people may not feel there is, if you can feel there is a space in your life to take a risk, then take the risk."

In addition, Michelle emphasized that quick execution is important, rather than wasting too much time on consideration and worry . This is also what she appreciates most about the FTX team. For example, sometimes SBF would ask her some questions. Although she replied within 24 hours, SBF had already solved them early, which made her seem like she was talking a lot of nonsense. This is the lesson she learned from some powerful founders.

Finally, I would like to share and strongly recommend an article written by Michelle herself at the end of 2021, "Ask Not Wen Moon-Ask Why Moon", which embodies her thoughts on WEB3 and Crypto investment:

Ask Not Wen Moon–Ask Why Moon

2021 was a bumper year for cryptocurrency: hundreds of projects were launched; thousands of new developers and more than 100 million new users entered the crypto field; the total market value of cryptocurrency increased by $1 trillion; the total locked value of DeFi also reached $250 billion; NFT sales broke historical records and received a feature on SNL; Tom Brady (professional American football player) and his wife Gisele's support for FTX sparked people's interest in cryptocurrency; PleasrDAO saved the Wu Tang Clan album; ConstitutionDAO almost bought the Constitution...

However, there are still many people who are new to the crypto space asking the same questions: What is happening in the crypto space? Is investing in cryptocurrencies or investing in the new Internet? What are the hot new tokens and new NFTs? When can I TO DAO MOON?

I think the better question is actually: Why Moon? Why is crypto and Web3 booming? Why now? While crypto is certainly worth taking seriously as a trillion-dollar behemoth, why is it important?

While answering these questions may be a Sisyphean task, we have attempted to do so in a few pages. These questions may seem simplistic to anyone deep in the field, but we hope to engage more users, developers, operators, and founders by providing a broad overview of the historical context of cryptocurrency and the mindset of the ecosystem.

We also hope it will help people understand why Sequoia Capital firmly believes that cryptocurrency is one of the most important seismic shifts of our time.

What’s happening in the crypto world and why it matters

At its core, money represents trust. Many people on this planet like to trust their money and financial system.

We trust our central bank not to devalue our currency overnight. We trust our government to avoid hyperinflation so that our currency maintains its purchasing power. We trust banks to keep our money safe and not lend it recklessly, and private companies to help us safely use our money for business and other financial services.

We pay for the privilege of this trust with taxes and fees paid to financial services firms (a multi-trillion dollar industry). This foundation of trust has been an essential cornerstone of our economic progress over the past centuries.

However, many financial systems do not deserve this level of trust. This is true even in some of the most prosperous and populous countries. The Great Financial Crisis of 2008-09, for example, led to an erosion of trust even in the United States. In recent years, the global monetary stimulus measures by governments in response to COVID have again raised many questions, further reducing trust.

It doesn’t seem like a coincidence that the Bitcoin white paper that sparked the crypto industry was released on October 31, 2008, just six weeks after Lehman Brothers collapsed in the financial crisis. Titled “Bitcoin: A Peer to Peer Electronic Cash System,” the paper described a solution to the holy grail problem in cryptography: using a distributed network to verify the authenticity of digital documents.

This introduces a new kind of problem on the internet: verifiable scarcity, and how to enable value to be transferred directly online without an intermediary. To exchange Bitcoin, all we need is Internet access and trust in Bitcoin’s open source code. Just as billions of people now trust the Internet to enable the free exchange of information around the world, 220 million people now trust blockchain to enable the free exchange of value around the world.

From a historical perspective, “internet finance” can be seen as the natural evolution of our financial system. The history of financial money is a story of gradual abstraction for the sake of convenience (barter economy to metal money to paper money, etc.).

Today, most of the money issued around the world is already digital, just as we once replaced gold with paper money. But we pay a huge price for the inefficiencies of this analog system, with its fragmented jurisdictions, countless intermediaries, and long settlement delays. Why don’t we move to an internet-native financial money flow direction? Isn’t this the next step in the journey that PayPal, Stripe, Square, and others should have started?

While Bitcoin appears to be designed to solve the payment problem, as is often the case, most inventions rarely go as their inventors plan. As demand for Bitcoin grows, so do its price and transaction fees, making it less of an investment vehicle (or store of value) than a payment mechanism (medium of exchange).

What’s most interesting is that new inventors build on the concept of Bitcoin in new ways. For example, Ethereum offers a distributed ledger that can be used not only for currency but also for computing.

As a decentralized computing platform, blockchain has captured the imagination of developers and has great market prospects. It can be described in a macro sense as an attempt to bring about a better financial order and a better Internet.

Better financial money: money that is free from arbitrary monetary policy, censorship and surveillance, and a more trustworthy, accessible, efficient and cheaper financial system;

A better internet: users own their own data, rather than applications renting access from a given platform; creators get better returns and communities manage themselves; digital goods (NFTs) that are more liquid, portable across platforms, and better suited to managing digital copyrights.

These are just goals, and we still have a long way to go. Some argue that the entire cryptocurrency endeavor is a scam, but that misses the point. Historically, when technological innovation leads to financial innovation before regulation, we see world-changing innovations, followed by manias, fraud, crashes, regulatory frameworks, and then the slow build of lasting value (see: early stock markets in Amsterdam in the 1600s).

Crypto seems to be no different, with fake tokens and some over-hype. But like all other technological revolutions, there will inevitably be enduring companies during this period.

Big Change

Crypto will change the value of the Internet and the Internet itself. Blockchain will rewrite the way we own, sell, buy, trade, exchange and reward. As software permeates our world, cryptocurrency (software money) will also permeate money and everything we do with it.

The inherent properties of blockchain, instant value transfer, verifiable scarcity and user ownership, can reorganize trillion-dollar market caps in payments, finance, gaming, content, social networking, and more.

1. Digital currencies are fundamentally useful to 220 million people and growing in the future, whether as a capped supply inflation hedge, censorship-resistant store of value, borderless medium of exchange, and/or investment vehicle, creating a new asset class.

2. This new asset class is creating a market for centralized and decentralized (DeFi) financial services. As with any asset class, owners want to be able to buy, hold, sell, trade, borrow, hedge, swap, subdivide, insure, and more. With cryptocurrencies, they also want the freedom to move across borders and time zones 24/7. This could expand the current financial system and create more consumer choices.

3. The rise of crypto requires a new crypto stack. From core infrastructure to developer tools, some traditional stacks can transform, while others will not. Hosting, nodes, fiat cryptocurrencies, and on-chain and off-chain data are just a few areas of the emerging crypto stack. In this era, value may accrue to new layers. In traditional software, the application layer generates more value (Google ~ $2T market cap, TCP/IP/SMTP arguably $0), while in crypto, core protocols can be monetized through tokens (BTC+ETH ~$2T market cap)

4. Blockchain supports not only digital assets, but also digital goods (NFTs) and decentralized applications (Web3). Although transaction volume, user interest, and developer energy in these areas are exploding, they are still in their early stages. Web3 has great potential to use blockchain to reshape Internet services around principles such as user ownership, creator rewards, and community governance (such as DAOs).

5. The regulatory framework is still being shaped, so founders need to thoughtfully explore uncharted territory.

Mental Model of Encryption

It may be helpful to understand cryptocurrency along two dimensions: space and time.

Space: Below is a map of the crypto ecosystem.

It's organized like a typical stack, from hardware at the bottom to applications at the top, and on the right is the infrastructure to build and access it. Now, of course we know it's not perfect. Many of these categories overlap.

Timing: Inspired by the classic S-curve of new technology adoption, this is a framework for when opportunities in a particular field mature. It’s also imperfect — construction happens simultaneously, phases overlap, and interact with each other in feedback loops.

However, this is not a replay of every local maximum and minimum of the past decade; rather, it’s an attempt to zoom out and imagine how we might evolve from millions to billions of crypto users.

Phase 1: Isolation. Crypto as an island, disconnected from the non-crypto world. Crypto built its own core protocols (think TCP/IP for the internet, and layer 1 blockchains like Bitcoin, Ethereum, and Solana for crypto). Protocols are inseparable from their native tokens, which create demand for exchanges and additional financial services. Most incumbents lack the technology and regulatory will to meet this demand, leaving crypto natives to fill the gap. Crypto native analogs for each financial service emerged in roughly their historical order: currencies, foreign exchange, lending, derivatives, insurance, options, ETFs, etc.

Phase 2: Connectivity. Connecting the crypto and non-crypto worlds. The non-crypto world sees the value in crypto and builds/buys infrastructure to access it. Custody/wallets, crypto-fiat on/off channels, data feeds, blockchain-specific infrastructure, and developer tools have grown exponentially during this time. New use cases from NFT art communities to gaming to Web3 social networks attract new users. As the mass market begins to participate in crypto, competitive pressures greatly simplify the user experience and lower barriers to access. Over the next decade, the number of users and developers with access to crypto will increase 10-100x. We believe we are in Phase 2, which is just beginning.

Phase 3: Maturity. The convergence of the crypto and non-crypto worlds so they are no longer distinct. As with mobile devices, once crypto access is ubiquitous enough, apps will have the foundation they need to reach their full potential. They will cross the crypto-to-normal divide. To be clear, there are already a lot of people building in consumer finance, DeFi, NFTs, Web3, and more, but only a few hundred million people and institutions have access to them. As access expands, user engagement with apps will increase by an order of magnitude.

expect

Cryptocurrency is still in its early days. While it is full of volatility, it is also full of innovation. To dismiss cryptocurrency as purely speculative is to ignore that every financial innovation has its history of abusers, and miss out on the huge potential to create a better financial system. To dismiss cryptocurrency as too slow, too expensive, or too confusing to use is like dismissing the internet during its dial-up days.

While criticisms of crypto’s user experience, cost, speed, or environmental impact are all valid, these are not doomsday signals for the movement, but rather opportunities for us to come in and build. Our fundamental demands are: billions of people want a better financial system and a better internet; we believe a new generation of developers is motivated to build these demands for the world.