Gili Raanan: One of the Best Seed Investor of All Time: 1 Decacon, 7 Unicorns, 4 Acquisitions| E1128

Intro (00:00:00)

• Gili Raanan believes that investors should always be looking for their next investment and that all companies are for sale at the right price.
• He is excited to have a conversation with Gili and hopes they can go skiing together again.

Gili’s Background (00:00:50)

• Gili grew up in a small town in Israel, far from Tel Aviv.
• He was a bright student who never did his homework and would make up answers on the spot.
• This characteristic of being smart and lazy drove him towards technology.
• He was attracted to computers because they could do what he told them to repeatedly without getting tired or complaining.
• Gili believes that laziness, in the right combination, can be a wonderful trait that promotes efficiency and focus.
• He views forming a venture team as filling gaps and ensuring that different elements are better than any of them alone.
• Founders should pick a lazy VC at the seed stage.
• Lazy VCs, in this context, are those who don't add value and let the founders build the companies themselves.
• At the seed stage, founders should look for company builders rather than just pickers.
• Every successful company has at least one board member who is the first call for the CEO and is present for big decisions.
• Founders should choose investors who will join them on the journey of building an important company.

Joining Sequoia (00:05:28)

• Gili Raanan joined Sequoia in 2009.
• He had previously invested in Sequoia for 12 years before joining.
• His first venture was in 1997 when he was 27 years old.
• Sequoia invested in his first startup, which was the first team to build a web application firewall in the late 1990s.
• The business was eventually acquired by IBM.
• Raanan relocated back to Israel and was recruited by Sequoia to be a partner in Israel.
• He met with Michael Moritz, who interviewed him before he joined Sequoia.
• Michael Moritz is a thoughtful and deep human being.
• During the interview, Moritz was more interested in Raanan's motivations and why he made certain decisions rather than just his accomplishments.
• Raanan realized that this was a different type of interview and had to focus on his motivations and drive.
• Moritz taught Raanan that getting to know someone involves understanding why they make certain choices rather than just looking at their accomplishments.

Lessons from Sequoia (00:08:25)

• Gili Raanan, a partner at Sequoia Capital, believes understanding an entrepreneur's motivations is crucial for successful partnerships.
• He emphasizes the importance of distinguishing between entrepreneurs driven by fame and fortune versus those with a genuine passion for their work.
• Raanan compares working at Sequoia Capital to playing for a top-tier football club like Manchester United, highlighting the transformative impact of the firm's brand and culture.
• He stresses the power of brand in attracting the best entrepreneurs, executives, and investors, creating a positive cycle that facilitates success.
• Raanan emphasizes Sequoia's culture of "endless hunger" and continuous improvement, where even after achieving significant milestones, the focus remains on identifying areas for growth.
• He believes that questioning oneself and striving for real greatness are key to staying successful.
• Raanan focuses on investing in people rather than products, as markets and technologies change rapidly, while teams remain the most stable element in a venture.
• He conducts unique interviews with entrepreneurs, focusing on their childhood, family, and personal experiences, to assess their potential and drive.
• Raanan seeks individuals who have faced challenges and have a strong desire to succeed, similar to Doug Leone's approach of looking for "misadjusted children" with a chip on their shoulder.
• He looks for early signs of uniqueness or excellence in potential investments, not just in tech, and seeks individuals who have overcome real-life difficulties and achieved success despite challenges.
• Raanan believes that sharing personal struggles can create intimacy and comfort during investment meetings, which he conducts in a converted shipping container in his backyard to foster a relaxed and open environment.
• One of Raanan's most noteworthy personal challenges was the tragic loss of his daughter five years ago, which he openly discusses.

Evaluating Founders & Ideas (00:27:23)

• Gili Raanan doesn't have a specific preference for founders to be industry insiders or outsiders.
• He cares more about their enthusiasm and energy level when discussing their ideas.
• Raanan has invested in both types of founders and has seen success with both.
• He doesn't believe founders need to be experts in the field to innovate.
• Raanan cites the example of Adelon, which started as an on-prem security company but pivoted to cloud security after customer feedback.
• He also mentions Alalo, a data platform for cybersecurity founded by non-cybersecurity experts who partnered with cybersecurity experts.

Importance of Market Timing (00:31:00)

• Gili Raanan believes market timing is crucial for building successful companies.
• At Cyberstarts, they use the "Sunrise process" to address market timing.
• Instead of chasing ideas and dealing with prospects' objections, they talk to a significant number of representative customers, especially large Fortune 500 companies' Chief Information Security Officers.
• They ask these customers to identify one pain point that Cyberstarts can solve with a $100 million investment in engineering over the next three years.
• This approach ensures that Cyberstarts companies address real customer needs and avoids market timing issues.
• Customers are more focused and willing to listen when the equation of power is shifted in their favor.
• Cyberstarts typically conducts 60 to 70 conversations with potential customers in the first three months to identify the most significant pain point.
• After developing a solution thesis, they return to these customers for feedback and validation.
• If the customers like the proposed solution, Cyberstarts builds it and then invites them to try it out, making them the first customers.

Interaction with Founders (00:35:43)

• Gili Raanan does not babysit founders but follows up after each conversation.
• They have a system where they rate meetings with founders and meet weekly to discuss their progress.
• The Sunrise process is an intensive experience where they ask all the tough questions a company might face in the next three to four years.
• This process allows their companies to accelerate and achieve significant revenue in the first 12 to 24 months.
• Out of the 17 companies that went through Sunrise and raised Series A, seven are unicorns, one is a decacorn, and three got acquired.
• The hit rate for Sunrise is very good.
• Fundraising for Cyberstarts is easier due to the Sequoia brand.
• The last Cyberstarts fund was raised in 90 seconds through nine WhatsApp messages.
• The Sunrise process is an ego-destroying process where founders face all the reasons people might not buy their product or like them.
• It is a difficult process that requires founders to prepare themselves mentally.

Getting Back Up After Failure (00:41:22)

• Gili Raanan believes in getting back up after failure and not giving up.
• He feels the energy to keep going and sees it as a sign to stay in the game.
• Raanan ran a marathon every weekend for a year, highlighting his determination and resilience.

Learning from Losses (00:42:45)

• Raanan emphasizes the importance of learning from losses and not repeating mistakes.
• He focuses on analyzing team dynamics and identifying where he went wrong in assessing them.
• Raanan believes in focusing on what works and doing more of it, rather than dwelling on failures.

Focus on What Works (00:44:22)

• Raanan highlights the importance of focusing on what one does well and doing less of what one doesn't do well.
• He identifies picking the right teams and going after important companies as things he does well at Cyber ​​STS.
• Raanan acknowledges that matchmaking between Founders is something he and his team are not good at.

Challenges in Matchmaking Between Founders (00:45:25)

• Raanan finds matchmaking between Founders challenging and believes it should be an organic process.
• He thinks creating real connections that last for over a decade is difficult and works better when it happens naturally.

Prepared Mind’s Movement (00:46:06)

• Gili Raanan prefers an unprepared mind when investing, allowing him to be open to the entrepreneur's ideas and not be confined by preconceived notions.
• Prepared Minds can be limiting and cause investors to lose their humanity.
• Raanan's business as a seed investor requires him to come into the process with a completely unprepared mind to avoid any biases.

Role of Price Sensitivity in Deals (00:49:04)

• Raanan believes that the most expensive money for a startup is the seed money, as it is paid for with equity.
• Price sensitivity is important for both investors and entrepreneurs, as it affects the choice of the best investor for the company.
• Raanan doesn't think he has pricing power, as most of their deals at the seed stage look the same and they don't try to negotiate for small price differences.

Right Amount to Raise & How Much to Raise For (00:49:56)

• In Israel, large seeds of $6-10 million are common, resulting in a 30% dilution, which differs from European companies that raise less and dilute less.
• Raanan advises founders to raise at least $5-6 million for enterprise software or cybersecurity companies to build a team, develop a product, and acquire initial customers.
• For Cyberstarts pre-series A companies, $5 million is needed to build a strong team, solve a significant pain point, develop working technology, and acquire paying customers.

Speed of Execution vs. Being First to Market (00:51:38)

• Speed of execution is the most important trait in scaling from $0 to $7 million.
• Being first to market is not always an advantage in cybersecurity.
• It's better to enter the market later with more knowledge, context, and a better product.
• A better product attracts happier customers, better channels, and faster sales velocity.
• Speed of execution alone is not enough; product-market fit is crucial.
• Understand the pain point, target the right demo, run efficient technical evaluations, and set the right pricing.
• A repeatable process for product-market fit leads to successful execution, fundraising, and company growth.

Cash as a Weapon & Importance of Liquidity (00:53:39)

• Cash can be used as a weapon to compete with competitors who raise a lot of money.
• Cash is essential for building a substantial company, but it's expensive.
• High valuations are necessary to avoid founders getting diluted by 50% just to raise the needed cash.
• The platform supports founders by enabling them to reach product-market fit faster, leading to higher valuations and more fundraising opportunities.

State of the Market (00:54:58)

• 2021 valuations are back, especially in private markets.
• Valuations are skyrocketing, leading to a bull run for the top 1% and difficult situations for the rest.
• Cyber portfolio companies are raising over $1.5 billion in the next few weeks, impacting the entire ecosystem.
• High valuations create downstream problems, such as unrealistic option pools.
• Gili is optimistic about the market and believes raising significant cash to build a business is the right thing to do.
• Investors, board members, and entrepreneurs need to be responsible in spending money and building companies, regardless of the amount of cash available.
• Gili emphasizes the importance of considering liquidity in early-stage investing, as the current price-to-value ratio favors sellers.
• Gili believes liquidity is part of his business and all his companies are for sale at the right price.
• He acknowledges the complexity of determining the right time to sell and is not sure if he has always made the best decisions.
• Gili suggests early-stage investors consider liquidity opportunities and various contextual factors when evaluating exits.

Distinction Between Seed Funds & Opportunity Funds (00:59:08)

• Cyberstarts has two types of funds: seed funds and an opportunity fund.
• Seed funds are $60 million in size and are used to write first and last checks to new teams.
• The opportunity fund is $500 million and is used to invest in follow-on rounds in Cyberstarts' own portfolio companies.
• Cyberstarts does not set the price for investments out of the opportunity fund.
• Cyberstarts has a reputation for being a reliable partner, so other investors are eager to give them the check size they want.
• Cyberstarts typically takes pro rata and has many friends in the industry who respect their partnership.
• Gili Raanan believes that rich investors are not necessarily better investors.
• He thinks that terrific instincts, knowing your game, building a terrific network, and other elements are more important than net worth.
• Money can make life more comfortable by reducing worries.

Quick-Fire Round (01:03:45)

• Gili Raanan changed his mind on the importance of product marketing in the early stage.
• He now believes that demand generation is more important for early-stage companies.
• Raanan thinks the biggest misconception of the Israeli Tech ecosystem is that companies sell early.
• He believes that founders should focus on building sustainable companies rather than selling early.
• The best investment advice he's been given is to focus on the team.
• Raanan disagrees with the advice that customers always love what a company is doing.
• He believes that founders should not always be raising funds.
• Raanan learned from Doug Leone that caring about the founders and the companies he partners with is important.
• He believes the biggest investing mistake during the zero interest rate environment was attaching unicorn valuations to companies with only a million dollars in revenue.
• In the next 10 years, Raanan wants Cyberstarts to be the best investor in cybersecurity worldwide and the go-to place for entrepreneurs starting cybersecurity companies.
• He does not make long-term personal plans but wakes up every day with the drive and energy to move forward.