Sequoia's Elon Play...Seed-Stage GenAI Funding Slows...Former OpenAI Board Member Speaks Out About Sam Altman
Plus, VCs from a16z, Lux Capital, and Work-Bench dive into enterprise AI.
The Main Item
Sequoia Bets Big on Musk-World
Sequoia Capital wrote another check to Elon Musk this week, taking a small part of a $6 billion funding round that valued his artificial intelligence startup, xAI, at $24 billion.
It wasn’t the first time Sequoia has doubled down on the Musk universe.
Let’s step back for a second.
The resume of Sequoia’s former top boss, Doug Leone, is chock full of wonky enterprise software companies like Medallia, which makes customer experience management products, and RingCentral, a cloud-based phone system. He led the firm through an era where marketplaces like Airbnb and video conferencing companies like Zoom were key winners for Sequoia.
Those deals helped solidify Leone-era Sequoia as the top venture firm in Silicon Valley.
But stuff like old-school enterprise software and marketplace businesses are out of favor these days.
ServiceNow, another one of Leone’s wins, was hammered on the stock market this week, with shares down 17.5% over the last five days. It’s far from the only traditional software stock that’s hurting.
Sequoia’s current senior steward, Roelof Botha, is leading the firm through a different epoch, one where the venture capital industry is excited mostly about defense tech and large language models. Predictable software-as-a-service businesses are out; big, bold bets on the future are in. Hardware companies like Nvidia, an early Sequoia investment, are making a resurgence. In some ways, Sequoia is going back to its hardware investing roots.
What founder is better at creating crazy, futuristic, hard technology, and bet-the-farm opportunities than Botha’s old PayPal mafia buddy Elon Musk?
As you may or may not remember, Sequoia has a long history with Musk that goes back to the PayPal days. Sequoia legend Michael Moritz was one of the earliest investors in Musk’s X.com, which merged with Peter Thiel’s company Confinity to become PayPal. Botha was PayPal’s chief financial officer.
Meanwhile, Sequoia partner Shaun Maguire has built a close relationship with Musk, with reporter Margaux MacColl at The Information recently calling him the “Musk Whisperer.” Maguire is Sequoia’s guy trying to see into the future.
Over the past few years, Sequoia has made a string of big investments in Musk’s expanding universe of companies.
In 2022, the firm committed $800 million to Musk’s chaotic bid to take Twitter private. (Leone, Botha, and Maguire co-led the investment in Twitter.) That same year, Sequoia co-led a $675 million investment in Musk’s tunneling effort, the Boring Company, at a $5 billion valuation.
To my eye, those bets seem, at the present moment, highly questionable. Investor Fidelity has marked down its investment in Twitter (now X) by 71.5%. Meanwhile, the Boring Company has a very long road ahead of it in proving that cars in tunnels is a good business.
Many Musk ventures have at various points seemed absurd before proving the haters wrong. I guess we’ll see. (Sequoia skipped another crazy-sounding Musk company: Neuralink. Recently, with Neuralink’s public demo, there are signs that Musk might be onto something there after all.)
Sequoia’s savviest investment in Musk-world to date has been its late-stage bet on SpaceX. The firm first invested in the pioneering rocket company in 2019, in a deal that valued the company at $36 billion. Sequoia put more money in at a $46 billion valuation in 2020, before the rise of SpaceX’s lucrative Starlink satellite internet service. The firm has kept doubling down even as there have been opportunities to sell. Sequoia upped its wager on SpaceX again in February 2021 at a $74 billion valuation. Now SpaceX is reportedly considering a tender offer that pegs the company’s worth at $200 billion.
I think people still underestimate SpaceX. The company doesn’t need to get to Mars for this thing to be a big success. The company’s satellite business has investors really excited and SpaceX’s rocket business has become a core component of the United States’ space edge.
Sequoia’s roughly $800 million invested in SpaceX is likely worth north of $2.5 billion today, a source tells me. That means Sequoia’s paper returns on its SpaceX investment are worth more than the money it has risked on other Musk companies, sources tell me.
No one will say exactly how much cash the firm put into xAI, but it doesn’t sound like it’s one of Sequoia’s larger Musk bets. Investors in the social media company X, including Sequoia, are getting a 25% stake in xAI, according to a post from Musk.
I think there are a couple things worth noting here about Sequoia’s Musk strategy:
Musk clearly rewards loyalty. Firms that are there for him when he needs them get better deal flow. So betting on X could be seen as a very expensive way to take one for the team.
You never know where Musk’s attention will drift. The risk is that you bet on a Musk company that falls out of favor and so you miss the big winner. Betting on a bunch of them means you don’t miss the home run. Right now we’re seeing that possibly happen with Tesla (where Sequoia is not an investor). Instead of building his AI juggernaut inside of his company whose valuation is propped up based on the promise of self-driving cars, Musk is building a new highly-valued AI startup.
Man, that’s a lot of key man risk. People like SpaceX President Gwynne Shotwell seem to be running things very effectively, but if anything happened to Musk, his companies’ prospects would certainly look very different. Musk gives his companies a big recruiting edge and a lot of free publicity. I’d say that X and xAI seem most dependent on Musk’s focus.
Later stage hardware investments are becoming more core to Sequoia’s strategy, and Musk has shown his chops there in a big way.
If you’re Sequoia, with $56 billion under management, you have to take some very big swings. And if you can stomach Musk’s histrionics, as Botha has apparently been able to do for a long time now, there’s logic in going back to your golden goose.