The Inside Story of Sequoia Capital's Investment in YouTube

Sequoia Capital invested $5 million in YouTube

Their stake was worth $214 million when Google acquired YouTube 1 year later

I found and analyzed their internal investment memo about the deal from 2005

Let's break it down: pic.twitter.com/u2CajV9Zb7

— Michael Houck 💡 (@callmehouck) June 5, 2023

Context:

It only took Sequoia partner Roelof Botha 3 weeks after first meeting the founders to decide to invest.

In the memo, he notes that "several VCs have been cold calling the company" but that he was in "pole position" to land the deal. pic.twitter.com/KWRgjDF9wO

— Michael Houck 💡 (@callmehouck) June 5, 2023

Botha told his partners YouTube was "interesting" for the following reasons:

- The founders are scrappy and smart
- Easy to use
- Growing quickly
- Riding tailwinds (user-generated content, online advertising, inexpensive video cameras, high-speed internet adoption) pic.twitter.com/ryHUvK2mjA

— Michael Houck 💡 (@callmehouck) June 5, 2023

Botha was particularly concerned about competition.

But he believed YouTube could grow fast enough to overcome it by remaining laser focused on improving the user experience. pic.twitter.com/RtnePGrynE

— Michael Houck 💡 (@callmehouck) June 5, 2023

Botha thought the biggest risk YouTube faced was their inexperienced founding team.

He emphasized that they needed to hire a CEO and that the team was open to the idea.

Interestingly, this never happened. Co-founder Chad Hurley remained CEO until 2010. pic.twitter.com/xoLGAEx9NO

— Michael Houck 💡 (@callmehouck) June 5, 2023

Botha acknowledged that he was unsure of YouTube's path to a successful exit.

He said he "cannot point to many high comparable exit valuations."

It's not explicitly stated, but it seems that his strong belief in YouTube's product-market fit gave him confidence. pic.twitter.com/PgYfJE4FDg

— Michael Houck 💡 (@callmehouck) June 5, 2023

Botha was excited about YouTube's not-yet-launched advertising product.

He correctly identified it was their major revenue opportunity.

But he noted "we don't yet know what form of advertising will work best" and it would need to avoid being "intrusive to consumer experience." pic.twitter.com/Ik3kZOBN5N

— Michael Houck 💡 (@callmehouck) June 5, 2023

After modeling out a few scenarios, Botha noted that the most optimistic scenario was 100x above YouTube's current scale.

But he believed the company would get there because of how quickly they were growing.

Today over 5 billion videos are watched on YouTube every day. pic.twitter.com/uPewAfjz9A

— Michael Houck 💡 (@callmehouck) June 5, 2023

Botha viewed YouTube as a content marketplace.

The last risk they called out was balancing growth in viewers vs growth in available content.

The number of new videos would need to be enough to support the number of daily viewers. pic.twitter.com/Cg29AH49nv

— Michael Houck 💡 (@callmehouck) June 5, 2023

Botha proposed that Sequoia invest $1 million in YouTube's seed round.

He set a target of investing an additional $4 million in their eventual Series A, as long as "specific milestones are met." (And they did).

This would have meant Sequoia would own around 30% of YouTube. pic.twitter.com/gTHhjhYn7e

— Michael Houck 💡 (@callmehouck) June 5, 2023

Sequoia's $5 million total investment only amounted to a 13% stake in the company.

YouTube grew so quickly that the valuation was higher than expected.

Even so, their investment was worth $214 million when YouTube was acquired by Google the next year for $1.65 billion.

— Michael Houck 💡 (@callmehouck) June 5, 2023

Retweet this thread to share this memohttps://t.co/Foq1Yoq3Dj

— Michael Houck 💡 (@callmehouck) June 5, 2023

Sequoia's YouTube investment TLDR:

- Concerned about competition and the founders' seniority
- Believed the product would help the team overcome any challenges
- Advertising was an attractive revenue option even before YouTube launched it
- Made a 43x return

— Michael Houck 💡 (@callmehouck) June 5, 2023