Sequoia partner reveals 4 types of ‘poor quality’ revenue

This article summarizes an episode of Sourcery’s video series featuring Alfred Lin, a partner at Sequoia Capital.

Alfred Lin, partner at Sequoia Capital / Photo credit: Sequoia

Alfred Lin, a partner at Sequoia Capital, believes revenue can be a poor way to judge a business. He argues that in today’s fast-changing market, operational efficiency is a more powerful weapon than capital and also explains how to identify different types of poor-quality income.

What makes a change big or small?

Lin’s focus on operational efficiency is built on how a company handles major change. He argues that real growth sometimes doesn’t come from small tweaks but from a major pivot.

Small changes vs. big changes
Lin makes a clear distinction between minor adjustments and major pivots.

• A minor change is a category expansion. He uses the example of when Amazon expanded from books to music.
• A major pivot is a complete reinvention. He explains this would be like Amazon deciding to “completely [go] out of e-commerce.”

From mobile robotics to drones
He points to Zipline as a good example of a company that made this kind of change.

Lin recounts the origin story of Zipline and its CEO, Keller Rinaudo Cliffton, “Zipline, they started out with this idea of building a mobile platform for robotics where the iPhone was going to be the brains. And what they ended up with was what Keller would say was kind of like a toy… Keller went back to the drawing board and came back and said, ‘You know what? I think we want to build drones.'”

A risky move
The move seemed very risky, as the team had no experience building aircraft. Lin remembers feeling doubtful, “I’m like, ‘What? You were building this mobile platform for robotics. Now you want to build drones. You don’t know anything about drones. You don’t have anybody on the team that knows anything about how to make a drone. How are we going to do that?'”

Finding a market that says yes

Lin explains that such a high-stakes pivot can’t always be tested at home. To prove the idea is viable, a company might need to launch in an entirely different country first.

When your home market says no
For Zipline, the decision to launch in another country was not a choice, but something they had to do because of government rules. US rules would not allow them to operate.

Lin states, “We don’t have any ability to fly drones beyond visual line of sight in the United States. What are we going to do? It’s like, ‘Oh, well, I guess we need to fly outside the United States.’ Like, what? Okay. And by the way, why would anybody pay you?”

Turning a problem into a business plan
Since they could not work in the US, the team had to find a place where their technology was needed.

Lin explains, “I think medical deliveries are really valuable. So, we’re going to start there, but we’re going to start in Africa. We’re going to start in Rwanda because the road infrastructure there is just bad. But we’re going to be able to take blood from the central of Rwanda and fly it out to all these remote places to save lives.”

Working well beats having more money

Knowing when to spend more money

Looking closely at income today

Types of poor-quality income