Re-Founding Incumbents for the AI Era with Sequence Holdings Co-Founder and CEO Michael Lee

1. 0:00 – 0:34

   Intro

   1. MLMichael Lee0:00

      Every company on the planet has a celebrated persona. In a world where you believe that alpha comes from engineering and AI, you need to create a culture whereby the celebrated persona is the engineer, and that's what's required. You think about your typical investment in a fund, and you're typically trying to figure out how do we start to package to sell this thing in three years. That is just a very different framing for how we think about technological transformation and what, what are the investments you're willing to bring to bear here. What we do is scarce. We're trying to do one deal per year. That's it. Our job is to do one.

   2. SGSarah Guo0:26

      [upbeat music] Hi,

2. 0:34 – 1:03

   Michael Lee Introduction

   1. SGSarah Guo0:34

      listeners. Welcome back to No Priors. Today, I'm here with Michael Lee, co-founder and CEO of Sequence Holdings. They just announced the largest AI take private to date with the Dell Family Office of Baldwin for $7.7 billion. We talk about this, the Sequence story, how AI transformation is actually going to permeate the economy, and what transfers from public investing to private equity to operating. Welcome, Michael. Michael, thanks for doing this.

   2. MLMichael Lee1:01

      Thanks for having me.

   3. SGSarah Guo1:02

      So

3. 1:03 – 1:54

   Sequence Holdings and Baldwin

   1. SGSarah Guo1:03

      you started Sequence Holdings, which is a permanent holding company that works with management teams to buy and refound their businesses to be market leaders with AI. Uh, uh, we should talk about that, and it's a very exciting model, but you also announced this big transaction in Baldwin. Tell us about it.

   2. MLMichael Lee1:19

      Yeah. You know, we started the company 20 months ago, really with an eye towards can we partner with world-class businesses and management teams, working closely with our frontier engineering team to forge market leaders. Um, the brokerage space is an area that we've been spending a lot of time on since the founding of the business. We've met dozens of insurance brokers, and Baldwin was truly N of one of all the insurance brokers that we've met. Um, it was-- It's been a privilege over the last few months to spend a lot of time with Trevor Baldwin and the management team, and we could not be more excited about the journey that lies ahead between us, the Baldwin team, and the Dell Family Office that supported us in this transaction.

4. 1:54 – 4:36

   Idea for Sequence

   1. SGSarah Guo1:54

      I wanna zoom all the way out to a little bit about, uh, you know, your background, you and your co-founder, Alex, how this idea for Sequence came about because you've been, you know, an investor now, you know, a hybrid investor operator. Like, tell me about how you arrived at the idea to begin with.

   2. MLMichael Lee2:09

      You know, when I first joined Lone Pine in 2017, one of the first areas that I was asked to cover was AI.

   3. SGSarah Guo2:16

      That's actually quite early. Yeah.

   4. MLMichael Lee2:18

      It was, you know, as, as I'm sure you recall, it's kind of when AlphaGo came out, um, it's actually when the first transformer paper came out, and there was a lot of excitement at the time around what would be commercially viable if you scale these architectures. And at the time, these were convolutional neural nets, GANs, LSTMs, and the like. And you know, I think we all know how the story ends, which is we obviously saw a lot of exciting things come out of it. But as you scaled these architectures, there are degrading effects over time to scale. You know, I share that context because, you know, when the models came out or ChatGPT came out at the end of '22, you know, what became obvious to me at least is that the world had forever changed. You know, we finally had an architecture that we knew could scale infinitely. Now, whether or not that was possible, what would come from that was not clear, but we do-- we did know that we could scale with compute, that these... the architecture would improve. And you know, like an investor, I started to think about what were the impacts to the world. And I kinda felt strongly that AI would have an uneven impact on the economy. There are certain parts of the economy that I felt that AI just wouldn't impact at all, right? Take restaurants, golf courses, things like that. There are certain industries that I just felt like a startup would win, right? Take coding, for example. Like, conviction in Sequence going to go buy an outsource coding s-services business feels like a terrible idea, which you will give money to Cognition or Philanthropic. But there-- As a student of business, there have always been certain industries where I felt like the incumbent had all the advantages, and that could be brand, that could be scale, network effects, regulatory. And in light of what is going to be the biggest technological shift of our lifetime, I felt very strongly that if you could acquire the right incumbent, inherit the advantages of being that incumbent, could you forge the market leader. And the kernel of that idea is the one that really is upon which Sequence was founded upon. Came up with the idea in early '23. Had a handful of people try to get me to lo-leave Lone Pine and go do it then. Just wasn't the right time for me. And then I remember going for a walk with my wife in '24, letting her know that, "Hey, it's pretty rare in life to be in the middle of the most important technological change of our lifetime," having the kernel of idea I felt very strongly about and feeling very strongly that, you know, I could pull together the team to go and pull it off. And so that's why we, we started Sequence and couldn't be more excited about kind of what we've been able to achieve to date and kind of what we

5. 4:36 – 6:32

   Incumbents in the AI Era

   1. MLMichael Lee4:36

      see ahead of us.

   2. SGSarah Guo4:37

      It's a super first principles approach to, you know, what is the macro change that is happening in technology? How it's gonna impact the economy? Um, but you know, many investors, at least venture investors, would be like, "Oh, no, incumbents have a bunch of advantages. I guess it's just not for us." How did you think about, you know, scale and the idea of being able to engage with or even, um, own incumbents? That's a-- I guess you can just do things, but [chuckles] that's a ambitious, um, premise.

   3. MLMichael Lee5:06

      I, I think it's more just it's the business model that meets the opportunity today. So, like, if you take a giant step back, you know, and at least at Sequence, when we think about what's happening with AI today, we think we're living through the equivalent of the next industrial revolution. And you know, what we generally see at most enterprises, what I typically see from a lot of the software companies that are producing AI agents today, is this giant push to give small machines to every human in the human assembly line-

   4. SGSarah Guo5:34

      Mm-hmm

   5. MLMichael Lee5:34

      ... and to speed up work. And, like, there's nothing wrong with that. That's great. It's better than nothing. But as you know, when you have machines that can work twenty-four/seven, that can scale with electricity, that can accomplish what no individual human or group of humans can do, the right answer is to think about how do you start to reorganize what an organization should be to meet the opportunity with-- of what's available to you with technology. And that's the context upon which we're sitting in. And I think for the f-really in the first time, it-- we have a real opportunity here to partner with amazing companies with great leadership teams, partnering them with our platform and our engineering team and really thinking critically around How do we reorganize the organization? How do we lean into what's best in terms of what these, the technology can do, what can humans do, and rethink how we can compete in these various industries? And I think it's just really more of an opportunity piece more so than an ambition piece in that, like, I just think this has to happen, and I don't see a natural way for it to happen unless you do it

6. 6:32 – 11:21

   Why a Holding Company

   1. MLMichael Lee6:32

      through our approach.

   2. SGSarah Guo6:33

      Can you talk a little bit about the structure of the company? Like, why a permanent holding company? You know, what does ownership enable you to do that being a, you know, a vendor or partner doesn't?

   3. MLMichael Lee6:43

      Yeah. I think there's two parts to that question. So in terms of, like, the holding company structure itself, you know, when I thought about what is required to accomplish what Sequence Holdings wants to do, which is how do we partner with world-class organizations? How do we bring frontier engineering to bear? How do we build a platform that we can share across all of our portfolio companies? The only natural way to do this was through a holding company. How do we build a business whereby we can forge market leaders? How do we align the duration of capital with the sustained investment and operational ch- commitments that are gonna be required to drive the transformation end to end? How do we create an organization that culturally is oriented around forging market leaders, not deploying capital? Um, and lastly, like, how do you create the right structure upon which you can take the retained earnings in your business to rethink about how do you support your existing companies and net new investments? And so when I think about the opportunities in front of us, the only natural way to go do this was through a holding company. In terms of your second question around, like, ownership, you know, let's maybe just play this out through an example. Let's say that you're an incredible business. You know, I won't pick on one. Let's say we're a Fortune 500 company. You have unlimited resources. The-- If I challenge you to say, "Hey, you're the CEO of this Fortune 500 company today, and your job is to refound yourself," you're stuck with three options. One is, "I'm gonna go do it myself." The structural challenge with that, and it's not a bad one, is just it's impossible to recruit and retain the talent required to go and do this refounding. And the obv- the answer to that is actually much more obvious than people think, which is every company on the planet has a celebrated persona. So let's take Blackstone, for example, an incredible organization, one that I admire a lot, and in fact, I make every person at Sequence read King, King of Capital. But the celebrated persona at Blackstone is the investor.

   4. SGSarah Guo8:35

      Mm-hmm.

   5. MLMichael Lee8:36

      And that's why they're able to aggregate the greatest investors in the world. In a world where you believe that alpha comes from engineering and AI, you need to create a culture whereby the celebrated persona is the engineer, and that's, that's what's required. It's the, the reason around why does Palantir exist. You know, I'm sure Alex Karp would hate how I would describe this, but it is foundationally an organization that has aggregated world-class engineers that celebrates the engineer and, and foundationally what they do is it's a wrapper to sell it to other organizations that are not able to get that talent. So that leads me to my second point. So if you can't get the talent to do it yourself, then there's this huge multi-trillion-dollar industry that got formed called the services industry, and these are great companies, Accenture, McKinsey, Palantir, that have-- do celebrate the engineer, that do celebrate change in technology. But the challenge that you have when you partner with a services provider in terms of rethinking and refounding your business is an incentives problem. Services companies optimize for kind of three things: getting in your wallet, staying in your wallet, growing their share of your wallet. It is a path towards incrementalism. To compound that, services pro-providers can't actually change the things that you really need to r-really kind of meet the moment. How do you change how the people are organized, who's working in these organizations, and the incentives? And so if you can't do it yourself, you can't use vendors, and you have the third option, which is what a lot of people do, which is they go buy software. The challenge with buying software is twofold. The obvious one is that it's beta. If it's available to everybody, that you-- it's available to everybody. I think the part that's more nuanced that I think people often miss is that if you and I were starting a soft-software company, the thing we would optimize for is what is a workflow that's reasonably homogenous, that exists in a lot of places, and then how do we install it fast enough but deeply enough such that we can sell a lot, but it's sticky? That-- those are the genetics of-

   6. SGSarah Guo10:31

      Structurally, yes, that sounds very attractive.

   7. MLMichael Lee10:33

      That'd be the genetics of what we'd look for. What that means, though, is that you're always gonna sell to a workflow as it's designed today, as the humans are set up in that human assembly line today. It's the only way you can sell a product. You can't sell a product around a new human assembly line that doesn't exist today because that's how you think it is. And so when we think about why does our mo-motion work, it's how do you have ownership, so therefore you're aligned? How do you bring, uh, create an organization like Sequence Holdings that celebrates the engineer and bring frontier engineering to bear? And then three, how do you drive a long-term horizon and economic model such that we're aligned with management around how do we think about how do we forge the best version of this company possible based on the technology that's available today? And so that's how we think about our business model. It's why we think it works. Um, and the early evidence from kind of BankSouth and kind of what we've observed in the field today, um, have prove-proven that out

7. 11:21 – 13:08

   Recruiting Top Engineers

   1. MLMichael Lee11:21

      today.

   2. SGSarah Guo11:21

      I wanna talk a little bit about BankSouth as well. But in, in, you know, you have a team that includes a bunch of, like, scale and Palantir DNA. Uh, you are trying to keep the, um, quality bar really high. What is compelling to the team, the engineers that work at Sequence?

   3. MLMichael Lee11:38

      I think it's a, a bunch of things. I think the first is really it's an opportunity to kinda work on the companies that actually are the capillaries upon which people interact with. You know, the AI model companies are phenomenal. We would not be here today if it weren't for Anthropic, OpenAI, xAI, and the like. But the reality is, is like the impact to everybody's day-to-day lives really are gonna be impacted by the companies that service them today. And so for us, it's the opportunity to partner with really important companies that play an important role in the economy and really thinking about how do we bring world-class technology to bear to deliver differentiated experiences for their customers. And I think that mission is, like, quite powerful. I think, you know, when I think broadly about the two engineering personas that we typically hire from, I think, you know, call it the forward-deployed engineers, the-- I think that the thing that appeals to them is the opportunity to be really aligned with the value that they create. And I think that's an extremely rewarding experience, and I think the ability to drive the type of change that would not be possible if you're a service provider is quite appealing. I think the other hand, which is probably not as fun for venture capitalists to think about, is like, you know, when I, when I talk to application software engineers, it's, "Hey, we're one of the few business models in the world that's compul-completely immune to what the model's gonna do."

   4. SGSarah Guo12:47

      Mm-hmm.

   5. MLMichael Lee12:48

      As the model performances improve, we celebrate here at Sequence, and that like that gives us more tools to bring to bear in the companies that we partner with. And like there's no real exis-existential risk to whether or not our business will be around. And I think those are kind of things that have appealed. I think the mission is probably the thing that drives it at the end of the day, but I do think there are tangibles when we talk with candidates that have been quite appealing for kinda what we're trying to build.

8. 13:08 – 17:46

   Investing in BankSouth

   1. SGSarah Guo13:08

      I remember when, uh, you first told me, "Hey, we think we're gonna go buy a piece of a bank and partner with, um, uh, with the BankSouth team," I might have reacted with some mild horror about the, um, difficulty and regulatory concerns around that, and I was like, "Michael, you must know that there's a reason that banking is not a popular private equity sector traditionally." Um, tell us a m-little bit about how you, you know, chose financial services and then what you've learned in the BankSouth partnership so far.

   2. MLMichael Lee13:36

      Yeah. So, you know, I think it's worthwhile to take a step back and thinking about how did this investment come to be, and then kind of maybe to tackle kind of how and why it's been kind of the perfect place for s-us to start our business. So, you know, when we started this business, call it March of last year, when you first kind of wrote [chuckles] the first investment to Sequence, you know, we had a cold start problem, right? So it's, the holding company model's a weird business. Like, without money, you can't do a deal. If you don't have a deal, you can't hire engineers. If you can't hire engineers, no one wants to give you money. Thankfully, you know, you were willing to support us. Um, you know, we were able to get a handful of engineers to come work with us, but yet we were stuck with kind of the cold start problem of nothing to really to do. And one of the things that we were debating at the time was, do we just go buy something to prove to the world that we can buy something and change it, or do we wait for the right asset? And as I, I think you know, we've always had a bias towards scale and enterprise. Unfortunately, there are not a lot of investors in the world that wanna give you hundreds of millions of dollars so you'll buy an enterprise to see whether or not your technology works. So what we decided to do is to go and take on a customer and, you know, call a dear friend, Jamie Reynolds, he's one of the co-founders of Avenir, and basically frame for him, "Hey, like, here's the problem that I've run into." And very fortunately, he, his family happens to own a bank down in Georgia, um, and that's how it became our first customer. And that started off August of last year. In fact, it was August fourth. It was my anniversary. I m-remember skipping it. Um, and it was an incredible experience. And so from August to about November, like kinda late November of last year, basically operating in a services motion and, like, really started to tackle kind of the key workflows that existed at the bank. Um, fortunate to us, you know, the family asked us at that point in time whether or not we'd become a permanent partner, and that's how it became our first investment. We ended up closing the investment in March. Took us a little while to kinda negotiate everything as well as get Fed and OCC approval. Um, but I think it's im-- I, I, I share all that context to say that, like operating in a services motion and then being an investor, we saw a night and day difference, right? It's a lot of things. One is from an engineering perspective, you know you're gonna be here for a long time. So the level of complexity and depth that you're willing to take on versus being a service provider, knowing that you'll eventually leave and have to leave behind applications that other people have to maintain is demonstrably different. The second thing is, is just a lot of excitement from the employee base around, "Hey, these people are here to support us for a long time," so how do we push the most ambitious version of this? And then three is like, really we can take a long-term orientation around like, what do we want this bank to look like three years, five years, ten years from now, and how do we lay the technological foundation such that we're always benefiting from model performance? And that's what we've been able to do. In a weird way, the bank was the perfect pilot for what we need to do to validate our business model. It was an ability to buy into minority stakes, so a venture skills type check to operate in a real enterprise-like environment. And in a weird way, the regulated nature of the bank was a feature, not a bug. One of the nice things about a regulated institution is that, um, how it operates is well-defined. The data hygiene is excellent. Um, there are well-defined rules around how your business is supposed to operate. And so if you think about that context, it actually works extremely well for agents. That's one piece. The other piece that's really important for banking, which has been a quite a, quite a learning for us in terms of how we think about investing, is the centralized nature of it. So when we think, talk at Sequence about companies we're looking for, we talk a lot about organizational physics. We like organizations that are quite dense, and the operations are centralized. So anything you build can be amortized over a large base. So like take a bank, for example. A bank may have a bunch of different branches, but all the underwriting happens centrally. So everything we build at, at headquarters gets, gets amortized over all the branches that they're working with.

   3. SGSarah Guo17:13

      Mm-hmm.

   4. MLMichael Lee17:14

      You contrast that with, you know, I think, you know, a lot of the roll-ups that we see out in the marketplace today, which I think is an awesome strategy, but there's a lot of complexity with it. You have to integrate different systems. You have to send engineers to a number of different places. You have to standardi-standardize operating procedures. You have to standardize cultures. And for us, the nice thing about the bank is that while it's a large organization with, you know, $100 million plus of sales, like the physics of the business are quite dense, and therefore we've been able to make a lot of progress in a short period of time.

   5. SGSarah Guo17:40

      There's a central nervous system. There's a ledger. There's some key processes. There are levers you can pull economically.

   6. MLMichael Lee17:45

      Exactly

9. 17:46 – 20:17

   Why an Insurance Brokerage

   1. MLMichael Lee17:46

      right.

   2. SGSarah Guo17:46

      Why insurance brokerage?

   3. MLMichael Lee17:48

      So the brokerage space has been an area that we've been spending a lot of time in since the founding of Sequence. Um, it fits a lot of the things that we look for. And so what do we look for broadly when we're as an organization? We think about, one is scale of the market. You know, what we do here at Sequence doesn't scale. So if we're gonna make a, an investment, we need it to count. We want to work on companies that we think we can build into $100 billion plus companies.

   4. SGSarah Guo18:13

      Like you're not gonna do this 10 times a year.

   5. MLMichael Lee18:15

      No. We're not, we're not an investment shop. We partner with great companies to forge leaders. The second thing that we cared a lot about is, is it an industry where the incumbent has all the advantages? And I'm happy to go into that in greater detail. And then three is, if we think about what the organization does and what AI is good at today, and we think about the overlap Can we build something special? And the brokerage industry, in a lot of ways, fits all of that. It's a two trillion dollar plus of premiums per year going to carriers. The brokers take a, uh, a vig on that, and it's been an industry that has minted dozens of very scaled company, large companies over time. In addition to that, it's just been a wonderful industry that's been really hard for startups to compete in. And it's for reasons that are less obvious to people than people think. Um, if you think about the insu-insu, uh, the insurance value chain, there's three parts to it. You have the carriers, you have the distribution partners, and then you have the customer. The carrier has-- makes money two ways. You have underwriting, which is I price risk. I hope to pay out less claims than what I receive. And then the other part of the business is investing. The insurance in-industry, since the beginning of time, has almost made no money underwriting and has made the pr-principal amount of their money through investing. So what that incentivizes is asset gathering. So getting high-quality gross written premium is the name of the game. And so that's why the brokerage industry is so powerful. Another industry interesting feature about the brokerage industry is that your customer doesn't actually pay you, the carrier does. So if you think about the nature of the business, which is a very relationship-centric business, gross retention rates are ninety percent, and you think about the fact that a broker doesn't-- can't-- doesn't really compete on price, it's a very difficult industry for, for startups to g-get into. So if you think about what's perfect for Sequence is it is a huge market. You have companies that are largely immune to startup risk. But what if we could partner with the right one? And that's what the opportunity at Baldwin presented, which is a scaled a-a scaled asset with a centralized technological foundation and a world-class leadership team that is both ambitious but also extremely excited about what's possible today with frontier technology.

10. 20:17 – 23:53

    Atlas Platform Explained

    1. SGSarah Guo20:17

       What can you say about what is, uh, generalizable or shared from a, like, a platform technology perspective across, um, the different companies?

    2. MLMichael Lee20:27

       Yeah. So I think if you take a step back, you know, we think about our shared capab-- shared, shared platform capabilities as two broad, broad-- in two broad areas, right? One is Atlas, which is our platform, which I'll tell you about here more in a second, and then kind of our engineers and kind of, you know, we have a playbook for how we work with companies. Like, this is an art, not a science. You know, I often joke internally that we have two problems here at Sequence. We have an engineering problem and a human engineering problem, and the human engineering problem is much more difficult than the engineering problem. But if we think about the engineering problem, we think about Atlas. So what is Atlas today? Atlas is our platform that we have built at the bank that we think-- that we expect to generalize over industries over time. And part of that is an observation that a number of our engineers have had from their prior lives, both at Scale, Palantir, and others, which is if you break down the business to its atomic units, eighty percent of it is largely homogenous and twenty percent of it is vertically specific. And so if you think about what is Atlas, Atlas is basically our platform that both does a number of things. One, it helps improve, um, the speed to which we can deploy, improves agent performance, it improves our build rates for our own engineers, and ultimately, it's a builder platform that allows the operating company engineers to build upon. There's four layers to it. So the, what we-- the first layer is the data ontology. So think about that as just simply how do we define the organization, the motion of that business in code. And that's extremely important. The way that we talk about internally is how do we make the business legible to models, right? How does a business, how does an agent know that this customer is the same as this cu-the customer in this system here? And how the properties of that customer, um, interrelate with the claims or the loan, the l-the, the loan policies that, that, that, that are associated with it. The layer on top of that is our agent builder, which is basically how do we build high performance agents grounded in ground truth, kind of, kind of the q- the things that we, I think we, we hear and read a lot about. The third component to it is what we call Lattice, what it-- which is our orchestration engine, which is, like, how do we actually instrument workflows using the agents that we've built? And on top of that, at the top, is what we call Artifacts, which is basically our application builder that sits on top of everything that we've built. And so if you think about what we've built in terms of A- uh, Atlas and what we've built here at the bank, foundationally, all the core infrastructure we've built is reusable at Baldwin and any future company that we do. And so that's, like, a core component of what we've built to date. On the playbook side from an engineering perspective, yeah, like, I think this part is, is an art, not a science. You know, I think one of the nice things about having great talented engineers from places like Scale AI and Palantir, they, that they have developed the playbook. But, you know, what we do is different. You know, I would say that, you know, one of the learnings that we've had with the bank post the investment is how much more hyper-attuned we need to be and sensitive to how employees feel, which is like there's, you know, as exciting as it is, it does draw a lot of anxiety around, like, what does this mean for us as an organization? And the key thing for us to sequence is how do we make people feel like what we do when we bring to bear here is how do we make elevate what you do here at the job? How do we exercise what is the best parts of being a human? How do we think about making your job more fun, taking away really the rote kind of repetitive work out of your work-workflow, and how do we make feel, make you feel like your organization's winning? And, like, that playbook is something that we're gonna continue to refine. I think we've learned a lot here at the bank. We expect to learn a lot here at Baldwin, and, like, that's gonna be a key component of what compounds over time for us to sequence.

11. 23:53 – 27:23

    Traditional Private Equity Limitations

    1. SGSarah Guo23:53

       What do you think is going to be special for you guys over time here that's very hard for, let's say, uh, more traditional large buyout shops to replicate, right? Because I, I, I don't know a single one that doesn't, uh, I think at least think about AI transformation today, and, like, much of what they do from a returns perspective, um, is probably dominated by, you know, underwriting consolidation to platforms, multiple expansion, uh, some financial engineering. But, um, I, I do think, you know, people have, like, let's say, portfolio value teams. So how do you, how do you draw the distinction more strongly between we're not an investing shop and, like, here's what we think it's still hard for other people to do without us?

    2. MLMichael Lee24:35

       So I have a lot of admiration for all the big private equity firms. Um-

    3. SGSarah Guo24:38

       And you used to work at Apollo.

    4. MLMichael Lee24:39

       I used to work at Apollo. I have a lot of friends who still work at all these various firms. Um I think they will continue to do great, but I deeply believe that we have a very different business.

    5. SGSarah Guo24:49

       Mm-hmm.

    6. MLMichael Lee24:50

       Right? If you think about your typical private equity firm, they are set in a fund structure. The fund structure economics are such that it incentivizes you to deploy capital. They're in the business of finding great assets, pricing them attractively, putting the right capital structure in place, doing sufficient amount of value creation to generate the, the required rate of return to satisfy their LP base. Our business is very different. Our business is around how do we find world-class organizations run by exceptional people and taking an extremely long-term horizon around how do we forge the market leader? And what we do is, is different by virtue of that. Now, I think there's a... The pointed question I think you're getting to is, can private equity firms over time do radical AI transformation through their motions? And I think many will definitely make a lot of progress on this front. Like, I, I certainly think private equity firms are incentivized. They have the resources, they have the capabilities to start to go and make meaningful progress on this front. I do, however, think that there are a number of limitations that they do run into, and I think many will find ways to solve parts of these. You know, one is, like, how do you recruit world-class engineers to come work at your firm? It's really difficult to do. Your typical PE firm has designed itself to celebrate the investor. And when I look at my great engineers, they wanna be in the room when decisions are made. They wanna have a say in terms of like, "Hey," like whether or not this is a good or a bad business. My guess is that if you go to your typical large cap buyout firm, it'd be highly unusual to find a twenty-five-year-old engineer have any say on, in terms of that investment profile. Um, so I think that will be challenging. I think the second part that's challenging is just the time horizon, right? The reality is, is if you think about your typical investment in a fund, it's, you know, they'll tell you it's a long time horizon, but you're typically trying to figure out how do we start to package to sell this thing in three years.

    7. SGSarah Guo26:31

       Mm-hmm.

    8. MLMichael Lee26:31

       That is just a very different framing for how we think about technological transformation and what, what are the investments that you're willing to, uh, bring to bear here. And I really think the last thing is just, you know, for us, we just have a extreme, extreme focus on, like, quality of business and team. And it's not to say that other private equity firms do not, but, like, we... What we do is scarce. We're trying to do one deal per year, that's it. We don't have a deployment cadence. I don't have a group of investors and LPs who are telling us, "Hey," like, "you guys are underinvested in the year." Our job is to do one. And if that means that we don't do any this year, that's fantastic. And, like, it's just, like, a very, I think, a very focused and deliberate approach that's just very different. We're gonna touch a very small surface area of the world, and I expect all these other private equity firms to continue to do great. But I do think there are core differences in terms of the genetics of the companies that we've built.

    9. SGSarah Guo27:16

       I hope to hold Sequence equity for, you know, the rest of my life, so, you know, go forth. Um, what,

12. 27:23 – 31:04

    What Sequence Looks For in Management Teams

    1. SGSarah Guo27:23

       uh, uh... Just, just one more, one more question on, uh, your own underwriting and, and the scarcity. It must be true that every CEO in their earnings calls over the last few years has talked about AI. Um, I think people recognize the change. I think, um, people genuinely want to invest in these capabilities for their companies. Um, what are you looking for in management teams where you say, like, "We can help you become a leader," or even a more, um, uh, dominant leader?

    2. MLMichael Lee27:52

       You know, I think you can learn a lot about a management team just in terms of, like, how, how do they play the game in the industry upon which they grew up in? And, like, that's, like, just, like, a core part of what we look for, which is, at the end of the day, Sequence has wonderful engineers. We have a very talented investing team. But at the end of the day, like, I have no expertise running a broker. I have no expertise running a bank. We're heavily reliant on the management team to be the best at their craft and competing in their respective industries. And, like, that's a core component of, like, how we evaluate management teams. The second piece, which is kind of more kind of central native to what we do, is what we do is difficult. Like, change and transformation is hard. Um, and as I alluded to earlier, like, the human engineering piece is, like, the hardest problem that we're gonna work on. And so when we think about the management teams who we wanna work with are management teams that have been excited about technology, that have already just start-started to put the groundwork and lay the foundation around driving change. These are gonna be small things around being in the cloud, like centralizing your data, data infrastructure. It probably means that you've already started to install OpenAI or, and/or Anthropic across your organization. You're making those efforts. And it tells you a lot about the individual who is willing to go ahead and do that at, at a point in time where it's still, like, not obvious to go do.

    3. SGSarah Guo29:14

       There's a lot of noise about, like, is there any real ROI on AI today?

    4. MLMichael Lee29:17

       Yeah.

    5. SGSarah Guo29:17

       Yeah.

    6. MLMichael Lee29:18

       And then also there's a lot of angst and anxiety and understanding, you know, how do you, how do you get your employee base excited about the fact, like, this is where the world is going, and we're gonna be at the forefront of it. And so, you know, I think Baldwin is a perfect example of that. You have, you know, Tre- in Trevor Baldwin, an exceptional CEO. Um, he was early in terms of driving Anthropic end-to-end within Baldwin. Um, they are on a single instance of, um, Applied Epic, which is your AMS, uh, which is functionally called the core operating system and insurance broker. And these are not easy things to do. It takes a lot of intent, kind of investment and change to go and do that. And so when we think about what is it that we look for in management teams is exactly that. Are you great at what you do on the field? And then two, have you already been driving the change in terms of adopting technology and, and leaning into what's possible today?

    7. SGSarah Guo30:08

       I remember when we first, uh, started talking about the Sequence thesis, I, um, I was actually, like, a little mixed on the idea of roll-ups. I, I just said like: Hey, you know, there's the technology piece, there is change management, there's operating the actual company, and then there's underwriting, um, and then there's deal-making, right? There's like, there's a lot of pieces go... I, I believe that this is the... this is a way that enormous businesses can change and go win industries. And then I think it's much, much harder than people think, and I think it's better at scale. And I, I remember you described, you and Alex described that to me much more clearly, where they're like, "Actually, we think change management and operating the business is gonna be the hardest part, and we have to assemble the team to go attack it, but we're also gonna partner with people." And as a, as a zero to one venture person, I'm like, "Ah, with incumbents." But I, I, uh, uh, I now, um, believe that is the correct path. With the right management teams, of course.

13. 31:04 – 34:45

    Accomplishments at BankSouth

    1. SGSarah Guo31:04

       What have you actually already accomplished at the bank, if anything? And then what is giving you confidence on, um, doing this at more scale?

    2. MLMichael Lee31:11

       Yeah, as I mentioned earlier, you know, you know, post-investing in March, um, we took a giant step back, and we thought about, as we look forward over the next decade, what does, like, the leading community bank look like? And so if you break down a community bank into its simplest parts, it has three parts of the business. You have a part of the organization that hunts for deposits. You have a part of the organization that hunts for loans. And then you have the core apparatus in the middle today that works very closely around how do we underwrite de-- un-underwrite loans and ensur-and ensure that, you know, we're giving loans to the right people in the community such that we're servicing the community in the right way, but we're also jar-- creating kind of the right economic model for BankSouth. Um, if you think about what we have done today is if you think about your average bank, historically speaking, loan volumes grow linearly. We call it middle and back office headcount. For no other reason than the fact that, like, processing a loan is a complex endeavor, and it does require a lot of individuals to be involved as a part of that process. What we have spent a lot of time on since we've gotten involved with the bank is how do we not only improve underwriting, but how, how do we ensure that all the people at the organization are focused on the things that they're best at? And so how do we get the underwriting team to stop spending time in terms of inputting numbers, but spending much more time on loans that have exceptions? What we've done since we got involved in the bank fr-- since March, and so it's been, call it, roughly six months since we first invested. What we've done now today is we've built a system that can take, take on all consumer loans within the organization. So the average cons-consumer underwriting today has decreased by ninety-four percent since we got started in March. Um, another good example of kinda what we've done is-

    3. SGSarah Guo32:48

       Sorry, the timeline.

    4. MLMichael Lee32:49

       The timeline. So th-that's really powerful. We've started to roll out commercial loans underwriting over the last few months, and we functionally have taken the average loan at the bank, which used to take thirty days to go, go end to end, to eleven days. Um, I share that to say that why is that powerful and why does it matter is that fun-foundationally what we've done with the tools is that we've allowed the organization to be able to take on significantly more loan volume than was ever possible before with the same amount of headcount. This is purely luck. I'm not gonna say Sequence had anything to do with this. But in Q2 of this year relative to Q1, loan volumes doubled at the bank. Historically, the bank would actually turn away business in that, like, the middle and back office, you know, the, while everyone's working really hard, has limits to how much bandwidth that they can take on. Um, given the systems that we've built, actually, the bank was actually able to handle all the loan volume, not change their underwriting standards at all. And in fact, we're-- it was able to do this with a significantly smaller underwriting team than what had existed prior to our investment. And reason why the underwriting team is smaller is one person retired and one person got moved into the front office. And I think that's just exemplary of kind of what is it that we do, which is like, how do we ensure that the right people are in the right places? How do we get them to work on the things that they enjoy working on? And how do we allow the organization to do more with less? And what that has resulted in is that every hu-- individual at the, at the bank today gets to spend time on what they do best. Loan officers are spending more time in the field versus writing credit memos. The credit underwriters are working on the hardest and most complex loans versus thinking about, how do I figure out whether or not we should issue a loan for a boat when the person already clearly has enough money? And that's what we've achieved at the bank so far. And as we look forward, we think we've laid the foundation for what should be a really exciting roadmap ahead around spinning up new products and new businesses, um, giving new tools to the loan officers and relationship managers such that they can sell more products. And then how do we start to think about de-delivering a differentiated customer experience that no one else in the industry can do?

14. 34:45 – 36:08

    Founder Lessons

    1. SGSarah Guo34:45

       So when we met, you were leaving the privates business at Lone Pine, a career investor. Uh, what is the biggest surprise or realization having started a company?

    2. MLMichael Lee34:56

       You know, I get asked this question from friends of mine in the investing business. And, you know, maybe, like, if you had to take a giant step back, the level of empathy I have for founders today versus even when I was running the privates business as Lone Pine is, like, just night and day. It is, it is remarkable to see people take an idea and build it from nothing to something. Um, it is not easy to attract people to come join you on your journey. It's not easy to attract capital to jo-join you on this journey. Um, but it's exceptionally fun and rewarding. And I have an, an immense amount of gratitude to the people who supported us at the beginning, like yourself, like Joe and Druid VC, um, and to all of our early employees. And, you know, what I'd say is that it's a, it's a... it's the highs are highs, the lows are low. There are days where it's extremely, exceptionally lonely. But I could not be having more fun. And all I have to say is that everything that Elon and Jensen talk about in terms of being exceptionally painful is exceptionally true. But, um, it's been a lot of fun.

15. 36:08 – 37:10

    Story of Dell Partnership

    1. SGSarah Guo36:08

       I love this partnership of equals, Sequence Holdings and the Dell Family Office. Tell me about how this happened.

    2. MLMichael Lee36:14

       It's a great story. Um, you know, as you can imagine, in a take private scenario, um, you do need to have certainty of capital. And as ambitious as we are and as amazing our partners are, um, most people don't have billions of dollars around to support an equity commitment letter for a take private. And so, you know, we started spending time with a number of partners in the market to think about approaching Baldwin together around kind of exploring the thesis that we brought to bear. Uh, we got introduced to the Dell Family Office. Um, and you know, I have to give Michael Dell, Dan Battar, who's the head of Global Direct Investing, a tremendous amount of credit for working closely with us to underwrite the deal, um, underwrite our technology platform, our technology transformation motion, and supporting us in this transaction. Um, they've been wonderful partners to us. Uh, we are gonna be co-controlling this at Baldwin together, and we expect to be partners for a long time.

16. 37:10 – 40:00

    Career and Investment Approach

    1. SGSarah Guo37:10

       So you have been a private market investor, a public investor, um, an operator. You know, I guess now you're doing take privates. Uh, uh, how do you think your career, uh, has affected, like, the way you predict markets, the way you look at markets, and, and, um, the unrolling of this technology?

    2. MLMichael Lee37:28

       You know, I think I've been very fortunate in my career to have the opportunity to wear a lot of different hats and learn the different, call it crafts of investing. You know, so I worked at Goldman coming out of college. I went to go work at Apollo, which was just, like, an awesome experience. Learning how do you structure a deal, how do you think rigorously around capital structures, how do you understand credit agreements and documents, how do you design management incentive plans, and, like, really learn the blocking and tackling of, like, private equity. Um, the opportunity to go to Lone Pine was really an opportunity to start to study the best companies in the world. You know, what's amazing about Lone Pine and working in an organization g- that gets to look at the full public company universe and have the difficult challenge of figuring out what are the best companies in the world is just an amazing aperture to learn, right? Like, why... What makes Nvidia great? What makes Microsoft great? What makes Visa great? And I think you learn, you know, this may be an overused term today, like, a real taste for, like, what is a great business. And then you also learn to appreciate the benefits of long-term compounding. And that was a really, really powerful kind of five years that I did at Lone Pine around studying the greatest companies in the world and, like, really deeply internalizing that the greatest companies in the world compound at rates that no one ever thinks that they can. The opportunity to kind of go and build out the private investing business at Lone Pine was really an opportunity to start to spend time at the frontier of technology, spending time with founders working on really hard problems that, like, other people didn't really see. Um, seeing what it takes for someone to build something to noth- from nothing to something. And then really getting really, really deep in terms of understanding where technology is taking the world. And so if I reflect on, like, how and why I think about the world that I do, it's, it's kind of the amalgamation of these experiences, which was like, how do I think about kind of an ownersh- the benefits of ownership? How do I think about that with the taste of what is a great business and having a, a real appreciation for the benefits of long-term compounding with like, man, like, here's what's possible if you marry that with world-class engineering and frontier technology. And, like, I think that's, you know, the... That experience is really what colors how we think about investing here at Sequence Holdings, which is, like, how do we marry kind of all the skill sets and the best of what I think are kind of the key domains for my invest- investing career?

17. 40:00 – 42:23

    Value of Exceptional People

    1. SGSarah Guo40:00

       You've never, um, been officially an early stage venture capitalist. What do you think that this class of asset managers misses?

    2. MLMichael Lee40:08

       If I were to take a giant step back, and if I were to, like, rethink, like, how I would app- approach private investing today if, if I were ever to go back into it, which I won't, but is just finding exceptional people working on hard problems in big markets. If I've learned anything in terms of my experience with Sequence, spending time with other founders today, is that, like, ideas are cheap, and execution is really hard. And, like, truly exceptional people will always figure out how to make something work, and that may be because they bring someone on board that highlights a weakness that they have. Um, it may be that they're able to, with enough persistence, get the right people to come support them on something that everyone else thinks is crazy. And so if I were to go back and do it again, I think betting on exceptional people is kind of the only thing that matters. Like, I just think that the vast majority of other things, whether it's the greatest idea I've ever seen, like, the greatest, hot, hottest traction we've seen in a lo- short period of time, like, I think are important signals. But at the end of the day, this is a people business, particularly early on, and people working on, who are highly ambitious on really hard problems that are in very large markets, you should back them all the time, even if it seems crazy. 'Cause I think the, you know, the upside convexity of backing those people largely offset kind of the rest.

    3. SGSarah Guo41:18

       That's a very... Isn't that the most purist venture attitude?

    4. MLMichael Lee41:21

       I think that's exactly right.

    5. SGSarah Guo41:22

       Mr. Michael Lee, private equity and public markets guy, is saying back great people in huge markets?

    6. MLMichael Lee41:27

       That's exactly right. I think that's the name of the game, and I think that's also true in public markets as well. Like, if I think back and I reflect on, like, the best investments that we've made at Lone Pine, if I think about the, the best companies that have been in the market today, it's been like, go find exceptional people. Like, I think the best example of that is, like, I remember meeting Jensen Huang in twenty seventeen. It's kind of crazy to think at the time, like, today, that, like, it wasn't what it is today, and he has been remarkably consistent. Clarity of thought, incredible execution. Been able to surround himself with the smartest people in the world who are extremely loyal and has con- constantly figured out ways to kind of refound his business to compete in a ever-changing market. And find exceptional people working in big markets, and I think whether it's early stage or late stage, I think most people will be surprised at the upside in terms of how that always plays out.

    7. SGSarah Guo42:20

       That's a great note to end on. Thanks so much, Michael.

    8. MLMichael Lee42:22

       Thanks for

18. 42:23 – 42:42

    Conclusion

    1. MLMichael Lee42:23

       having me. [upbeat music]

    2. SGSarah Guo42:26

       Find us on Twitter at NoPriorsPod. Subscribe to our YouTube channel if you wanna see our faces. Follow the show on Apple podcasts, Spotify, or wherever you listen. That way you get a new episode every week. And sign up for emails or find transcripts for every episode at no-priors.com.

Episode duration: 42:44