Roelof Botha, an actuary and venture capitalist based in Silicon Valley, is driving innovation affecting the public globally. He talks to Marjorie Ngwenya
Roelof Botha graduated from the University of Cape Town (UCT) with a bachelor of business science degree in actuarial science, economics and statistics - he achieved the highest grades in the history of that program. In 1996 Botha qualified as a Fellow of the Faculty of Actuaries - the youngest to do so in South Africa at the time. He later went on to complete an MBA at Stanford University, where he was valedictorian of his class.
In Silicon Valley, Botha's roles have included being CFO of PayPal at a young age and director of YouTube, Tumblr and a range of other companies whose products affect hundreds of millions of people today. For the past 10 years, he has been partner at Sequoia Capital, a venture capital firm in the Valley, focussing on internet services and software investments. He led Sequoia Capital's investment in Instagram, and currently serves on the boards of companies that include Eventbrite, Evernote, and Square.
I spoke to Botha about his motivations for training as an actuary and how this complements his current role. I sought his views on leadership and the direction of future technological innovations. During our conversation, I found him to be sharp, visionary and highly engaging in equal measure.
What led you to pursue an actuarial career?
In South Africa I grew up in the shadow of a well-known father and grandfather. I had the top results in the province when I finished high school. "Botha's grandson is number 1" was the headline carried in the local newspaper. Psychologically, I was driven to make my grandfather proud and accomplish something in my own right.
I finished high school at the end of 1990 - it is the year that the ANC was unbanned and Nelson Mandela was released. People were speculating about South Africa's future and the country has certainly fared well compared to expectations back then. No one could have foreseen the peaceful transition that we've had. I wanted to keep my options open and studying actuarial science meant that I had a passport that allowed me to work internationally and to compete on a global scale.
Actuarial science was the most difficult degree to get into. I relished the challenge it presented. A student two years my senior was my role model. He chose the actuarial path and it influenced my thinking.
The appeal of the actuarial science degree was that it taught problem solving skills. If you develop the skill of being able to approach situations analytically and solve very complex problems, that serves you well whatever your career.
There is a subtle benefit of actuarial science which I didn't appreciate when I joined the profession. Professor Robert Dorrington at UCT once quipped, "Actuaries are trained to think 30 years into the future and accountants are trained to think a year in arrears." Part of what actuarial science enforces in you is long-term thinking and that frame of mind influences the work that I do today. We invest in companies that employ three people and we have to imagine what the company might turn out to be in 10 or 15 years.
In 1996 you became the youngest to qualify as an actuary in South Africa - a Fellow of the Faculty of Actuaries. How do you view that accolade?
I was thrilled! However it paled in comparison to the thrill of being able to pass first time and the stress of waiting many months for results to be published. I remember I was at the Grahamstown Art Festival that year when the results were issued. It is South Africa's version of the Edinburgh Festival. When you've devoted that many years of your life to accomplishing an objective, anyone could tell you if feels wonderful.
After a stint with McKinsey in Johannesburg, I understand that in 1998 you went to the US to pursue an MBA at Stanford University Graduate School of Business where you were valedictorian.
What motivated you to pursue an MBA?
One of my colleagues at McKinsey was a Stanford graduate and he convinced me that I should at least apply for a post-graduate programme in the US. Having done my undergraduate degree and qualified as an actuary, an MBA seemed a bit wasteful as I had already covered some basic business training. He convinced me nonetheless. A further factor was that I had once overheard someone at UCT accrediting my academic success to my grandfather's influence. Part of my drive at Stanford was to make a name for myself in a place where no one knew of my family or background.
If you think back to the late 90's, we were starting to see the rise of technology. There was a lot of enthusiasm around what was happening in Silicon Valley and the pervading sentiment that software was going to change the world. There was excitement about opportunities to build new companies which would take on the established guard, in an environment of enormous wealth creation, disruption and change. When I was accepted at Stanford it was a great opportunity to live abroad for a few years, compete against the best and take on a fresh challenge.
How well do you think your MBA has complemented your actuarial training for your career toolkit?
I was exempted from a lot of the basic curriculum in subjects such as accounting, finance and statistics because of my actuarial training. It freed me up to do a lot of interesting subjects, for example advanced derivatives. The real value in the MBA from an academic point of view was learning about non-quantitative subjects such as organisational behaviour, negotiations, leadership and interpersonal dynamics - affectionately known at Stanford as "touchy-feely".
It was an eye-opening experience allowing me to receive unvarnished feedback about the impression I create. Your classmates hold up mirrors to your blind spots and it is enlightening to understand how you come across. Functional competence and technical skills are important as a foundation but interpersonal and leadership skills are key differentiators later on - understanding how to influence and motivate people.
What one skill would you advise trainee actuaries to hone early in their career?
Empathy - the ability to put yourself in someone else's shoes is an underappreciated skill.
Please share some anecdotes from your time at PayPal. What did you learn from holding such an influential role?
My involvement with PayPal was a true case of necessity being the mother of invention. I had run out of money, due to the emerging markets currency crisis in 1998 when Long-Term Capital Management blew up. I also couldn't take money out of South Africa prior to leaving the country because of exchange control. So I watched the dollar value of my rand savings plummet.
I didn't have money to pay rent one month. I borrowed money from friends and family. It was embarrassing to be in that position. When the third offer from PayPal came around, I accepted it so that I could work part-time for three months before graduating.
Soon after joining, I built a bottom up financial model to help understand the drivers of the business. It turned out to be a good model that was very representative of the company's situation and gave us visibility in being able to forecast. As I was building the model I was trying to reconcile actual results compared to expectations. I discovered that one piece of the model, which worked out fraud losses, was divergent. Identity theft was rife at the time and we were losing millions of dollars a month from this activity.
The view that was taken by the accountants mismatched the losses and the exposure to which they related. I applied the chain ladder technique to our fraud losses to try to understand their cumulative distribution function. I was trying to work out how long it takes on average for fraud to be notified. I realised that our losses were much larger than we had believed. I quantified the size of the problem and spurred engineers to build frameworks for fraud control. We caught the problem early and saved the company from bankruptcy. It was an interesting experience to apply actuarial techniques in a very different context.
Initially, I had a single model, which I checked and tweaked monthly. I soon figured out there were two underlying fraud types - identify theft and merchant fraud; both displaying different characteristics. Changes in the mix of fraud were masking underlying movements. We were continuing to break down the problem and building more predictive models.
In a fast-paced internet start-up, when your predictions turn out to be robust, you build credibility in the organisation. You can start to see the impact of changes to business models and use scenario analysis to aid business decisions - it is of enormous value to a company.
After identifying the fraud problems, we used logistic regression analysis to build the initial fraud models to predict whether a new user was a good or bad user. We could decline what were believed to be fraudulent customers. Nowadays they largely use machine learning techniques.
Technology is advancing at such a fast pace, vastly reducing distances, as this virtual interview today proves. Tell me about your and Sequoia Capital's role in this.
Sequoia invests in very early stage companies and helps them blossom. Take for example YouTube, where the three founders are friends from PayPal. Sequoia was their first investor - I took a board seat and helped grow the business and it was acquired 12 months later. I acted as an advisor helping the founders to navigate business-building and assisted with strategy, negotiations and the eventual sale to Google.
Part of our involvement is providing financing but being a business building partner is a strong area of focus. We meet regularly with entrepreneurs at board meetings and act as a sounding board.
I get a thrill from watching companies thriving in the long-term in the way that PayPal and YouTube have done. I am inspired by the impact they have on the lives of hundreds of millions of people across the globe.
What future innovations do you foresee?
The least sexy and basic innovation to note is that software is infiltrating so many parts of the world. In the same manner that decades ago maths was a foundational subject, computer science is becoming that way.
There are tens of millions of people applying computer science in their jobs every day to help them be more productive. This includes modern actuaries. The recognition of the role of computer software in any discipline is something we should be aware of and harness. If you want to stand out in tomorrow's world you need to leverage computers as much as you can.
There is an abundance of consumer service innovation taking place today because of the accumulation of technology and the ubiquity of computing devices in consumers' hands. When I joined PayPal there were some 250 million people in the world with an internet connection. Just 13 years later, that number is 10-fold - a third of the population of the planet. Smartphones are truly the personal computer and open up a range of services that can be made available.
We were the original investor in Whatsapp, recently acquired by Facebook. It has half a billion users of its messaging service saving lots of money as a result. It is fascinating to be able to innovate with a team of 55 people and serve so many people around the planet with a wonderful software application that leverages cellular technology and smartphone capability. There is a whole class of that sort of innovation which is very interesting and has a ripple effect on infrastructure such as database technology. The databases we used at PayPal wouldn't meet the needs of Whatsapp today - the scale is entirely different. It is an interesting cycle of innovation and tomorrow's data warehousing technology is incredible.
Lastly, there is an explosion of data science making its way to other industries such as biology. I am on the board of a company started by a South African who I met at a Science Olympiad in 1990. The founder is a PhD in electrical engineering but applying techniques to biology to make sense of fragments of genetic information to help parents make choices about the health of their children. They are using data science and Bayesian techniques to make informed decisions by combining completely different disciplines.
How would you describe your leadership and influencing style?
Supportive but demanding. In my work, I help entrepreneurs and founders be the best they can and their companies in turn. This relies on the brilliance and determination of founders but we play the role of setting high standards to help them realise their potential.
If you were beginning a three-week break tomorrow, how would you spend the time?
I would spend it with my family. I am married with two young children and it's always fun to spend time with them.
I also have a number of interesting books that I'd like to read. My biggest frustration is I am able to buy books faster than I can read them! I remember being at my grandparents' house when I was four or five, looking at a huge stack of encyclopaedias and fantasising about absorbing all the knowledge within them. A little bit of that curious child has remained with me and if I could have a 'groundhog day' I would spend all my days in a library to read every book available.
Standing in 2024 and looking back, what new milestones would you be proud to reflect upon?
From a career perspective, I would be most proud of the companies that I am involved with today and companies that I will support in future being enduring businesses in 2024. We are in the business of making money for our limited partners, foundations and endowments, but I get a thrill from watching companies thriving in long term in the way that PayPal and YouTube have done and I am inspired by the impact they have on the lives of hundreds of millions of people across the globe.
In my personal life, being a good parent and a husband.
Do you find time to read The Actuary?
Yes! I have it delivered to the office. My colleagues walk by my desk and marvel at me. I am accustomed to it though - I suffered enough actuarial jokes as an undergraduate.
I like to read articles related to finance and investment. I have always had a keen interest in theoretical finance, options and derivatives.
As an undergraduate I used to look at back pages. Nowadays I am drawn to the puzzles pages.
My biggest actuarial challenge is doing CPD while working in such an unusual environment. I have also been watching the training videos on the Institute and Faculty of Actuaries' website and I find them very useful.