After listening to Professor Doyle’s discussion on venture capital, I was intrigued to watch the video of Sequoia Capital’s founder Don Valentine at Stanford Business School that Professor Doyle mentioned during class. That being said, I have decided to write this blog post on Sequoia Capital, Don Valentine, and how the firm has been phenomenally successful in the venture capital space for so many years.
Don Valentine started Sequoia Capital in 1972 in Menlo Park, California. Since its inception, some of Sequoia’s most notable investments include: Google, Oracle, Atari, Instagram, WhatsApp, Youtube, Hubspot and many more. The total market capitalization of Sequoia-invested companies now have reached roughly $3.3 trillion. It is clear that Sequoia has had outstanding success in the venture capital space. So what sets Sequoia apart from all other venture capital firms? Why have they been able to identify and successfully invest in so many unicorns throughout the past 30+ years? Don Valentine addressed these questions in his speech at Stanford Business School.
From the several venture capitalists who I have heard speak or have read about, each of them has said that the most important factor when determining whether or not they will invest in a startup is the people. Their reasoning for this is that there are so many similar companies in the world, therefore, it is about finding the right people who can take their company to the next level and beat out the tremendous competition from other startups or large companies. However, Don Valentine and Sequoia Capital takes a different approach, which may signal towards their outstanding success. The Sequoia team values the market opportunity over all other factors when analyzing a startup. They believe that in order to build big companies and make the 50X returns they want on their investments, they must invest in ideas that have a huge market opportunity. They look for markets with little competition, markets that are dynamic, and markets that when combined with Sequoia’s capital and guidance can be billion if not trillion dollar industries.
Some of the most prominent markets that Sequoia has and will continue to invest in involve a platform-like effect. For example, after Sequoia determined that Apple was creating a new market themselves, they understood that Apple as well as its competitors would require disc drive technology, user interface technology, and mouse technology among other things for all of their products. That being said, Sequoia financed a variety of startups that were producing these technologies as they understood how much of a necessity these technologies would be in the new, massive personal computer market. Don Valentine found tremendous success with this strategy and Sequoia continues to look for opportunities to invest at the system application level of large, growing markets.
Valentine also explains that he does not want to invest in companies that are creating markets because it is too expensive and hard to determine whether or not they will be successful. With that said, Sequoia did initially invest in Apple; however, sold their shares in Apple before anything had come to fruition. Although Sequoia would have reaped tremendous benefits from this investment, a reason why they may have pulled out may be due to this strategy of investing in large markets rather than creating markets. At the time, Apple was creating a market of personal computers and Sequoia did not want to spend the money and take the risk of investing in a company that was creating a market. Rather than creating markets, Valentine says that the best investments exploit large markets early and use Sequoia’s capital and resources to help companies lead these new, yet established large markets.
So where do people fall into the equation when Sequoia is deciding whether or not to invest in a startup? As stated before, rather than seeing people as key components to the success of a startup, Sequoia simply looks for the market and how big the problem the idea is solving. That being said, Sequoia solely wants the founders of their companies to have the technical skills to build and grow the product they are investing in. Having founders who are only adept at technical engineering is enough for Sequoia investors as they believe their team can guide the startup to success if the market opportunity is there. In his Stanford address, Valentine stated that the CFO is likely the last person any startup needs to hire because they do not have any money for the CFO to manage and it is the product-market fit that will determine the success of the company. This is a very interesting approach as it directly contradicts how many other venture capitalists view and analyze startups. However, there is a clear indication that Valentine’s approach is successful as Sequoia has become one of the most world renowned VC firms due to their abundance of extremely profitable investments.
A final competitive advantage that Sequoia uses when analyzing startups is asking questions and focusing on the value of storytelling. Valentine explains that most entrepreneurs are awful storytellers, despite whether or not their startup may be promising. To overcome these poor storytellers, Sequoia focuses on asking strategic questions to help the entrepreneurs explain the different aspects of their value proposition without feeling threatened. Valentine says that money flows as a function of an entrepreneurs story. Therefore, by asking the right questions and helping the entrepreneur comfortably tell the story of their vision, this helps Sequoia invest in the best startups and the most promising markets. Additionally, when Sequoia does fail on an investment, they strategically think about what questions they did not ask or what information they did not understand so they know to ask those questions and be better prepared in the future.
In conclusion, it is evident that Sequoia differentiates itself from its other VC competitors by engaging in a different analysis strategy – one that focuses on the market rather than the people. By doing so, Sequoia has and will continue to invest in companies that have the potential to become leaders of the world’s most massive markets. This strategy, along with Sequoia’s culture of asking the right questions is what had allowed them to become one of the world’s most prominent VC firms.