Don Valentine, Sequoia Capital: "Target Big Markets"

TL;DR

Don Valentine says Sequoia Capital targets big markets because a company is highly unlikely to become big without attacking a large market. Sequoia examines market size, market dynamics, competition, the problem being solved, and the founder’s market idea rather than primarily choosing people by education or perceived brilliance. Its Apple strategy expanded into more than 15 related investments, illustrating why the full market-system approach is worth exploring.

Transcript

please join me today in giving a GSB welcome to Don Valentine I didn't realize that were this many people had no place to go at noon I want to thank all the women in the room for Zappos this is the only company that we've ever done where the product was priced inversely proportional to the amount of material that made the shoe so if you ever hear a... Read More

Key Insights

• Sequoia Capital prioritizes market size and dynamics over individual talent when investing.
• The key to building big companies is to target large markets with significant potential.
• Sequoia focuses on system-level investments, integrating various components and applications.
• Successful investments often involve exploiting existing markets rather than creating new ones.
• Understanding and leveraging market dynamics is crucial for venture capital success.
• Sequoia's investment strategy includes identifying technological trends and future applications.
• Valentine highlights the importance of storytelling and questioning in securing investments.
• Failures often result from market mismatches rather than technological shortcomings.

Questions & Answers

Q: Why does Don Valentine say venture capital firms should target big markets?

Valentine says Sequoia Capital’s objective was always to build big companies. In his view, a company is highly unlikely to become big unless it attacks a big market.

Q: How does Sequoia Capital choose investments?

Valentine says Sequoia does not begin by choosing people; it chooses markets. The firm examines market size, market dynamics, competition, the magnitude of the problem, and what could happen if Sequoia and the founders are correct.

Q: Does Sequoia prioritize founders’ education and perceived intelligence?

Valentine says Sequoia does not spend much time considering where founders went to school or how smart they appear. It is more interested in their idea about the market they are pursuing and the scale of the problem they are solving.

Q: What market opportunity did Sequoia see in Apple?

Apple’s founders envisioned people having their own computers. Valentine contrasts that idea with the DEC 100 minicomputer, which cost $250,000, showing how difficult it was then to visualize personal computers reaching much lower prices.

Q: Why did Sequoia invest in companies around the Apple computer?

Sequoia viewed the Apple computer as a system that required more than one product. Because the original audio-tape memory was slow and unreliable, the firm financed memory and disk-drive companies that could make the system more useful.

Q: How extensive was Sequoia’s system-level investment strategy around Apple?

Valentine says Sequoia ultimately made more than 15 investments in the Apple computer category. These included memory, disk drives, interface technology, and applications rather than only the primary computer company.

Q: What did Apple find at Xerox PARC, according to Valentine?

Valentine says Apple’s people found technologies they needed at Xerox PARC, including a mouse and a graphical user interface. Sequoia then financed technologies found there, while Apple became known for its superior graphical interface.

Q: How did Electronic Arts fit into Sequoia’s Apple-related strategy?

Electronic Arts was an application investment within Sequoia’s broader Apple system strategy. Valentine says the company was started in Sequoia’s office and eventually employed more people there than Sequoia itself, prompting the firm to ask the team to leave.

Summary

In this video, Don Valentine, a venture capitalist, discusses his approach to investing and building big companies. He emphasizes the importance of focusing on the market rather than individual people, choosing markets with significant potential for growth, and investing in companies that solve big problems. He also shares stories and advice on storytelling, asking questions, and making investment decisions.

Questions & Answers

Q: What did Don Valentine learn from his worst investment?

Don Valentine learned that even if the technology of a product works, it may not be successful if there is no demand for it in the market. He discovered that timing is crucial, and if the timing of a product's availability doesn't align with market demand, it can lead to failure. As a result, Sequoia Capital, his venture capital firm, will stop financing companies that don't have prospects for success in the market.

Q: Where does Sequoia Capital get its money from?

Sequoia Capital sources its funds from tax-exempt investors, such as universities, foundations, and international limited partners. They aggregate the investments into partnerships and have been selective in their limited partners to avoid liquidity issues and the need to sell assets for tax purposes. By working with tax-exempt sources, Sequoia Capital can focus on investing without the burden of tax implications.

Q: What markets excite Don Valentine today? What markets give him the greatest concern?

Don Valentine expresses excitement about the mobile market and the potential for further developments and applications in this space. He sees a lot of growth potential and opportunities. As for concerns, he mentions that in the past, there was a lot of hype and interest in the nano market, but Sequoia Capital chose not to invest in it. While it may have been a mistake, as the future success of nano investments is uncertain, Don states that they haven't seen any notable successes in the nano market so far.

Q: Can you explain more about Sequoia Capital's approach to choosing investments?

Sequoia Capital's approach is focused on the market rather than selecting individuals or companies. They aim to solve big problems and build big companies by investing in markets with significant potential. They prioritize the market size, dynamics, and competition, and focus on finding people with ideas and solutions for these markets. They also have a search function and actively engage in identifying and approaching potential investments. Sequoia Capital aims to make the management of their invested companies easier by outsourcing non-core functions and heavily relying on technical and marketing talents.

Q: How does Sequoia Capital handle failures and shut down investments?

Sequoia Capital believes in making informed decisions and constantly evaluates their investments. If a company is not meeting milestones or if the product doesn't find market traction despite the technology working, Sequoia Capital may shut down the investment. They hold post-mortem reviews to understand what went wrong and learn from it for future investments. Sequoia Capital aims to invest in companies that have the potential for success and will not continue financing those that face fundamental market-related challenges.

Q: How does Don Valentine approach storytelling and asking questions during investment discussions?

Don Valentine considers storytelling as a critical skill in the venture capital industry. It plays a crucial role in conveying information and securing investments. Sequoia Capital encourages entrepreneurs to tell their story effectively and comfortably. When it comes to asking questions, Don emphasizes the importance of asking concise questions of less than 20 words to allow the entrepreneur to explain their thoughts and ideas comfortably. Sequoia Capital aims to create a comfortable environment for entrepreneurs to share their perspectives and engage in meaningful conversations.

Summary & Key Takeaways

• Don Valentine of Sequoia Capital stresses the importance of targeting large markets to build successful companies. He explains that Sequoia prioritizes market size and dynamics over individual talent, which has led to successful investments in companies like Apple and Cisco. This market-driven approach focuses on exploiting existing markets rather than creating new ones.

• Sequoia Capital's investment strategy involves a system-level approach, integrating various components and applications. Valentine highlights the importance of understanding market dynamics and leveraging technological trends for venture capital success. He emphasizes the role of storytelling and effective questioning in securing investments.

• Failures in venture capital often stem from market mismatches rather than technological issues. Valentine shares insights into how Sequoia evaluates potential investments, focusing on market opportunities and the ability to exploit them. The firm's strategy involves identifying technological trends and future applications to guide investment decisions.