Sequoia VC Founder Donald Valentine’s Secret: “We Invest in Markets. Not People.”

Donald Valentine founder of Sequoia Capital funded Cisco and Apple. In a way he was one of the founders of Silicon Valley and the startup culture it catalysed. The firm he started in 1972, California has made its way to influence markets and become a phenomenally successful VC even to this day, and how.

Here’s an excerpt from a 2010 speech Mr. Valentine gave at Stanford University’s Graduate School of Business:

“I do a lot of the interviewing and recruiting of people joining Sequoia. And one of the subjects I asked them about is why do you want to join Sequoia? Assuming you think we are successful, why do you think we are successful?
What have you learned?

And it turns out many or most of the people in the venture business historically would answer that question by telling you they finance the best, brightest and greatest managers in all that stuff.

We do not, we have always focused on the market. The size of the market, the dynamics of the market, the nature of the competition. Because our objective was always to build big companies.

If you don’t attack a big market. It’s highly unlikely that you will build a big company. So we don’t spend a lot of time wondering about where people went to school, how smart they are and all the rest of that. We are interested in their idea of the market they are after, the magnitude of the problem they are solving and what can happen if in fact the combination of Sequoia and the individuals are correct.

So what were we thinking when we financed Yahoo?

[Or] the two founders of Apple – what did they have in mind? They had in mind the idea of you all being your own computer.

There was no way to visualise a world in which the computer was ever going to be cost reduced from $250,000 to the computer prices you face now. And using Apple as the example, one of the sub questions that I was encouraged to talk about is how do you go about picking, choosing?

We don’t choose people. We choose markets. And once we choose the market, there is a primary product. We rarely invest in an area where there’s only one product. So if you take Apple, the original system governing memory was an audio tape player.

Now you have to have a great sense of humour using an audio tape player as a primary memory. They were highly unreliable and they took forever to download the information. So we knew, if you think of the Apple computer as a system, we knew we would have to finance one or more – memory companies; disk drive companies. We had to have initially floppy disks which needed financing disk drives that made the memory information portable. And fortunately for us IBM had always had a facility in San Jose where they located their R and D for memories.

So this was a very fluid community we helped ourselves, to some of the people from IBM, financed several companies in the disk drive business, one of which achieved revenues of a billion dollars. Without a memory system the PC is nothing.

So this is how we chose to invest at a system- application level.”

Then came Electronic Arts, Instagram, WhatsApp, Truecaller, Freecharge, Café Coffee Day and too many other countless companies.