Today, I came across a very interesting video on YouTube for Don Valentine, founder of Sequoia Capital. It was a guest lecture at Stanford University in Oct. 2010. In this post, I am summarizing few points from his speech to keep in mind and learn from.
First: Why Sequoia focuses more on the Market and less on the Entrepreneurs
Sequoia invests in several growth markets and a different kinds of products and services. So they look at the market first, and then at the founders. They consider the size of the market, the dynamics of the market, and the nature of the competition. Why? Because the objective is always to build big companies, and they believe that if you don’t attack a big market, you’re highly unlikely to build a big company.
They don’t spend time on where did the people went to school, how smart they are, and all the rest of that as Don explanes. They’re interested to learn more about the entrepreneurs’ idea about the market they’re after, the magnitude of the problem they’re solving, and what can happen if the combination of sequoia and the founders is correct.
Second: What functional skills Sequoia focuses on when financing startups
Don was saying that they have gone into businesses with some people who had absolutely no business credentials. And yet, Sequoia organized the companies in ways so that the people who are going to the run them, who often are young, could run them based on the limited experience they had. They taught them that to establish good companies, they only have to do couple of things well in their companies, two main functional skills: technology/engineering so that the product can be built, and marketing so that the dynamics of the market can be identified.
Third: How Sequoia supports its entrepreneurs
The entrepreneurs Sequoia financed are often clueless about what they don’t know! And what Sequoia tries to do is to supplement what they don’t know through the people at sequoia. Sequoia works hard to make the job of starting the company and managing it as easy as possible for the founders.
Sequoia fund lots of companies in-house, at Sequoia offices. Such companies usually include only 10 people. They get free rent, free lunches, and free lots of other things. It encourages the entrepreneurs to focus on their core business and never do functions in-house that they can outsource. So the last person they hire in the management team of a startup is the financial officer for example. As a matter of fact, Sequoia offers shared resources such as CFOs who work for multiple portfolio companies.
Fourth: How Sequoia analyzes trends and predict the future
Sequoia was never interested in creating markets as it’s too expensive. However, it is interested in exploiting markets early with the right people, technologists, or people who had a dream to solve a problem and create a new product. Most of those people were not interested in becoming wealthy, that was an accident as Don tells!
One of the advantages Don claims to have, is that he knew the future., which is a phenomenal advantage in the venture business based to Don. Sequoia spends huge amount of time trying to figure out which applications it should attack and in which order. So knowing the future made it very easy for them to invest in successful companies.
They don’t focus on one category to the exclusion of other categories. They have teams of people that specialize in different areas of developing a knowledge base and market sizing information about where they should be spending time. They analyse systems, learn what’s needed, and then they nock peoples’ doors, instead of waiting people to knock theirs.
They know what kind of companies to look for, what kind of products, and therefore what kind of people to look for. So the people become very important for their fundamental technical skills when applied to a particular problem that Sequoia is interested in solving.
This is a very different approach than many VCs in the venture business have followed. Sequoia knows what to do, and search for people who are/can do it. They don’t wait for opportunities to come to their doors.
Fifth: Why Sequoia emphasizes on the art of story telling
The art of story telling is incredibly important for Don, because that’s how to money works. For him, the money flows as a function of the stories. Because most of the entrepreneurs don’t know how to tell a story, as a VC, you have to learn how to ask the questions that makes the entrepreneur comfortably tells you his story, and what he thinks is important so that you get it.
For a long time, Sequoia didn’t understand the product or the market while listing, so they have learned to string questions in a way that provides the entrepreneur with a way to explain: what he wants to do, how long it’s gonna take, who the competition is, and how much money he needs, without feeling threatening.
When a portfolio company fails, they try to learn what questions they didn’t ask, or what answers they didn’t understand, because they’re dealing with amateur story tellers.
Sixth: Why Sequoia Shuts down a company
Sequoia learned from the failed investments not that the product didn’t work, but that the dynamics of the market didn’t work. Such companies built spectaular products for which there were no buyers. For Don, The critical thing is getting a product developed where the timing of the product’s availability and the market demand are simultaneous. otherwise, you’re spending lots of money on developing a market which you did not intended to spend money on.
Sequoia also learned to shut down such businesses if the return expectation that they started with is no longer a reality. In other words, if the expectations for success are no longer realistic.
Here is the video, I advise every VC and Entrepreneur to watch it, and to listen carefully to the enormous amount of wisdom in Don’s words.
