Reinventing the wheel is not necessary to succeed at investing which has been around forever. One way to amplify our own investing skills is to just study the best and try to adapt as much of their thinking into our strategy. Founded in 1972 by Don Valentine in California, Sequoia Capital is now the #1 VC firm in the world. So much so that the mere mention of them as an investor, and particularly lead investor, usually brings other investors running as fast as they can into the investment, leading to oversubscribed raising rounds. Even with the transition in management to Michael Moritz and Doug Leone, the firm continues to maintain its leading reputation. In 2019, Sequoia became even more bold by making more new seed-stage investments than Series A deals. This due to the fact that the Hurun Research Institute recognized Sequoia as the leading investor in unicorn globally, highlighting its involvement in twenty percent of all privately held companies valued at $1 billion or highe. WHAT. One VC firm was in on 1/5 private unicorns in the entire world? This is even more impressive considering they do not necessarily invest everywhere in the world, even though they do have operations in Europe, China, India and elsewhere. If that weren’t enough, 1200 of their long-term investments from the past contains 300 IPOs. An astounding 25% going to market. Oh my. With that kind of track record, if I could get in, it would be a no brainer to have some of my money invested by Sequoia. Alas, that is not the case so will have to make do with other alternatives. Investing as if we were thinking like Sequoia could be a good place to start, given the successes they’ve had:

1970s-1990s: Apple, Cisco, Google, Nvidia, Webvan, Oracle, Cisco, Microchip Technology, LSI Logic, Linear Technology, Network Appliance

2000s: Airbnb, Palo Alto Networks, ServiceNow, Unity Technologies, Youtube

2010s: 23andMe, StarkWare Industries, Instacart, Klarna, Nubank, Snowflake, Stripe, WhatsApp, UiPath

2020s: BitClout, Bolt, FTX, Wiz, Loom, Shein, StrongDM

Don Valentine

Direct, blunt, candid, Don was the founder and managing partner from 1972–1996, and made several notable investments prior to the 2000s. He noticed the trend of technology and began making personal investments into technology companies. What’s most interesting is that at time of founding, he did not make the name of the company named after himself, but rather after trees that are the largest, oldest, and tallest in the world. That seems to represent humility, long-term thinking, durability and may translate into the types of founders that he himself was and additionally sought after. Given the large size of Sequoia’s, it would make sense that the companies he looked for were involved in large market sizes, with TAMs, total addressable markets that were already gigantic, and potentially that could even increase in size. Large markets typically are already saturated with a wealth of competition. So, it stands that large markets targeted will be markets that are not obvious to the majority, or they would already be filled. Don’s bet on Apple led to an entirely new market, which didn’t even exist at the time, but now seems more like a necessity as opposed to its initial luxury, and even undiscovered market. His initial specialized knowledge of microprocessors from his work experience led to personal computers was what led him to invest in Steve Jobs.

Somewhat counterintuitively, Don did not place the same emphasis on the founder as VC firms do typically. He looks first at the biggest markets, and then looks for the people to fill those markets. Products that can disrupt existing markets, or that can create new market categories that people actually need or want, is what makes a good opportunity. He has no consideration towards educational background of a person; some in fact, had no ability to run businesses but with the product idea, were setup with reputable people from business backgrounds to help run the business side. The founder must be mission focused on getting a new invention out there; if they are in it for the money, he will not consider these types of founders. The people he invested in typically have a strong technical knowledge of technology, engineering. Only then would marketing and sales come into play. Don was the one who knocked on founder’s doors, rather than VCs typically having founders call them first.

The art of storytelling is very important; be able to tell good stories that can convince people to follow you. Knowing how to ask good meaningful questions, particularly concise questions in under 20 words, is also a good skill to learn on the social communication side. Having post mortems on failed companies to see what went wrong is a good way to improve future decision making, which Sequoia does for every company they invested wrongly into. He also cautions, similarly to Charlie Munger, that knowing what you don’t know is very important, and perhaps more important than what you actually know. In terms of timing, the best time to invest is in bear markets, as there is more opportunity.

Doug Leone

Doug Leone was hired on by Don and later made managing partner and owner alongside Michael Moritz. He was managing partner from 1996 until 2022. Doug likes to look for someone with strong strengths, that achieved an improbable unusual success, particularly at an early age. If not in business directly, other achievements when younger that could signal success.

We want to be partners with entrepreneurs from day one; we know that after many years, that DNA is set in the first 60–90 days. This can be seen in a person’s history. When they were younger, did they try to set up businesses? Such as lemonade stands, lawn mowing, app creation, etc? Someone who started as a kid has the DNA of an entrepreneur. Someone who started something on the side while working is as well. Someone who just wants the glamour, status and money of being a successful entrepreneur would not fit the mold.

In terms of people, Doug is a strong believer that great people attract other great people in a nonlinear way. Because great people are so few and far in between, they stand out like sore thumbs and they recognize each other very easily. One facet of someone who makes for a great founder is someone who uses the word “we” a lot instead of I, those with a team mentality, rather than someone just in it for themselves. Additionally, small teams end up faring better than big teams due to too many cooks in the kitchen syndrome. With a small team, decisions are made faster, and thus, the time it takes to make a decision, make a mistake, then back out, is better. People who come from humble backgrounds and have a need to win, a chip on their shoulder, gives an innate intrinsic motivation that simply won’t go away. That doesn’t mean the founder will succeed, but it means the founder will do what it takes to succeed.

Small startups tend to have two main advantages; stealth and speed. In order to keep these advantages, one needs to stay away from the cocktail circuit. Going around constantly networking, fancy conferences and flying around to these events is largely a waste of time and money. Better to get 1 strong believer to back financially and work at getting a superior product than many lukewarm believers with a mediocre product.

Due to lack of ability and saturation, there are VC firms that have never generated a positive return in ten years and still raising money. One place for more opportunities is to look abroad in untapped huge markets that are expanding rapidly that doesn’t have quite the scrutiny that developed markets would have. Doug in the 2000s set up operations in China and India for separate teams in China and India to run, rather than himself. Another sign of humility as Doug admits he does not understand consumers and business in these countries. These markets could be wonderful going forward, with undiscovered gems that could grow even more than the ones in the US, as you would have a fast-growing market and a fast-growing company. Two major tailwinds. With larger populations, the market winners in big markets will offer even bigger returns. Just case in point Shein, the Chinese retailer for clothing that has taken over everyone with cheap prices and its own supply chain. Aka Zara but only better.

Disclaimer

This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.