What does Apple, YouTube, Oracle, LinkedIn, Instagram, Zoom, Stripe, Google, and Airbnb? Besides being the tech titans of our generation impacting all our lives, they were all funded by the same investor. Well, step inside Sequoia’s offices at Silicon Valley’s capital of capital, Sand Hill Road, just a stone’s throw away from Stanford University. Ever since the firm’s founding date in 1972, they have backed companies worth $1.4 trillion. It is safe to say that Sequoia proliferated the venture capital industry to new heights and enabled some of the more revolutionary technology.
Return in venture capital follows a power law curve, which means that only a few companies generate all the value. Hence, most venture capital investors are looking for the so-called “unicorn”, or startups with a valuation of $1B. It seems like Sequoia has a crystal ball enabling them to invest in all unicorns of the world. However, there is an elegant rationale behind their risky investment strategy. Here are the five secrets of Sequoia’s success in investing in startups.
- Focusing on the markets: Sequoia looks at the market first, then on the founding team. They consider the size of the market, the dynamics, and the nature of competition. The objective is simple, the only way to grow a big company is to invest in a big market. An example could be cloud computing, which has a market size of multiple billions and has a double-digit yearly growth rate.
- Focusing on founders’ functional skills: Sequoia does not care about business credentials. Instead, Sequoia organized the company so that the people who are going to run them, who often are young, could run them based on their limited experience. However, the two functional skills they are looking for are:
- Engineering: can the founder build the product?
- Marketing: are the founder able to launch the product to the market?
- Supporting the entrepreneurs: Sequoia provides office space, free lunch, and housing to the founders, enabling them to focus on building their companies. Moreover, they are also an operational team of business executives and legal advisors to accelerate the startups’ growth.
- Analyzing trends and predicting the future: Sequoia has a team of people that specialize in different markets and anticipate which to tackle next. This enables the firm to know what kind of companies and people to look for and what products to fund.
- Storytelling: The founder of Sequoia, Don Valentine, famously said that money flows as a function of the stories people tell. Hence, it invests in founders who can tell a story about their vision of the world.
Sequoias influence on the global startup ecosystem has been pivotal, and it is safe to say that the world would have looked drastically different without their contribution. If you are interested in knowing more about the world of venture capital and investing in technology, look at Sequoias founder Don Valentine’s speech at Stanford University in 2010.
Very interesting read. I did not know that Sequoia is behind all these multinationals. It is fascinating that some companies that few people have heard of, can be so influential. Another example is SoftBank. The company has stakes in most of the largest tech giants, like Apple, ARM, and Uber, and remains largely in the background.