Sequoia Capital (Part 1)

0:00 I love it. You know the um I had been intending to upgrade them when I was in New York. I was like, Oh, I'm gonna go to the flagship Nike store and get like the latest, latest model. They don't make'em anymore. They don't make the f the fly knits anymore? Well they make fly nets, but they don't make the free fly net. Oh the Nike Free FlyNets. So I think this might be the last model. Well to stock up. Yeah, I know what I'm doing this weekend. Welcome to Season 5, Episode 4 of Acquired, the podcast about great technology companies and the stories behind them.

0:39 I'm Ben Gilbert and I'm the co founder of Pioneer Square Labs, a startup studio and early stage venture fund in Seattle. And I'm David Rosenthal, and I am a general partner at Wave Capital, an early stage venture fund focused on marketplaces based in San Francisco. And we, as you know. are your hosts. Today we are talking about the absolutely legendary Sequoia Capital. And because it would be inappropriate to try to cover Sequoia's immaculate history in just one episode. This is only part one.

1:08 And typically I try and throw out some stats in this section about why the company that we're covering on this episode is important. Well today I'm only gonna throw out one. Since its founding in nineteen seventy two, the firm has helped to catalyze companies that now represent three point three trillion dollars of public market value.

1:29 And for context, the entire NASDAQ is ten trillion dollars. It is frankly absolutely unbelievable that a single firm can be responsible for helping to create so much of our modern economy. This is Bananas. Yeah. For comparison's sake, uh what did we say? Next.

1:47 Which is one of our A pluses, uh we said generated a trillion dollars in uh market cap value, uh, the next acquisition. So here we are talking about three point three trillion dollars. Now obviously it's a venture firm, not a company, but uh This is one of the reasons I've been so excited to dive into this new category here on Acquired and can't wait to tell this history of Absolutely.

2:11 All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chat bot out there. Lagora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do.

2:44 operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legor's Bet Here is interesting, since it lets each lawyer handle more complexity, any given person can increase the quality of their work. and do higher value work. And this means that the pie can grow even as each individual task takes less time.

3:20 And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time. Legora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries. And crazily, they went from one million

4:05 Eighteen months. truly insane numbers. And that is the real test.

4:13 Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, You can learn more at Lagora.com slash acquired And just tell'em that Ben and David sent you. So lastly.

4:35 Our limited partner bonus show this week was kind of a fun flip for me. David interviewed me on what is a startup studio and how does it work, and I dove into our process here at Pioneer Square Labs. If you want to listen and become a limited partner, you can get started with a seven day free trial and listen right here in the podcast player of your choice. by clicking the link in the show notes or going to glow.fm slash acquired. I promise it's very easy. I like that. I like that. Yeah.

5:05 All right, David. It's time. It's time. Let's do it. So one thing that is uh oft forgotten these days, uh, because it's just a name and is like uh you know reminds me of uh the quote about

5:20 Fishes and water, uh, where you know you ask a fish, like, How's the water? And the fish says, What's water? And that is that Silicon Valley. Is called Silicon Valley. Because of silicon. Uh, even though it is mostly software these days, uh and the internet. So to set the stage for this episode. We need to rewind Back to the origin of Silicon Valley.

5:43 And Indeed. Silicon. So we go back. when and this is really the moment I think you could argue when when Silicon Valley, as we know it, both in terms of Silicon and in terms of the concept was born. And that was when a group of eight Employees.

5:59 Leave a company called Shockley Semiconductor. Shockley Semiconductor Laboratory and start a new company that ends up being called Fairchild Semiconductor. And this group of eight employees. goes on to be known as the traitoress eight. And we'll uh we'll link to in the show notes to this amazing photo. We'll link to the Wikipedia page uh of these eight individuals. Uh it's just so great. So nineteen fifty seven in all the best ways. Why did these eight folks leave Shockley and and start their own company. And this was a radical thing to do at uh at the time.

6:32 Well, Shockley semiconductor was started by Bill Shockley and Bill was a genius. He was the co inventor of the transistor uh that he and helped helped invent when he was at Bell Labs. And for that he won the nineteen fifty six Nobel Prize. Uh I mean he literally helped invent computing.

6:51 But He did have a Dark side. And that dark side was that he was a terrible manager and people hated working for him. Um, and to help you kind of get the picture uh at this point in time and then for kind of the rest of his life, he became a white supremacist and was a proponent of eugenics. So this is the sort of uh person we're talking about that would prompt people As brilliant as he was and as amazing as the innovation that was happening at Shockley. would be prompted to maybe leave and do something.

7:19 Uh rat. So Who are the traitors eight? Well, among them there's some names you might recognize, starting with Gordon Moore. Of Moore's Law and Bob Noyce. Who, of course, the two of them would go on to found Intel, although that's a story for another day. And Eugene Kleiner, who would go on to help found Kleiner Perkins, which is another venture firm story for another day. But what was interesting is when they left and they started Fairchild

7:44 It wasn't actually a startup in the way that we think about it today. It wasn't an independent company. it ended up uh they had a really tough time getting it financed. And so how it ended up being organized was as the West Coast semiconductor division of an East Coast company Called Fairchild Camera and Instrument Corporation.

8:05 So Fairchild was located back on Long Island in New York. Uh and they owned the company. Um I always assumed that Fairchild was like one of the traitorous eight. No. Not at all. Uh yeah, they didn't actually own the company. I believe they had equity in it. But no, uh so how did this happen? A man named Sherman Fairchild at this point in time who lived in Long Island was the largest shareholder in IBM because his father had helped Finance Tom Watson is

8:35 In forming IBM uh many years, many years earlier. So when the Trader S8 were trying to get their new company off the ground, they intersected with a man named Arthur Rock, who's gonna come up again in a minute here, was one of sort of the early proto venture capitalists in California. uh and he was a former investment banker and he was trying to get financing. It was really hard. And so he ended up going to Sherman Fairchild'cause he knew Sherman was the largest shareholder in IBM. He was interested in technology, and uh Sherman agreed to set this up as a division of his camera and instrument corporation. Wow. Creative. Yeah.

9:08 Yeah, which is uh which is crazy. So the way it happened, they loaned one and a half million dollars to the company. In return for which they got an option to buy all of the stock of the company for three million dollars. Uh imagine if if VC's uh structured uh deals that way today with founders. It wouldn't uh it wouldn't quite set up the uh the right uh set of incentives. No. But you gotta, you know, crawl before you can walk.

9:34 Yeah. Yeah. you know, Fairchild would lead to many, many things, including, of course, Intel, and we'll we'll get into that a little bit later. I mentioned Arthur Rock, so What was the financing environment for

9:48 quote unquote startups in in California at this point in time. Knowing how markets work, I think we can assume that there wasn't much of it given the terms of that other investment that you just mentioned. Indeed. So as uh you might guess from how Fairchild was financed the quote unquote venture capital industry or the proto venture capital industry that existed in California at this time was pretty much nothing like we know it today. For one, it was so small that the individuals who were doing it, all of them in California, they would meet for lunch once a month at the Mark Hopkins Hotel in San Francisco at like a table, regular table, and they would sit around and and talk about like the various companies that they were working on. That was that was it. That was the entire industry. And for two None of them actually came from a technology or a uh startup or company background. So Arthur Rock, who who we mentioned, he was an investment banker and a few other folks that were kind of instrumental at this point in time, uh pitch Johnson and Bill Draper, the name Draper might uh ring a few bells for folks.

10:53 They had worked in the steel industry and come out to California and started financing companies. There was another gentleman named Tommy Davis. He was a real estate developer who developed an interest in this this sort of thing. So that was that was really the state of things. And um, you know, as evidenced by Fairchild, you know, here you have eight of the most talented scientists and engineers working in the highest growth industry Yeah. And it's literally impossible to finance them. They have to get essentially bought by an East Coast company to even get their company to filed. It's so interesting.

11:27 Like i i venture capital falls under the broad asset class today of alternative investments, which always seems a little funny given, you know, how how much especially today with all the late stage com uh money coming into startups, how much money is really invested there. And it's silly to call it alternative. Now, when you look at it in these days, it's very much uh you had to be a very alternative counterculture person to believe that this was the best way to go and invest your money. So it's right at this moment in time. That a Quite uh maverick, one might say.

12:01 uh individual comes on the scene. And Basically Basically single handedly, right?

12:09 The playbook of what Modern venture capital. And alongside it, uh what a modern startup would look like. And that man's name. Is Done.

12:19 Valentine. So Don of course goes on and and starts Sequoia Capital and we're gonna tell this story here. I cannot recommend highly enough anyone, whether certainly if you work in or are interested in venture, but even if not, if you're just interested in technology and startups, go do two things. One, watch uh the YouTube video of a talk that Don gave uh at the GSP at Stanford in twenty ten. And two, read um this wonderful, wonderful oral history that uh Berkeley did uh as part of the history department there with Don. Uh, and uh you will get a sense for what an amazing character this guy is and and and a lot of

12:54 This show is a lot of the history of this show is taken from those two documents. Yeah, and listeners, the way to think about part one and part two of the Sequoia story, part one that we're gonna focus on here, this is really Don's story. Yeah. And uh it's really cool actually the the talk that he gives at Stanford. He holds up uh towards the beginning of it the resume of an individual who had just joined Sequoia Capital that week. That individual is Alfred Lynn, of course, friend of the show and former guest. He printed out Alfred's resume and brought it to this talk. I also love that Alfred like had a resume at that point. Like he was, you know, COO and chairman of Zappos that had just been acquired for over a billion dollars, but always hustling. Okay, so who

13:35 is done. So he was born in nineteen thirty three. In Yonkers, New York. Uh back on the East Coast. His father was a teamster, um so a delivery truck driver and a union member, uh, if you can imagine it, which um Don took a ends up taking a very, very different path in life. Um his parents were completely uneducated, both of them. Neither of them had finis grade school.

13:59 Um So not like not like hadn't gone to college, like hadn't finished school. No, literally like had not finished elementary school. But in good Catholic fashion, uh they do value education and especially Catholic and religious. And so Don grows up in uh in New York going to Catholic schools. And then he does he ends up going to Fordham University, uh, Jesuit University. graduates in the early nineteen fifties and promptly, as most folks did back then, at least most men, gets drafted into the army. Uh this is rape Either during or right before when the Korean War is going on.

14:35 according to Don, he quote had a terrible attitude about the military. He didn't like and doesn't like regimentation. And this is gonna become very clear. Don does things his own way. But one thing that he loves is electronics and technology. And um he ends up getting put in charge in the army of of in his words, trying to teach senior officers to use modern technology instead of the way that they were inclined to fight wars, you know, which was with like

15:03 Horses and you know, in cavalry. All that said, the army and Don still don't really mix. So he transfers to the Navy. And this is a major, major moment for him because he gets stationed in California. He comes out to California and he steps off the boat and he's like I have reached the promised land. It doesn't snow here in the winter. I'm never going back to the East Coast. I love this place. His goal is he wants to find employment at a West Coast electronics company. Um so he gets out of the Navy. Uh it ends up taking a little while. He first gets a job at Sylvania Electric. Uh which was actually based in Pennsylvania. I believe he was working for them in New York. Uh well it's the vacuum tube company. So this is how he gets into technology because this was still, you know, the semiconductor I Ble

15:50 Most computing such as it was was being done with Vacuum tubes. You know, remember the Eniak and like this is what we're talking about back in these days. I guess I know Sylvania as a lighting company. I think do they make light bulbs? I've like seen the logo around like Home Depot. I think they make light bulbs now. I mean who knows what the corpor structure the company is these days. At the time they were making vacuum tubes and selling them as as competing components mostly to uh the defense department. And of course Don had come from the military. Uh so Don ends up jumping ship to Raytheon.

16:26 and moving to Los Angeles. So here he is. He's finally he's achieved his goal. He's living in LA Out in California. Love and life, surfing. Uh he was a big water polo player and he's working in uh what at the time was the high technology industry selling uh computing solutions to the defense department and the military. He starts taking part time courses at the business school at UCLA uh focused on sales and marketing because he comes really interested in uh of course sales, which is his job, but also the marketing component. Like who are we selling to and why? And he has a great quote. He says, you know, uh where is the decision making process in a great company? The answer is it's in marketing. In a well run company, the marketing department

17:09 In conjunction with the science department, science being engineering at the time. Decides based on what their capabilities are, what the problems they can solve, what sequence they should solve them in, and how much money they can dispend they can spend on building that product and how big is the market. Who's going to buy this stuff. And all that happens within marketing in a primary position. This really becomes Don's life passion. And and that ethos, you know, ends up informing uh everything he does and everything that's quiet capital, as we'll see. Um so

17:40 After a short stint at Raytheon, Uh he ends up getting recruited to move up to Northern California. And joining. A fresh startup in a a really hot semiconductor company up there.

17:53 Fairchild semiconductor. Was was Fairchild independent at this point, or were they still a part of the the bigger umbrella. No, they were they were this was still very early. They were part of uh of camera and instrument, as we'll see. So Don joins, he's not part of the trader's eight, but he joins he's like employee number forty or fifty. They're doing a couple million dollars in sales, but still really small. And um at first they put him in charge of of selling Fair child semiconductors to defense firms back in Southern California. So they sent it back down to Southern California. It's exactly what it is doing in the army, right? It's educating about modern technology, the you know, to to people who had been doing things an older way and trying to basically do a very complex sale. Yeah, and I mean it's kind of amazing that like um you know, Don's history from Yunkers, New York, everything basically, you know, sets him on it's like the Steve Jobs quote of like you can't connect the dots looking forward, but looking back, everything you've done, you know, prepares you for what you're doing now. Done, you know.

18:53 Basically Uh knocked it out of the park uh selling selling to defense contractors down in LA, he takes the company from this couple million dollars in sales when he joins to over$150 million in annual sales uh in just a couple years. And um and it's over that time he gets promoted, ends up running all of sales and marketing for Fairchild, and he starts Using everything that he's learned in his passion for marketing to

19:21 Tap into like, hey, maybe we should be selling to other markets too. And which other markets should we be selling to? And are there things that we can do to customize the chips that we're making to make them more applicable to these other applications in other markets? The quote he has here is Business was so good. I mean this was like God to be at this moment in time. It was like it was like to be there in, you know, uh the mid uh mid nineties when the internet was taking off or the mid two thousands when web two dot oh was taking off. And it was literally just like You could see the roadmap of what all the applications were gonna be, and it was just like go build them first and best. Yeah, not only did the semiconductor have perfect product market fit, but it scaled horizontally across tons of industries. I mean everybody was going to need

20:09 equipment that required semiconductors. And I think you know that now we sort of like take it for granted w actually We're in this phase where we're sort of moving forward from IT departments into, you know, companies that don't have IT departments, but this was the development of IT. You know, this was ever every company that was starting to embrace technology would use something with semiconductor products in it. Yeah. I mean, we're we're gonna see this here in a minute with the personal computer and Apple, uh, but then with the internet, then with Web Two.0, then with mobile. Like you have this tectonic ship and then it's like, okay, we know what the applications are, let's go build the applications. And Don is really the first person um in in technology to recognize that these are this is the dynamic of how the broader technology ecosystem works. Um so he says business was so good that we had more opportunities than we had engineers. And we devised a bit of an ad hoc technique for evaluating different companies, companies that Fairchild could potentially work with and and sell to before we would commit our engineering resources to work on them on a specific project. We had to understand the nature of the application and understand the size of the market. There are a number of kind of highlight things that we did before we committed engineering.

21:21 And you know, you could think about that and think about like, gosh, man, that sounds a lot like writing an investment memo for a venture capital firm. It's also what a what an incredible privilege to to be in a position where you get to pick your customers based on who you think is gonna be the most successful with your product. Yeah. Yeah. Totally. So Remember though.

21:43 Um Don't working at Fairchild. He's taken them from a couple of million in revenue to over a hundred and fifty million in revenue. And this is like, you know The the early nineteen s late fifties, early nineteen sixties. So 150 million wasn't just 150 million back then. Remember though, Fairchild, you know, it isn't an independent company. It's a subsidiary of this long island based East Coast, you know, conservative camera and instrument corporation. So every time that Don is, you know, working on building, you know, a new customization and application, new market that Fairchild wants to enter. He has to go to

22:18 the board of the company and get their approval for what they're doing. And downside you know, that goes well enough. Like incentives are aligned, of course, Fairchild wants wants the company to grow and do well. Um But Don gets this idea. He's like, you know We could really accelerate our market and our partners that we're working with

22:38 A lot of these Applications companies are new entities that are integrating our technology into a full solution for a given industry. They're getting off the ground. We could really accelerate things if we invested in these companies and helped them, uh help them build themselves because the the bigger that they get and the faster that they get bigger, the more sales they're gonna have, the more sales we're gonna have. Right. It's this ecosystem mindset. You know, we need to we need to help invest to build the ecosystem around our products. Totally. Uh so he thinks this is brilliant.

23:10 He takes this idea to the board and the board is like Absolutely not. That's a crazy idea. Whoever would want to do That uh so you know, Don in in typical Don fashion, he says, Well screw it, like if the board's not gonna do this, I'm just gonna start doing this on my own, with my own money. When he would be working on the on the technology and marketing roadmaps for for Fairchild and working with startups to help build applications, he would just start investing small amounts of money personally in these startups uh that he w knew that he was gonna make them into big companies.

23:44 Um The only problem though is like he's doing this personally. He doesn't have enough capital to really get these companies all the way to working. You know it's so funny how like we we joke here a wave that like Uh you know, your your

23:57 Raising money for a new startup and um you know, even today in twenty nineteen, like the answer for how much capital you need always comes back to like, you know, somewhere between one to three million to get off the ground. And that was the case even back then. Is this totally amazing. This is like my one of my biggest tech themes, but it is crazy looking at their first five investments. Two of them were at two million and one of them was at two and a half million. And it like it is today's seed round. And yet what they're doing is they're building Freaking, you know, semiconductor physical applications. Like they're they're using semiconductors to make another product physically manufacture it. Like it is nuts to me. Manufacturing like totally. Yeah. So even back in the sixties, you know, a couple of million back then was a lot more in today's dollars, but you had to do all this really hard. Stuff. Don't starts doing this. Fast forward to nineteen sixty seven.

24:49 And there was another company in the valley uh that had been around for a long time and was kind of founding, uh, called National Semiconductor. And Uh, National makes a big play. They're already a public company, I believe. They poach a number of people from Fairchild, including Charles Sprock, who becomes the CEO of National, and Pierre Lamond from uh a name that's gonna come up again very soon. Pierre Lamond from Fairchild, who becomes the chief chip designer and head of engineering there. Um so

25:20 Charlie Sprock is CEO, he does a couple of really interesting Things. First is so Everybody in Silicon Valley at this point, remember it's called Silicon Valley because they're making silicon chips. They're making the chips there in Northern California. Fairchild's producing them there, all these companies that Don's investing in, they're doing manufacturing right there. Charlie at National he offshores.

25:43 Chip production to Asia. And he he reasons that like, hey, the intellectual property that we're building here, we can just do all the design and building here, and we'll just outsource the actual production of these these chips of the silicon as a commodity. Um so that creates a huge price war in the industry and massively lowers the cost of Silicon which then in it ends up enabling all the things that come shortly thereafter, including the PC. We should also say the the incredible growth in demand for silicon is Fairchild's fault, because Fairchild was the one who pioneered the idea that silicon was actually the most effective material to use for semiconductors. That wasn't the case before. I believe before Fairchild people were using germanium to make semiconductors, which is a rare precious metal. Yep.

26:31 National would actually go on later to acquire Fairchild. And uh Ben, do you know who would ultimately become the CEO of National Semiconductor? Uh this is you know, this is like the beginning of a Valley being a small place and uh and all of these dynamics enabling the personal computer. Gil Emilio. Oh what? Yes. Of Apple fame. Yes.

26:54 Future CEO of Apple. Future first, I believe. Founding CEO of Apple. Yeah. I believe his first CEO gig was taking over for Charlie as CEO of National. Yeah. So All of this is going on. Fairchild is on the ropes. Uh In nineteen sixty eight.

27:10 Gordon Moore and Bob Noyce leave Fairchild. So Don Valentine's still there at Fairchild, uh, and they start Intel. And Don sees the writing on the wall and he's like, Oh man, Fairchild is cooked. Uh brain drain. Yeah, brain drain. Uh I mean it's just like Silicon Valley today. These things start happening, like the the key leaders and really smart people start leaving. You know the writing's on the wall. Uh He leaves, he moves over to National as head of sales and marketing at National. Now This is where

27:40 Serendipity. completely strikes. Uh if Don hadn't made this move, I'd r seriously doubt that there would be a Sequoia Capital. And there may not be a modern venture capital industry as we know it today. So Charlie um is obviously Brilliant. And this move of outsourcing uh production of of chips is revolutionary to the industry. And quite prescient. And quite prescient. Um but there's one thing that he's absolutely terrible at. And that is public speaking. And that's one thing that Don is not afraid of.

28:09 So uh remember, National's a public company. Um and they have to do earnings calls with Wall Street even back in nineteen sixty eight. Charlie's terrified of this. He doesn't want to do them. And so as soon as Don shows up, he says, Great, Don, you're head of sales and marketing, you lead the earnings calls. Uh Which would be unheard of today for I mean it's your CEO and your CFO and your C basically without you know, without exception. Yep, yep. And you have other executives on there from time to time, but uh not leading it. Don starts leading the earnings calls. Um Through that, he gets to know a lot of the shareholders of National. And it turns out that one of their largest investors is. An enormous public investment fund.

28:52 based in Los Angeles back in Don's old stopping grounds called um at the time called the American Funds. And that was part of this institution called Capital Group, which I think a lot of people don't know about, but Capital Group still today is one of the largest uh uh mutual funds and pools of mutual funds of moneagers in the world. I believe they have well over a trillion dollars in capital under management across many, many funds. Capital Group, uh they had been seeing what was starting to happen up in, you know, the new proto Silicon Valley. Uh they'd seen the Intel IPO that had happened uh which had, you know, was the first and Intel was the first true venture backed company that had gone public and all the wealth that that had created. And who uh originally backed Intel? Uh, I believe it was Arthur Rock. Arthur Rock organized a syndicate that uh backed Intel with

29:44 Equity. Uh well, it was a convertible instrument. It was like convertible debt, I believe. Uh a story for another day. So Capital Group, they'd seen this and they actually Funded AMD. Uh and AMD also came out of Fairchild, which I didn't know until doing research for this for this story. So yeah, both Intel and AMD both were Fairchild alumni. I mean the uh really all goes back to the traitoress aid and this legacy of like Hey, leaving dying companies and starting new ones out of them that propels Silicon Valley to its day, to this day.

30:16 That is so much like all these other industries we've talked about, I mean Verizon and ATT basically both coming out of the the original massive ATT company. It feels like Chip companies are not unique in this characteristic of uh of you know both modern giants coming from the same source. Yeah, yeah. So Capital Group, they've invest they've privately funded AMD. They're a big investor in national. So they're like, you know, especially as a public investment vehicle, they're at the forefront of being um investing in Silicon Valley and its growth.

30:51 Uh they get to know Don And they learn from Don about all this private investing he's doing. And so they approach him with an offer. How about He do this full time.

31:02 Leave National. And come and start working with them a capital group. They'll give him You know. certainly capital, and they have more capital than probably just about anybody in in the world at this point in time, uh or access to capital. And take him from, you know, the couple thousand dollar personal checks that he's able to write to finance these companies up to enough that he can actually

31:26 support them to get to uh get to a public offering where they need to get to. Um so Don jumps at this chance. Uh, you know, this is his true passion. He loves this and this is a chance to Um You know, take all of these roadmaps and marketing and market analysis this skills that he's developed and just have this be his full time job.

31:46 This is, of course, the birth of the illustrious and uh and name we all know today, Capital Management Services Inc. Yes. Well, it was part of Capital Group. So we'll get into the structure in a second. I wanna throw in a few great quotes from from Don here. He talks about Why he had the Courage to think that he could do this full time. And this is crazy. Like nobody is investing full time in

32:12 private technology companies at this point in time. It's it's, you know, a bunch of folks who made money in other industries having lunch at the Mark Hopkins Hotel, remember? And Don is gonna make this his full time job. So he said, I had a sense that my system of selection would work far more than it wouldn't, but I didn't have the resources personally to play Texas Holdem and put up more chips. um the opportunity to have a large discretionary pool of money to continue to support the investment ideas was the difference in the environment I was in and the environment I was interested in going to. And after twelve or thirteen years in the semiconductor business, I had a very high profile reputation in this community. And again, he was already doing the investing privately. Uh so he says so people who were interested in starting companies often gravitated to me to help them start their companies. From their point of view, I had some money, I knew how markets worked, and how to help them position their company in the market. market. So I had a bit of an unfair advantage in those two respects. But the most unfair advantage I had was I knew what the future was and very few people knew what the future was. Nobody else, nobody else in the venture capital industry at this point, was from the semiconductor business. Nobody else knew marketing and nobody else knew The microprocessor. Uh so it's kind of amazing. Like Don has this as we've talked about road. It's three pretty valuable things to be good at at this point in time. Exactly, exactly. So like if you think about what what he's saying. So

33:29 It maps pretty exactly to the core functions of a venture capital firm. So On sourcing. He has a network of super talented technical people and scientists with the right experience to start technology companies. You know, he is I mean, his name is Don. It's it's perfect. He's like the original Silicon Valley Mafia Don. Uh that's one, that's like top of the funnel, that sourcing. But then two, he has this unique experience that he knows all the road maps of you know Fairchild and National and the whole semiconductor industry. He knows what markets to attack. So he has like the selection judgment of which Founders and ideas to invest in.

34:05 And then he has the ability to actually help them, unlike anybody else in the industry at the time, actually help them build their companies through, you know, certainly recruiting management teams, but also strategy and decisions in the early days, because he's lived through it, so he can help them build their companies. And now finally through Capital Group, he has access to essentially an unlimited pool of capital, which again nobody else in the industry had. People were having to go back to the east coast at Fairchild to finance their companies. So David, you're saying an unlimited pool of capital. How does that really break down and how much money from the capital group could Don really invest in startups? Exactly. So this is 1972. Don leaves, he starts working with Capital Group, and Capital Group sets up A new five million dollar fund.

34:48 uh for their clients who want to invest in this high risk, high return startup in the semiconductor industry in in um in Northern California. And Capital Group calls it the quote unquote Sequoia fund. Uh and this is the beginning of the Capital Group came up with the Sequoia name. Well I don't know I I don't know if Capital Group or Don did, but it is it is within Capital Group this nineteen seventy two five million dollar fund is called the Sequoia Fund. And uh so Don starts working on this on behalf of Capital Group and Capital Group's clients.

35:19 But you know, again, Don's kinda like a maverick and he does things his own way. He really he's not super interested in just working for Capital Group forever. He really wants to do this himself. And and Capital Group totally supports him in that. So he starts making investments on behalf of them. But he also starts working. In parallel on creating his own fund and own firm. uh that he's gonna call Sequoia Capital and raising an outside fund. And you would think this would be

35:46 Easy, right? I mean, Don has this amazing track record. He has a brilliant strategy that nobody else can replicate. He knows what's gonna work. He has the uh there are no LPs. Well, he has the stamp and imprimateur of Capital Group, you know, one of the most storied money managers um you know in the world at that point in time. And then He learns a lesson that uh, you know, generations of people who start new firms uh have learned again and again. Uh we learned at Wave, which was that even with all that, starting raising a first time fund is really freaking hard. Like really freaking hard. Yeah, and what Don was doing was raising a first time fund for an asset class that didn't yet exist. So for Don, there weren't a group of investors who were used to putting money in this risk return profile. It it was going and convincing them, hey, like there's not really historical data on this, but you should take a flyer not only on me, but But on this entire concept.

36:45 Yeah, totally. I mean, you gotta remember, this is pre you know, for for listeners who know about David Swenson at Yale, the uh chief investment officer at Yale, he really pioneered This um this approach that Large uh pools of capital, especially tax exempt nonprofit sort of pools of capital should should put a lot of their assets in alternative investments where they can get extremely high returns over a long time horizon. And because they're tax exempt, they can compound those returns at a much higher rate than than ordinary folks. This concept didn't exist. So most pools of capital, you know, university endowments, uh foundations, family offices and the like, you know, all all of capital's claims. Yeah, it's fixing. A little bit of stock that they're investing in, you know, and and these folks, they're targeting across their investments

37:33 Uh a ten percent I R Uh, which, you know, is great and better than like the you know average market returns, but it's nothing like what Don thinks he can generate and what the venture capital industry promises. So he goes out and he makes this pitch about like, hey, I think I can at least double ten percent IRR. And if you look at my personal track record, like it's much more than that. And indeed Sequoia's first few funds would be well, well above ten percent IRR, many multiples above that. The reception he gets is like Well, this doesn't sound like the investing business. You know, this isn't fixed income. This isn't you know and and Don's like, Yeah, you're exactly right. This isn't the investment business. This is the company building business. I'm in the business of starting and helping build

38:19 Great companies. And and he's so right. I mean, that is what true early stage venture is. It's not, you know, investing, allocating money and seeing what happens. It's really digging in and helping start something from scratch. And that's where to this day, you know, the deep uh the the true outlier returns are. Um But the L P community is just like they don't get it. So Don tells this great story. He goes to see Solom Brothers in New York story to West. Which uh I believe it was Solomon Brothers that was the subject of uh Lyus Poker, Michael Lewis's first book. And um and he sits down with the folks there, he gives them the pitch and they say Uh I see that you didn't go to Harvard business school. And he says, Right. I didn't go to Harvard business school. I went to Fairchild semiconductor business school. And um they didn't like laugh at all. And they're like, We're not going to invest with anybody who didn't go to Harvard business school. Uh so

39:14 It ends up taking him uh almost three years while working with Capital Group to raise the first independent Uh, but finally in nineteen seventy two. And even that, that was like single digit, like how big was that fund? I couldn't get the exact data. Well, I I saw a couple of conflicting sources, but I believe it was somewhere between three to five million. So Quite, quite small. And that's with three years of work on it. Just think about the tenacity. I mean most people would give up. Yeah, totally. Think of Sequoia Capital today.

39:43 And then think back to the early seventies and one man, you know, Don Valentine, scraping together for three years just because he believes so deeply in this vision of the future. to uh to put, you know, three to five million together and start investing. Like it really just like tells you a ton about um You know, you look at their ethos today, and this is where it comes from. Once he gets started, he sets what he calls a few ground rules for investing. So these are this is the original Sequoia Capital Investing Checklist. One.

40:13 Must be in a very big market, the the potential investment. Two. Must be in Northern California. That's changed. Three, must be in advanced technology. Four, must have high gross margin ability. That has also changed. And five, must have the potential for Sequoia to make a hundred million dollars.

40:34 on the investment. I mean that's incredible. Like Uh three to five million dollar fund and he's still like he's only aiming for shooting for the moon. Sequoia alone could make a hundred million dollars on these investments. Which is basically by today's standards saying it has to be a unicorn because it in general, uh an early stage, um, call it a series A uh investor is gonna get diluted to around ten percent ownership by the time there's an exit is sort of the finger in the air way you would think about this stuff. Sequoia's uh had some examples where they've bought up more, think Dropbox, um, and there's also uh examples that we're about to go into where um the the terms were much different and you didn't just buy fifteen to twenty percent of a company, you bought much more in these early days. And these companies most of them weren't raising multiple rounds. So Sequoia was financing, that was the only private capital that they were raising, and then they were going

41:24 Achieving profitability and and going public. But but still, like you know, you think about today people talk about um, you know, oh V C investment, you gotta underwrite to 10 X returns. You know, even from day one, Don's underwriting to twenty X plus returns. And if he doesn't see that, and and still to this day, I mean Uh, I think one of the things Sequoia is really known for is they will only attack markets that truly have the potential to be large. Like a billion dollar market is not enough for them. You need a multi billion dollar, uh, you know, ideally 10 plus billion dollar market. Cause again, like they're aiming for each of their investments to make twenty X plus. And then the final I love this. The final item on the checklist for for Don's criteria for investing is must be positively responsive to our active participation. Uh you know, which is good, though. And and um you know, obviously Don uh develops quite a reputation as we uh as we talked about with Trip on the EA episode. Being very active and being very active.

42:22 Not only governance, but uh um influencing management of the companies. This is really Critical like Done. He has

42:31 The credibility to be very active in these companies because he has helped build the previous generation. Of You know of defining companies that are setting the roadmap for everything that's going forward. The other thing that he develops is uh is is a methodology for kind of assessing entrepreneurs. David, but before diving into the entrepreneur side of things, the thing that struck me on these ground rules, and as we've danced around a couple of times here, Don plays by his own rules and and he sort of has this ethos of

43:00 uh the this this early stage investment business is a subjective business. It's not a highly analytical, data driven business, like it's a it's a feeling business. And yet, in these ground rules, it's it's interesting to see what hard and fast financial things jump out. So even in this high area of subjectivity and gut feel. must have high gross margin ability is in there as one of these precious few rules. You know, as an early stage investor, that's that's like really ringing home to me and and and thinking about how important that is in the ability to to sort of of course scale a company but but generate outsize returns. The only number that you see in here is that that hundred million. Um then the only other thing that sort of close to resembles a number is high gross margin ability. It's interesting to think about what makes the cut.

43:48 Yeah. Well and this this also leads into um the his his methodology for assessing entrepreneurs. But um Don You know. As as so many other things in pioneering the venture capital industry, like

44:01 I think he I don't think he would put it in these words, but he recognized that this is a business that is both art and science. And that is What is so incredibly awesome and fun and rewarding about working in this industry in in early stage venture capital. But again, you know, if you think back to

44:19 the folks that were doing this before. It was all art, you know? And if you think to a lot of the entrepreneurs who were starting companies like the Trader S8, um, it was all science. Like they weren't thinking about the art of like, oh, how do we make this into like a huge wealth generating vehicle for ourselves and for the ecosystem? It was like no, we just want to go do science, you know, and let's like find some way to do science. And and Don is really the first person, I think, to bridge this gap. The methodology for assessing companies and entrepreneurs, he kinda goes back to and I assume this he was doing this while he was working at companies too. You know, remember he has this Jesuit education and Catholic school up upbringing background. And he goes to uh He he goes to the Socratic method. You know, still to this day I think this is a lot of how Sequoia runs their interactions with entrepreneurs.

45:09 They ask questions. And This is such a Key to being a great VC, one thing that I struggle with a ton. is like you can the temptation is always to insert yourself into what's going on.

45:24 Don recognizes that like what you need to do is listen to what the entrepreneurs are saying. You may agree or disagree or like understand or not understand, but like you need to understand how they Think about things, not how you think about things. Yeah. Um it's not about their answers, but why they're thinking that answer is the right answer and how they arrive there and what the thought process is. Yeah. And so, you know, Don talks a lot about uh if you watch the the YouTube video of of of him at Stanford, how Formulating a question is he believes is the most important thing in his business. And so he has a rule that questions can only be twenty words or less. And uh uh when he when he solicits questions from the audience at Stanford, he says, twenty words or less or I'll kill ya. It's great. But that's how he approaches things. Because he's really interested in the storytelling technique of of the entrepreneurs because he says it's about the building of the idea, the size of the market, the degree of technical risk to get this product finished, who's going to care, and explaining that in a very simple way.

46:30 We can tell that that person who can do that, explain it in a very simple way, is somebody we want to be in business with. People who are instead complex rambling all over the place. They're not, you know Donna's realized that the value, uh, the only competitive advantage that startups have is Focus and speed and stealth. And so if you're all over the place, you're not gonna be able to execute on those things. And that's still true today.

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48:46 How do you square all of this with Don's sort of uh off stated principle that he invests in markets, not founders? And h how d how does this assessment of founders fit into that notion? Well, you know. And I'm asking you as technology historian, not obviously you're not in Don Don't Exactly. Well I think Of course they're interrelated and like All investing. It is it is

49:13 early stage investing, it is about both the market and the team. But I think that's this is the key is like the market is the important thing, but you need a team. This gets back to uh Don's last point on his checklist of must be receptive to our active participation. You need a team that's gonna be focused and able to quickly the right solution into the market. And so he has this this Really great quote that I think encapsulates this. He says, So our view has always been preferably give us a big technical problem, give us a big market when that technical problem is solved, so we can sell lots and lots and lots of stuff. Do I like to do that with terrific people? Sure.

49:51 Are we willing to invest in companies that don't have them? Sure. You can augment management, you can help them with more people that are highly qualified. We invest in the size and the dynamics of the market. I don't care if Genghis Khan is running the company. We'll give Genghis Khan some help. Give me a giant market always. Uh but I think, you know, Steve Jobs is gonna come up in a minute here. But I think, you know, his point about Genghis Khan is that Genghis Khan may be Genghis Khan, but

50:18 He was focused on, you know, winning and uh speed and conquering. Uh, and that's what they're looking for. And that to just beat this metaphor to death, and that Genghis Khan Also has weaknesses and therefore must have a team that surrounds and complements. And I think Don has some quote, I I don't have it exactly, but about how the most critical thing for an entrepreneur when sort of listening to these questions, what are you listening for, is is really this self awareness of what they're good at and what they're not, and exactly point number six, how receptive they're going to be um to to being helped with those weaknesses.

50:54 Yeah. I mean again, think back to this moment in time. The people that were starting these companies, they were engineers, they were scientists, by and large. And uh Dunce. superpower was he was able to augment these companies and these teams with folks like himself who were able to do sales and marketing and go to market and then Sequoia could help argument augment with

51:17 finance and accounting and everything around that and uh and the outsourcing of all that. What he couldn't have was folks who thought they knew everything. So What actually do they end up investing in once they close this the first Sequoia Capital Fund in nineteen seventy five? So it turns out Don Makes his first

51:35 Investment. In indeed. A quite giant market enabled by semiconductors, but uh One a little off the beaten path and certainly different than um the uh defense contractors that he started his career selling to. And that was Atari. Uh, and we're gonna talk much more about Atari later in the season here on Acquired, but uh it was the very first independent Sequoia capital investment. Don invests six hundred thousand dollars uh in the company in nineteen seventy five. Uh

52:05 And the very next year the company ends up getting acquired by Warner Communications for twenty eight million dollars. Uh at Sequoia makes a quick four X return. Yeah, which is great. Great IRR. Uh, but uh Does fall short of the twenty X that Don is hoping to underwrite too. Did I find a different source on that? I thought it was a two million dollar initial investment.

52:27 Uh or was it to did he do a follow on for two million? I believe the initial investment was six hundred K. Now Atari had also already been around for quite a while when I'm I think three three years they had gone without before raising. Yep, and uh Don had known Nolan Nolan Bushnell, the CEO for for many years. So I have to assume this was one that he had kinda waiting in the wings uh uh till uh until he closed the fund. Which which every good uh venture capitalist should have when out raising their first fund is who who's gonna be your first investment. Oh man, we did that too. We have it's amazing. It's amazing how much the industry is still the same. So then

53:03 In nineteen seventy seven. uh Sequoia Bakes. Um Wet. could have been uh perhaps their biggest and most important investment.

53:13 Ever. And unfortunately becomes perhaps their biggest and most important lesson. Just to pile one more thing on before the big reveal, which everyone probably already knows. uh is responsible for about a trillion of that three point three trillion number that I quoted of public market value today. Yeah. Yeah. Well, it's a good thing they still have another two point three trillion that they're part of. So in nineteen seventy seven as Trip alluded to in our episode.

53:39 Sequoia invests in another little company that was founded by an early former Atari employee. That was Apple computer. So Steve Jobs had worked for Nolan Bushnell at Atari. Uh and uh Don had had gotten to know him a little bit then. And they'd so Jobs and Waz had started the company and they brought on Mike Scott as the first President of the company.

54:00 Yeah, we should say d Doug got to know uh jobs a little bit at that company, but Did not have the impression that this was a venture backable guy at this point in time. Yes. So Mike. Uh the the two Steves had brought on as the first president. And it turns out Mike used to work for Don back at Fairchild at National.

54:27 And uh so Don gets wind of the company, he he meets with them and And Don also knew A very important guy in Apple's history, Mike Markola.

54:37 also used to work for Don back in the semiconductor days. And Don quote unquote sends him to the company with the intention that Markla is gonna replace Mike Scott as the president and run the company. Ultimately, though, uh you know, as Trip talked about, Markola makes a brilliant decision and says, you know, I don't actually want to run this thing day to day. I'm gonna be the chairman and really help these guys. But regardless, what's you know, this is a you know kind of perfect example of Don's company building at work and management team uh recruiting. On the back of this Apple raises their first venture capital round of just over half a million dollars. Interestingly, um The lion's share of the capital comes not from Sequoia, but from Venrock, uh, which does a little over two hundred and fifty thousand dollars. Don and Sequoia do one hundred and fifty thousand dollars, and Arthur Rock does the balance. So

55:25 Apple is off to the races. And they really, you know, as we've chronicled many times and will continue to chronicle in the future, really invent the personal computer and usher uh that wave of technology in. Two years later though, and this is this is the David Sigh there comes out. This is just so painful, uh so painful and and clearly has left its mark on on Sequoia. Two years later. I couldn't find all of the circumstances around this, but to the best of my understanding.

55:56 So uh The first Sequoia Fund. Did not have only um tax exempt nonprofit LPs in it. Uh it also had, I believe, you know, individuals and and maybe corporations and uh you know not Solomon brothers, but other folks like it, and certainly Capital Group, as a result of that, uh those folks needed to pay taxes. And apparently some of these LPs were encouraging Don to make a distribution of some of the gains in the fund so that they could pay their taxes on the gains. And so

56:28 Apple had grown quite a lot. It's now nineteen seventy nine. And Don, before the IPO sells Sequoia Steak, which they had invested a hundred and fifty thousand dollars for six million dollars, uh to make this tax distribution to LPs. Now that's a Enormous return. Phenomenal return, yeah. Phenomenal return, but oh my goodness, six million dollars compared to what Apple, you know, would shortly become and then ultimately in the long term, of course, become. And it's this lesson, you know, that drives uh Sequoia and subsequent funds to take uh to take their capital only from nonprofit tax exempt sources. Which becomes, you know, really not uh certainly the norm across the industry, but uh a goal and and the lion's share of money that moves into venture capital is ends up being university endowments, foundations, folks that are super long term and patient and aren't going to

57:22 force VCs to make uh these terrible decisions like this. Yeah, and another uh uh you can sort of check me on this, David, but um my understanding is Sequoia More so than your average venture firm holds the stock in companies longer after they go public and and often um sticks with the companies for a very long time, I think probably also inspired by this lesson. This and and others that we're gonna that we're gonna talk about here uh in short order. Uh you know, we're gonna talk about Sequoia's playbook in a little bit, but one of the key lessons that they learn is like when things are going well.

57:57 go long, you know, like value creation in these companies that are building And creating enormous markets takes a long, long, long time. I mean, just look at, you know Airbnb, look at Google, look at it, look at Apple. Uh, you know, you can still be getting enormous, enormous value creation a decade plus after these companies are founded, regardless of whether they're private or public. Yep. So it's fascinating to think about, you know, the first couple of investments or first two out of a handful of investments being Apple and Atari. It in total.

58:30 returned a profit of about ten million dollars or a max of ten million dollars. It is wild to think that that is the sum total of of Sequoia's return on those two companies. I know, I know. But at the time, I mean, like I even, you know, f uh pulling it into context today, like if we within, you know, two to three years of starting wave, if we could be sitting on two X cash distributed, like I would feel great about that, you know? But the lesson here is like that's not the game we're the business we're in or the game we're playing. The game we're playing is like Ten X plus cash distributed. And to do that, you really need to be in it for the long haul, especially when you're investing early. Yeah, the other thing to know here and and David, as you uh as you foreshadow and you've been smiling a little bit, we will get into this much more later this season. Uh but

59:19 With Atari The Atari boom that we all sort of know of in the eighties was after it had sold to Warner. And so, you know, Sequoia didn't even have an option in participating in that upside unless they were gonna block the sale. Yeah. Yeah, totally. Uh and and that also leads to another part of the Sequoia playbook, which is like when things are going well.

59:39 Really try and convince these companies to stay independent and not sell. I mean th look at Instagram, right? uh selling Instagram to Facebook was uh was a terrible, terrible mistake by the founders and the investors, even though, you know, it netted them great returns at the moment. And it's interesting, Sequoia ended up investing right before that deal happened. That is a debatable topic, but we can uh

1:00:06 I think if it had gone a lot longer, then Facebook would have had to pay a lot more, like in the dozens of billions of dollars to acquire purely because there is a very, very high user count uh social network that is a threat to them. However, do I think that Instagram would develop the business that they have today that is billions of dollars of revenue flowing through them by advertisers? Maybe, but that's not a sure thing. I mean, that's all because of what Facebook had had done funneling all their existing advertisers there. I think that's true, and certainly they helped accelerate it, uh grow it uh more quickly, but at a minimum Instagram should have waited, you know, longer and then had a WhatsApp like acquisition. Uh at a bare bare minimum. Um again, it's so hard to

1:00:52 I know it's easy to armchair quarterback this now and hard to be sitting in the seat of, you know, Kevin and Mike when they have a billion dollar offer in front of them. Uh but this is the value. I mean, Sequoia's learned these lessons over so many decades and seeing it time and time again. So the other lesson that they take from Apple is what Don and square call an aircraft carrier approach that they start taking to these big markets. They realize, Don realizes that Apple has created this PC market. And it's not just gonna be Apple that's gonna succeed in the PC market. They're gonna usher in all of these other enabling companies that you need around the PC. So like Apple is the aircraft carrier, but you need all the destroyers and the, you know, uh the ships around it and like all the planes on the ships and all that stuff. So they start financing component companies around the PC industry. Apple and Don help start a company called Tandon Corporation that makes disc drives. Uh they are first investors in Tandon. Tandon goes public after a couple of years, reaches a market cap of over one and a half billion dollars. This is in the early eighties. Um company called Printronics that makes printers, a company called Priom that makes disc drives, a company called Dyson that makes magnetic discs uh for the disc drives. Uh all told, I believe Sequoia ends up making about 15 investments kinda in this aircraft carrier strategy around Apple.

1:02:12 And it drives. much of their returns in these early funds. Some other notable investments that they make during the seventies and eighties. In nineteen eighty one, they invest in a company called LSI Logic. which makes it again around PC and computing, they make storage and networking products. Uh in nineteen eighty three, so just two years later, LSI goes public in the largest IPO on the Nasdaq in history at that point, raising$153 million in the IPO Uh, which is, you know, I mean one hundred fifty three million dollars. That's like a solid, you know, soft bank size around today. This is two years after Sequoia invested in the company.

1:02:50 And it yeah, inflation adjusted. I mean, that's in the sort of uh five hundred to a billion range. Totally in the way to think about how much they raised. Totally. Uh 1982, as we chronicled, they invest in trip and electronic arts or amazing software in the beginning. They also invest in threecom in nineteen eighty two. Uh folks might remember threecom uh which was uh made networking gear and eventually and the palm pilot. ThreeCom, I didn't realize came directly out of Xerox Park. Uh so that's the other thing that Sequoia, you know, kinda on the back of Apple starts doing is they start raiding Xerox Park and IBM's West Coast Division and all of these old school East Coast companies that had been training these technologists and developing uh you know, advanced technology and they just start commercializing them left, right, and center.

1:03:36 Nineteen eighty three. They invest in Oracle. And also Cypress Semiconductor, both of which become massive successes. And then in nineteen eighty three wanna make on on Oracle before breezing because we're of course we need to do an episode on Oracle Larry at some point. But there's a crazy thing here that uh Oracle went six years before raising money. Yeah from from Sequoia. And I think They had bootstrap off of two thousand dollars.

1:04:03 And if you think about it, like Oracle was really one of the first True software companies. They were wildly capital efficient and Larry was very outspoken against, you know pushing back against this rising venture capital industry and uh speaking all kinds of uh ill tongues of of the venture capitalists and what they do and come in and try and control companies and raid them all these things and of course ends up partnering with with Sequoia six years in, but uh a very different start than a lot of these other companies, which required much more capital to get going. Yeah. And

1:04:34 didn't want to dive too deep into it is that I might be speaking a bit out of school, not having done the deep dive on Oracle and their history yet. But To jump in and speculate a little bit. I think part of the reason why Larry That said, I'm gonna speculate wildly. I think part of the reason why Larry was so anti-VC was VC was anti-software and anti-Larry. Like this was like they didn't understand, Don didn't understand software. You know, like he was a semiconductor guy. All of these companies we're talking about, with the exception of EA, are hardware applications companies. And so I don't think Oracle could raise venture capital when they got started. They were the first real

1:05:09 you know, s real software company. It's the highest gross margin of them all. You know? I know. It fits that thesis so well. But it wasn't, you know, the the venture world hadn't woken up to that just yet. Uh they would. They would, and Sequoia would too, of course. But uh but so much of the DNA comes from this hardware world. The last kind of Great. And for Sequoia certainly the greatest uh hardware investment that they make.

1:05:35 is in nineteen eighty seven. Don invest two and a half million dollars in a little company called Cisco. for thirty percent of the company. Started on the campus, uh actually at the GSB at at Stanford. Started on the campus of Stanford. Sandy and Lynn were um I can't remember which was which. One of them was the IT administrator for GSP and one I think was was elsewhere on on the campus. And networking was just becoming a thing and they were married. They were sending messages to one another and and This is this amazing romantic story that they had had jerry rigged the network to be able to send messages to each other to work. I know. And that turns into Cisco. And that turns into Cisco. I mean it just goes to show you how these companies start. And and you know

1:06:16 Don having learned the lesson from Apple of like, you know, hey, we'll finance Gingas Khan, you know, he doesn't care. Like most VCs would look at this team and be like, we're not gonna finance this team, but he cares about the market and the application. At the time, there were no routers. So networks, like local networking was just becoming a thing. But networking networks was impossible. And so Sandy and Len Yeah. And just, you know, such a brilliant Sequoia still uses this example today of like the very very best, most elegant expression, simple expression of what a company does. It's three words for Cisco. We network networks.

1:06:52 That turns out to be uh not just an enormous, enormous market, but really the enabling uh technology for the internet. Cisco stock was the tracker for the internet hype in the in the dot com era. I mean, it was like if if if you wanted something that was emblematic of people's excitement about this new technology, it was Cisco. And so Now we're in nineteen eighty seven, we're twelve years after the kind of independent constitution of Sequoia Capital.

1:07:20 Don has learned all these lessons. He's not letting this one go. So Not only does he fully finance the company uh upfront uh with two and a half million dollars, gets thirty percent of the company. The company then goes public shortly thereafter. Uh I believe they raise hundred and sixty some odd million in the IPO. Don stays on the board. Don doesn't distribute the shares. He remains chairman of the board, I think, until the mid nineties. And they ride Cisco up and make enormous, enormous returns on this company. And that is that really becomes the playbook for for Sequoia Capital going forward. Amazing run.

1:07:55 Also just such a great example of like Sandy and Lynn weren't thinking about the internet. Nobody was thinking about the internet when they started Cisco. But uh things just kept the market kept evolving and kept getting bigger and expanding. And Don again, you know, and Sequoia being so focused on the market, they knew that like Even though this company was public, there were still enormous returns to be had because the market was nowhere near penetrated. So

1:08:19 Alongside. all these investments that they're making. The funds kind of steadily grow in size from that first fund of three to five million. It stabilizes at around a hundred and fifty million per fund in the nineteen nineties that Sequoia's raising every Three years or so uh and and having that be their investment period. Along the way though, of course, to do that.

1:08:38 You have to not only build these companies, but you have to build Sequoia, you have to build the firm. Uh you can't do you can't invest in all these companies and give them the time and attention that you need to do true early stage company building alone. So Don starts adding partners to Sequoia. And uh and he talks about the process of doing this. And again, remember Back when they started like the the number one requirement for being an investor, quote unquote, was going to Harvard Business School. Not Fairchild semiconductor business school. in this sense was generally a public market investor or or or perhaps some other alternative investment, but not investing in startups. I mean the the Solomon brothers folks probably looked at this more like gambling. Like what you're doing isn't investing and you're not a d a person that looks like an investor. So what are we even talking about here?

1:09:26 You know, I think they and the irony of it all is it's the exact opposite of gambling. It's building. Mm-hmm. Mm. Yep. But yeah, so okay, so so Don has this great quote. He says, Adding new talent was and remains a continuous process. Conventional education was never a high priority.

1:09:42 You know. Plenty of folks have gone to Harvard and Sanford Business School, you know, w worked at and and work at Sequoia, but That's not What They look for. We look for people with functional experience in a startup, i.e., design and application engineering, product marketing, sales, aspects of outsourcing manufacturing.

1:10:01 Our investment decision making process requires very self confident people. able to be challenged publicly. I look for people that are as far different as possible than I am, because we do things here on the basis of consent among the partners. And I don't like having a homogenized set of opinions. Don wants people to be He says, I want as much confrontation and different thinking as possible. And he wants people that are gonna be confident and comfortable enough to put their thoughts out there and debate as part of the group. One of these lessons that Don's learned is that sometimes the most amazing companies like Apple, like Cisco, they look crazy. And so you need somebody that's willing to see the potential behind the craziness and stand up for them. And oftentimes that's not folks who are coming from Harvard Business School.

1:10:45 I believe the first partner, ironically, that joins Don at Sequoia, um does come from the investing world. Uh in nineteen seventy nine, Gordon Russell uh joins uh joins Don. He had worked with Don at Capital Group. So he comes from Capital Group, comes in and joins Sequoia, and he builds Sequoia's healthcare and biotech investing practice. So kinda in parallel uh even from the seventies back in Sequoia, they're not only investing in technology and hardware and semiconductors, they're also investing in healthcare and biotech. Um but of course it's it's technology that the firm finds its its true success in and uh And in nineteen eighty one.

1:11:23 We mentioned Pierre Lamond earlier. Don convinces. Pierre. Uh already had an amazing storied career as a chip designer and architect at at Fairchild and at National. to come in and join him at Sequoia as a partner. And uh

1:11:38 Pierre has an amazing run. He stays as an active investing partner at Sequoia for almost thirty years. And then this is incredible. He moves to Costla Ventures and joins Vinode uh over at Kostla uh in the mid two thousands. And then he goes and he joins Formation Eight. And he's now after formation eight out of Eclipse, he is still an active general partner making and leading investments today. He just turned eighty nine years old. This is incredible. He was born, I believe, in nineteen thirty in France. Uh he is a true

1:12:11 True legend in the industry. But that's the kind of folks that, you know, Don is looking for is people who are literally gonna die in the seat because their their lifeblood is building technology companies. Uh and Pierre absolutely fits that to a T.

1:12:27 So then. In the late eighties. Uh two. Very, very important. People.

1:12:32 uh joined Sequoia from Interesting backgrounds. So in nineteen eighty six Mm. Gentlemen, a true gentleman.

1:12:40 By the name of Michael Moritz. Now Sir Michael Moritz. who uh was from the UK and had come over to America and had become quite a famous journalist for Time magazine. I believe he he wrote um a book on Apple while he was still at Time, right? The Little Kingdom, I think it was called. Sounds right.

1:13:00 And that's how he gets really interested in Silicon Valley and technology and sort of the people behind Apple. And venture capital. He leaves time and he starts a VC newsletter with the goal of he wants to break into the venture capital industry. I remember Dick. Old is new again, baby. Mike has never, you know, other than this VC newsletter company, he's never built a company or worked in technology in his life. But remember, Don's looking for these mavericks and he has a soft spot for people that kind of do things their own way. Don decides to take a chance. On Mike.

1:13:30 and invite him into Sequoia and to join the partnership. And um That ends up being Just an incredibly, incredibly prescient decision that leads to Yahoo and Google and Many many other companies.

1:13:45 Count as how to hack your way into V C is this like uh the first example of That actually would probably still work today. Yeah, I think there's a quote about Moritz, which is he had the journalist instinct to go for the jugular and not hold back. Uh, and uh a friend said that about him. David, we've started a podcast and have a a love for media, but I I have this sort of reverence for really good journalists who who not only are able to to really tell a great story, but sort of get the truth out there. You know, it's it's a special talent for someone to be able to cover an industry and yet have their respect in this way.

1:14:23 You know, we talked about the Socratic method of questioning that Don holds so dear, and I think this is what he saw in Mike. Uh, and we'll save a lot of this for part two of uh of our Sequoia journey here too, but um But that's what Mike was so great at as a journalist. Uh and and Don actually says, you know, he says the two people that he's m met in his life who are the best questioners are Mike and Steve Jobs. High company. The other

1:14:50 very important person who joins Sequoia Capital in the late eighties, is a relatively young Brash sales guy who comes from Hewlett Packard and Son. That uh Also as an Italian immigrant.

1:15:04 decides that he wants to work in venture capital. He just calls Don up one day. Cole calls him and says, Hey I want to join Sequoia. And if you know anything about the person that we're talking about, this is exactly in character. And this gentleman is Doug Leone, who Today of course.

1:15:20 is uh runs uh all of Sequoia and all of their operations globally. And I I believe will be the person that ultimately advocated for and took Sequoia into becoming a global firm. We're gonna talk much more About both. Mike and Deg.

1:15:33 Next time on part two. But just to wrap up Part one, which again is really Yeah, the story of Don and uh I mean you can't Extricate Don not only from Squia, but from Venture capital.

1:15:44 Uh and the whole industry in total. In nineteen ninety six, after it had become clear that that Mike and Doug were Amazing investors. And not only amazing investors, but

1:15:55 Um had internalized. all of these things that are meant to be Sequoia and then built on them themselves. Don does something pretty amazing. He literally hands the keys.

1:16:07 Of Sequoia over to Mike and Doug. Doug talks about this in an interview with um with Dan Primack and Axios, uh that um I don't have the exact quote here, but he says Don one day in nineteen ninety six invited Mike and Doug into a conference room and he sat them down and he said I'm giving this firm to you. And

1:16:27 There are three things. One. You're going to run the firm. I'm not gonna run the firm anymore. Two, you get to decide what I do.

1:16:35 You can keep me around, I can continue making investments, or I can not. It's completely up to you. And then three, if you do want me around, here's the things I'm willing to do and not willing to do. But one of the things I'm not willing to do is run the firm. So like you guys make all the decisions about what's gonna happen uh from now on. And that's just like even today, that's so rare. I mean, this is the first very successful. Well, not the first in the industry, but the first successful generational transfer at Sequoia. Most venture firms and most founders of venture firms don't have the ability to do this. Uh and it's so hard. I mean, Don created all of this.

1:17:08 And he's willing to say, You guys are the future. Change is part of Not only what we invest in, but part of the venture industry too. And like you guys are the people that are gonna lead the change. It takes a lot to do something like that. It reminds me a lot of uh um another great venture firm that we may also cover benchmark. It was a very different way of doing this. V very different, yes. But uh you know, equal partnership. There's a great sort of uh interview with Andy Rackliffe and and Patrick O'Shaughnessy on um uh invest like the best, where uh Andy talks about how at the peak of their power the original partners uh handed us the keys.

1:17:43 And I think it's uh While done very differently. Th there's there's definitely common elements between both of these these great firms. Yeah, and if you look at the firms that have managed to survive, you know, generation after generation and wave after wave of you know the technology industry and and venture capital's evolution alongside it. It's the firms that do this well. The firms that don't don't make the transition. And and Don has a great quote about this. He's, you know When Sequoia was started, the positioning was to L Ps was we're gonna deliver vastly superior returns to anything else you can get out there. And that proved well, we'll talk about it in grading, but I think that proved true. But

1:18:21 The positioning of Sequoia is now two things. And he says, This uh it's the stability that comes with generational transfer. It says the stability is part of why we have had the same limited partners for almost forty years. When D's saying this now almost fifty years. Uh stability and returns is how Sequoia is positioned. For the type of LPs that they're trying to attract, which are patient, very, very long term capital, you actually need both of those things. Returns isn't enough. You need the stability that accompanies those returns so that people will have confidence that like Hey, you can get great returns, but if the firm blows up then you're you're useless to me. All right listeners.

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1:20:39 Go check out service now.com slash acquired and tell'em that Ben and David sent you. Do we want to go into what would have happened otherwise? Yeah, let's do it. Alright, so listeners, the the way that we wanna do this section on this unique episode is uh what would the world be without Sequoia? And there is a very Sequoia centric view of the world, which is all of the technology industry looks very different and without building this sort of aircraft carrier strategy around Apple um and and financing all of that. um in a very scarce capital environment like there was then. Uh we we may not have, you know, the the Apple that we have today. We may not have some of the other tech giants that we have today. There's a alternative view that you could take to that that says, look, capital is capital. And the the the

1:21:25 Ninety nine percent of the value or maybe maybe a hundred and ten percent of the value that comes from receiving investment from a venture capital firm is the capital itself, and everything else is either hullabaloo or value detraction. And capital will always expand to fill all attractive opportunities. Exactly. Exactly. That we despite some friction points, we live in an efficient market, and if it's truly a great opportunity, then capital will flow to to go and fund that thing. And so um the world would look no different today if uh uh you know if there was no Sequoia. Um I think I fall slightly toward the former part of that scale. And I'm not willing to say that we you know, we wouldn't have some of these amazing technology innovations without Sequoia, but I do think in just pouring over the hours and hours of reading that you know that we found about Don and and really learning about the history of this firm. Don played a very active role in in building a lot of the companies that they invested in and deserves a lot of the credit for that.

1:22:22 Well, listeners, let us know uh how you like this uh type of episode focusing on venture firms. Uh We of course love it as uh as you know, venture investors ourselves. Um but We've been talking all about Sequoia on this episode. There is really along the exact same timeline, there is a perfect example of what would have happened otherwise, and that is Clyder Perkins. Which

1:22:45 over this time frame that we're talking about was equally, if not arguably more successful than Sequoia. But what's really interesting and and we'll dive into when we ultimately do an episode on on Kleiner, their philosophy was quite different. And uh was a lot more interested in the entrepreneurs, uh, and the backgrounds of the entrepreneurs than necessarily down in Sequoia War. So I think to my mind, what would have happened otherwise Of course Silicon Valley would have happened. Of course the modern technology uh modern venture capital industry and startup industry would have happened, you know, even though Don helped catalyze

1:23:20 All of it. Somebody would have. Certainly Kleiner would have and did. Uh Kleiner Pickens would have and did. But I don't think there would have been as many chances taken and opportunities given to, you know, the quote unquote Ho Chi Minh out there that uh Sequoya was willing to fund. Uh and you know, it wasn't just in those days. I mean Look at Airbnb in the early days and uh Sequoia's extremely prescient early invest in investment in, you know, the three Airbnb founders. They didn't look like what, you know, a prototypical founder looked like at the time. Far, far from it.

1:23:54 You know I think it's Sequoia and Don's DNA coming from A true. You know. incredible marketing background and markets focus, uh that um

1:24:06 You know, maybe wouldn't have developed in the same way without Sequoia. Yeah. And y one way to look at this is like If you're the Kleiner Perkins in nineteen seventy eight, you know, you are uh backing founders and outsourcing a lot of your judgment to them and you're just saying you run you know, obviously they weren't hands off, but You run the company and uh the reason I'm investing in you is because I trust you to, you know, figure out how to run this company. And what Don was looking at is

1:24:34 you're really onto something in this killer market, we're gonna go build this thing together and I'm gonna help you do that. And the the the downside to that that we haven't painted yet is if you're a founder that believes that you need to be the CEO of that thing forever and and you're in a market that deserves a team to really go and and value maximize the the the way to tackle that opportunity. Like It the terms of these investments, especially at at this time, were that, you know, often firms would own 33 to 51% of the company, they would have the right to buy the rest from you. They would have the right to replace you. They would have I mean all these rights. Of course, much of this still exists today. The job of a board is to hire and fire the CEO, but it was much more uh prevalent back then, especially within uh Don's view of the world, is that um I'm building this company uh with you uh right now and like this company may outlast your leadership. Well the unspoken words in uh Don's, you know, uh quote uh we said earlier about management can be augmented is Management, of course, can also be replaced. Uh now, you know, there's

1:25:36 Upsides and downsides there, right? Like if you're focused on if your focus is building a great company. Sometimes that's the right thing to do. Uh, and um you know, sometimes of course Don and Scoy would get that wrong, but sometimes it is the right thing to do. thinking back to our conversation with Tripp and what attracted Tripp and EA to Don was this knowledge, you know, y you were getting what you saw with Don, and he was going to uh force you to build a big company one way or the other, you know, with you or without you. All right, we are in tech themes now, but to officially call it that and and uh and move through it here, the thing that really jumped out at me, uh and of course, you know, being in this industry, knowing folks funded by Sequoia, knowing folks at Sequoia, you you you know some of this tangentially, but it's worth taking a fresh

1:26:25 Look. when preparing for these episodes to really ground yourself in in what assumptions am I making. The thing that jumped out at me was Sequoia in all of their copyrighting, it never says investment, but rather partnership. We it's not we led an investment, you know, it's not it's it's we decided to partner with that company. And they have a uh statement on their website called their ethos, which says we're serious about our work. and carefully choose the words to describe it. Terms like deal or exit are forbidden. And while we're sometimes called investors, that is not our frame of mind. We consider ourselves partners for the long term.

1:27:02 it immediately jumps out at me as David, you so often say company builders, you know, we are partners and the way that we do that is we've got this, you know, huge fund that we manage that of course we have a fiduciary redu responsibility to our LPs to maximize the value. the way that we decide to partner is through investing in you, but you know, we are your partners in this business. Five, six, seven years ago, I always thought that was when I heard we were so excited to partner with this venture firm on this thing, I was like, Oh God, here it comes. If they invested money in you, just say it. I finally am sort of like seeing I think what firms like Sequoia, and it's you can't really say firms like Sequoia, because there's no firms like Sequoia. But what Sequoia means when they say partnership rather than investment, it is a very different frame of mind. It's not I'm looking for opportunities to get a multiple of my cash. This looks pretty good, so I'm gonna throw it in and hope that I get a multiple out of it. It's

1:27:55 For some reason I believe that th this is going to be a society defining company in the next, you know, coming decades, and I'd like to be a part of that with you. Well it gets back to I think I've talked about on the show before. Um but when we were starting Wave, one of the first people we talked to was Greg McAdoo, who was a longtime partner at Sequoia and led their investment and initial investment in in Airbnb and uh and was on the board for many years and and was a big part of the reason why my partner Riley joined Airbnb and he said to us something that'll always stick with me. He said that Doing venture. Extremely well and at the highest levels, early stage venture. It's all about alignment. And

1:28:35 I think this is what, you know, through this history we've told how Don and Sequoia came to understand what this alignment meant. The alignment is around building Long term. Big, great companies. And so if your focus is that you need LPs, unlike the original set of LPs who wanted a tax distribution and forced them to sell their steak and apple, you need LPs who are willing to sign up for an essentially infinite uh not infinite, but decades to multiple decades long time horizon because

1:29:04 when there's true opportunity, the mass the the lion's share of the value gets built at the end, you know? Think about the run that Amazon's had or or even Apple's had in the last 10 years in their market cap relative to the first ten to twenty years of the company. So that's the LP aspect. But then To this company building aspect, like if you're truly aligned around that, you're optimizing for those outcomes, which means you aren't just like Sitting on the side and letting things like play out, you are helping make the decisions and build the company and build the culture uh that is going to enable a super long term uh great company to be built like that. Uh and I think that really is their ethos. Uh now that's

1:29:47 That's not the only way to do investing and we'll we've talked about and we'll talk about many more on this show. But it's a really, really unique one that um I think it's been cool doing this episode to see like exactly how this was developed. Alright, my second second tech theme. Is That it's called Sequoia.

1:30:04 Not Valentine Capital or Valentine and Co and Valentine's Exactly. The way that Sequoia thinks about themselves is that Sequoia exists behind the founders. It's not about Sequoia, it's about the founders. I mean no, it's no it's or it's more importantly about the companies. Um And Yeah, not the founders. Right, right. It's a and and even more so, it's not about the person, but it's about Sequoia. So even when you pop up that one level, it's not hi, I'm Don and you know, uh, I'm you know, extremely public and loud and writing op eds all the time and doing all this kind it's if you want to talk about the investment company, let's talk about the investment company, and that's Sequoia, and I happen to be a part of that. But you know

1:30:50 It's it's not all about me all the time. And it's interesting, you know, you talk to people and and you say, Do you think Sequoia's low ego? And people would say, uh no, absolutely not. Like that that is not the not the way that I would use to describe them. But I think you talk to folks at Sequoia, you talk about companies that have been funded by Sequoia, and they do take that very, very seriously, where we're one of the best firms in the world. But It's uh at this level it's about the firm, not the not the partners. I think it all comes back to this.

1:31:20 super long term orientation. Like You know. Does Sequoia have? ego around that of course they do. Go look at their website. Like, you know, but it's all about long term. It's not about like look at this deal we just did. It's about like look at this company that was built over decades uh that we were part of um and look at all of these companies. And look at Sequoia itself, which we're gonna get into much more in in our next part of this uh of this series here. So I tried to for the section

1:31:47 Kinda. catalog and and crystallize like what are the elements of if you had to distill the Sequoia playbook from this history and from from Don's experience, uh I think these are the these are the points that I would put in it. You know, one First and foremost, of course, is focus on the market. Both the size of the market and whether the the dynamics of the market will lead to rapid adoption by a new entrant. Second is that Change equals opportunity.

1:32:15 This also didn't make it as much into the history and facts, but Don has this great, great quote about this. So he says, One of our theories is to seek out opportunities where there's major change going on, a major dislocation in the way things are done. Wherever there's turmoil, there's indecision. And wherever there's indecision, there's opportunity. When it becomes obvious to anyone who reads Time Magazine that it's useful to have a distract. drive on a computer, then it's already too late in the cycle to invest in disk drives. So we look for the confusion phase when the big companies are confused, when the other venture groups are confused. That's the time to start companies. The opportunities are there if you're early and you have good ideas. Uh which I think that is just like such a perfect way to frame it. So hard to do in practice, but uh uh a really perfect way to frame it. Next, I think is when you find one of those opportunities. Don't get caught up in overly focusing on the team. Like, of course you want the team to be great, but like if the team doesn't look like a traditional team that you would pick from central casting to do this, like

1:33:09 Don't worry about it. You better to pursue the opportunity and you can augment the team if they're receptive to working with you on it. That gets too. The next piece, which is be a company builder, not an investor. You know, to really do this at the early stages, you gotta dedicate the time and effort. You have to have a partnership of people made up of people who have actually built these companies, whether that's in their career as investors or their career as operators, but people who really know what they're doing and can help the companies make good decisions and recruit great management teams around them. Related to that.

1:33:40 You can only do that at the early stages. Like Sequoia now, of course, and we'll talk about this much more, invests at all stages of a company's life cycle. But this type of company building investing that we're talking about. You can really only do it at the outset. Once once the DNA is set, and it's interesting, I think Sequoia used to have a one of these quotes uh on their website in their Ethos section. I don't think it's on there anymore. They believe that The DNA of a company is set within the first ninety days of operation. And after that, it's really, really hard to change it. And Having lived through that and now, you know, making the whole focus of my investing at at that.

1:34:16 stage the market on YouTube and like I completely agree with that. Just reflecting on how crazy it is that this asset class exists. We all take for granted that there's early stage fundraising. That like

1:34:30 In mass. A couple million dollars are gonna get deployed into Ideas. hundreds if not thousands of times per year. And that there's a whole asset class of investors that are willing to do that. And now it makes sense

1:34:47 Because we've seen the sm the handful of those become so, so valuable that you know, you index the whole asset class and like S sometimes it overperforms, sometimes it underperforms, but like it it sort of tracks other asset classes in terms of of uh risk adjusted return. It's a pretty special thing that it exists. And this is this is probably an ethnocentric statement, but that it exists in our country. Like if you think about the impact that it has had on GDP. the access to early stage capital

1:35:19 from a large group of people who it's their business to take a flyer and their business to underwrite a tremendous amount of risk. by you know, having a twenty plus company portfolio. I think it's a really good thing that that this system got created. And that this type of capital is is available today. And surely it is not deployed in the the best way that it could, or certainly the most

1:35:45 Fair way that it could. But the fact that it exists at all is is intensely value creative and and We take it for granted that it exists today and it's it's kind of mind boggling how difficult it would have been to convince people at this point in history that they should plow money into it. Gosh, remember the Solomon Brothers meeting that we talked about that Todd had? One of the other reasons I was so excited to to do this episode is

1:36:11 We deeply believe it wave. something that I think Sequoia also believes in this history shows, which is you know, you mentioned This asset class exists now and it, you know, you can have an index on it and it works because like you know, a few companies out of these, you know, many, many seeds of small companies will get built into, you know, giant sequois like trees. That's true. But I think there's a there's a a faulty logic conclusion you can draw from that, which is that we should have an index fund on this because what this

1:36:39 history illustrates is that That defeats the whole thing. Cycle. Like the reason that you know, sequoia sized trees get grown from seeds is because of, you know, careful watering and feeding of them from people who are experienced gardeners who really know what they're doing, you know. I really want you to change your Twitter bio to experience gardeners. I love it. I love it. Uh experience forest keepers, let's put it that way. You know, that's a big part of, you know

1:37:07 a change that we and I think you guys too like hope to be in the early stage ecosystem now is getting away from this like watering a million seeds and into like Tending a garden. Yeah. Yeah, I mean we thought long and hard about that with with PSL when we were first getting started and I think uh

1:37:25 uh should we be doing sort of more companies, you know, should we be doing this in like an accelerator style way? And uh Ali I mean we talked about the studio model on the L P show, but it it's it's very different and it's it's much more concentrated bets. And um I think Sequoia is a a great example of uh especially you know in the era that we're talking about it of incredibly concentrated bets and and a lot of work into'em um after the investment. Yeah. Okay, so my last two uh for the Sequoia playbook are You know, one, let your winners run. Uh everything we've been talking about, like If you if you've got something that's growing into a sequoia sized tree, like

1:38:01 most of the growth is going to become after you know decades plus into the company. let your investment in them run. And then the last one, you know, which is what Don did that we ended history and facts on, which is hand over the keys before you fall asleep at the wheel, you know, if you're running a venture firm. Uh so much easier said than done. All right. Should we move on to value creation, value capture? Yeah. Let's see. What's the best way to do this one? Well, uh one thing we talked about is we don't have the uh exact data on the returns of Sequoia's early funds. Uh we have a general sense from a few sources uh that we can talk about. But compare that to to

1:38:39 how the NASDAQ performed over a similar point in time, which is kind of the closest you could come to like approximating uh this type of investment as a as an investor at this point in time. Yeah, and and I guess what we're doing here is we're sort of rolling together value creation, value capture, and and and grading to touch on what we do in the section with value creation, value capture. Normally when we're covering a company, we say, you know, hey, Shopify um enable$250 billion of sales or something like that. I can't remember the number. um last year. How how how effective were they at actually capturing that value that they sort of created. Uh I would say Sequoia has been uh

1:39:18 um surgically good at capturing the value that they that they create in the world um with I think few misses. I don't think Don um had any trouble capturing the value he created in the world. Well, I I would say yes yes and no certainly no in Sequoia today. No. Uh but I think it took them many years to learn, you know, how to do that, right? Even Don coming from the background and the personal investing he did. I mean You know, the Apple decision was such a huge mistake. Uh, you know, Sequoia captured six million dollars of value from Apple, uh and

1:39:51 You know, lost out on the Dozens to hundreds of billions. Like uh so yes, I think they they have time to do it. A few mistakes. One very costly one. But yeah, I think that's I think that's fair. The real Testament here would be to ask the entrepreneurs that uh that Sequoia worked with. Like, do they feel the one the successful ones that the value that Sequoia and their limited partners captured from

1:40:17 uh the value that was created at those companies. Do they as entrepreneurs feel that It was worth what they got in return. Acquired Fm at gmail.com if anybody wants to email us. We didn't ask Trip that directly in the EA episode, but I think he probably would have said yes, right?

1:40:35 Oh yeah. Yeah. That was my I mean that that that was definitely the sentiment I got from him. Good point. We were mixing grading and And value capture and value creation. Should we move on to getting?

1:40:45 Yeah, so I mean I mean grading the the way that we traditionally do it for folks that are new to the show is um big company buys little company and we have history as our guide, was that a good use of capital by big company to buy little company? Dave and I were talking before the show on how to uh think about grading for this episode and I guess w the way we sort of landed on it is opportunity cost for L P capital. So what you know, if you had just put money into um the Nasdaq to try and and do some technology investing um you know from nineteen seventy five onwards sort of how how would that have looked. Just interesting to know the Nasdaq between nineteen seventy five, conveniently when it was created, um, and nineteen ninety

1:41:26 grew about six point five X with uh a a couple of pretty serious hiccups in the middle where it lost thirty percent of its value and then took a long time to to creep back up. So a stock market like any other. And so that's sort of the basis that that we decided to compare it to. David, how how do you think Sequoia sort of stacks up against um you know, that that public market accessibility. It's hard to compare exactly'cause we don't know the returns for any given fund, let alone all the dollars in aggregate. But I believe based on some quotes from from Don in in some of our research and and other data we have that Sequoia was probably averaging a fifty to sixty percent IRR on their funds during this period.

1:42:08 So if you look I actually haven't done the math of what that would be over fifteen years, but it's well, well, well above uh six point five X. And so now if you assume Sequoia is taking as carried interests, you know probably in the early days twenty, I believe now they're at thirty percent carried interest that they take on their funds. Uh so taking that out of the returns I still believe net you're performing well. Uh I believe you're performing much, much better than that. And uh there's a great quote um there was a Forbes profile uh that they did on Sequoia in twenty fourteen and uh there's a great quote in there from um the uh the CIO at Notre Dame, uh which is a a great LP uh one of the most sophisticated uh endowments out there. And they say that um Sequoia

1:42:51 is the single best performing manager that they have had in their entire portfolio for the last thirty plus years. Uh and that is across all asset classes, which is pretty incredible. Wow. Okay, so how do we assign a letter grade to this one? Well, I mean It clearly it's an A, right? Like uh I think the question is like

1:43:15 Is this an A plus? I think it has to be an A plus, right? Like if we're uh looking at a a whole bunch of funds bundled together is like too difficult to like assign a single letter grade two. I you know, I think like w were we looking at one that had it was of significant size and had the highest IRR of all time, then we could go, Oh, that's an A plus. Um But like it feels reasonable for me to say that like the first fifteen years of Sequoia's existence were but an A. relative to other venture firm I mean, yeah. The reason I make a case for an A plus is twofold.

1:43:52 One. How much Done. really was a part of inventing So many things about the way the whole

1:44:00 Not just venture capital, but startup ecosystem works today. And two, is is that quote from from Notre Dame. Now, you know, maybe there are other great managers that Notre Dame has not invested in. Uh but um But man, to be the single best performing manager over thirty plus years in a Marquee endowments portfolio, like It's hard not to uh hard not to assign that an A plus. All right, I'll go with you. Mm-hmm.

1:44:25 All right. Well, with that. This has been a blast for us. You guys have enjoyed it too.

1:44:31 Certainly hit us up in the Slack or acquire at FM at gmail.com. Uh if you have stories to share, thoughts, or other areas you want to see us dig into, especially on our continuing saga of Telling the story of Sequoia from Doug and Mike. Uh Well. their generation when they were coming up, than taking over and taking Sequoia into the

1:44:50 Now. twelve billion plus dollar global growth behemoth that it is today. Yep. Would love your feedback.

1:44:59 Alright, Carvets. Carts. Let's do it. Uh, you wanna go first? Yep.

1:45:04 Mine is an episode of The Daily, the podcast by the New York Times uh from a few weeks ago called What American CEOs Are Worr About. They report on an event that happened last month where nearly two hundred executives uh got together at something called the business round table, which I didn't know was a thing. It's not like a governing body of any sort, but it's like a two hundred of the fortune, I don't know one thousand CEOs that get together and make proclamations. And um one such proclamation that they made uh this year was that they are going to not just think about their stakeholders, uh their their their only stakeholder as their shareholders, but also their employees, their customers, their community, um, a broader set of stakeholders. And in my head, the the thing that first occurred to me was, well, that feels like illegal. in some way. It feels like the purpose of a corporation is to maximize shareholder value. And I've just have taken that at face value, call me out a capitalist, but like that that is my understanding of of relatively recent phenomenon. Yeah, and I didn't realize and like it got me thinking, because I've always thought like, well you should do all these other things

1:46:17 you know, that's bending the rules of the company to to potentially sacrifice shareholder value to go and and, you know um do things that you don't think long term will accrue to shareholder value. So obviously like you should be active in your community and you should take care of your employees. But I always thought with this lens of like, oh companies do that because it's going to accrue to shareholder value at some point. Um and it's fascinating to number one, listen to this proclamation and then they dive deep into Exactly, David, what you were talking about. The fact that it's it's a relatively new phenomenon, one that sort of uh grew up in the seventies and eighties in the sort of professionalism of Wall Street and companies changing their bylaws to to basically say w we exist to be a publicly traded security and then we are at the sort of mercy of that.

1:47:05 It's this interesting if we actually drift this direction, uh, that they brought up, it's much more a return to sort of the the business as a pillar of the community from the sort of early nineteen hundreds. And I'll be very curious to see if this sort of comes of anything and if this stirs more more sort of similar sentiment. Yeah. Yeah, super interesting. Um Well and um

1:47:26 you know, definitely reflective of uh the times we live in, uh in terms of uh corporations and the the world at large. So uh I hope things go more in that direction. It's interesting to see we have one of our five portfolio companies is a B Corporation. Do you guys have any B Corporation? Uh we don't yet, but we're super yeah super supportive of that. Yeah, it's been really cool to see that. Um You know, emerge as a a way to institutionalize some of the uh governance rules um around this idea. We invest in B corporations as in C corporations, but um uh no preference f necessarily for one or the other, but we're we and many other V C firms are super open to it and supportive of it.

1:48:04 Okay, my car as listeners may know, for some reason that I even I don't understand, uh I use Amazon music, uh instead of Apple music or Spotify. I'm actually yeah, I'm definitely gonna change that'cause Amazon does so many things great, but music is is not one of them. But One thing that popped up on uh the homepage of Amazon Music uh last week, uh, which maybe is worth the whole thing, is I had no idea, last week was the twenty five year anniversary of Notorious B. IG's first album, uh Ready to Die. Uh so like speaking of Mafia Dons uh on this episode and Biggie. It's so good. And and uh so Amazon did this cool thing where they have a bunch of tracks from the album and then in between each track they have like a commentary from, you know, journalists and people that were there, producers, puffy, you know, everybody part of making uh making Biggie's first album. Just listening to it all again just

1:49:00 Man, Ryan, like it's so good. Like you know, maybe some of the content and uh language he uses uh, you know, haven't aged too well, but um but like he was so good. Like I've never heard anybody that can rhyme like Biggie and just the music and the tracks and like what Diddy did producing it, like It was uh it really cool to rediscover and and be listened to that over the past week. David, I love the incredibly eclectic collection of carve outs that you have. It's this like you know, crazy place in France. It's this really hard to get through you know, thousand page book that like I will never have a prayer of actually go and then oh yeah, well it's this you know, it it really takes me back to when I I was really into Biggie, you know? Uh well.

1:49:47 Well the secret is I I keep a little uh note my Apple notes of uh Anytime something strikes me, I just put it in there as a potential future carve out. So Oh, that's awesome. All right listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on StatSig, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yeah.

1:50:15 In the crazy speed of today's AI world. Shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers. And how fast you can use that signal to guide what you ship next. This is where StatsIG comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

1:50:47 So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. Alright, listeners. Thank you so much. Thanks to all the great sources that you can find in the show notes uh for helping us um research and put together this episode. And If you would like to either join the Slack, you can do that at acquired.fm or become a prestigious acquired limited partner.

1:51:16 You can do that at Glow.fm slash acquired. And it comes with a seven day free trial. Yeah. One quick note on the Slack. Uh we've found a couple questions about this recently. Um the Slack is Awesome. You absolutely should join if you're not part of it yet. The way to do it is go to our website, acquire.fm, and then on the homepage, there's a little button on the left hand side of the homepage right below the main image. Click that and you'll get an invitation to uh sign up and join the Slack.

1:51:44 All right, listeners, we'll see you next time. See you next time.

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