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Sequoia Capital (Part 1)

Season 5, Episode 4

ACQ2 Episode

September 26, 2019
September 26, 2019

Join the Acquired Limited Partner program! https://glow.fm/acquired/

Acquired dives into the history behind storied venture firm Sequoia Capital and its legendary founder, Don Valentine. Part 1 tells Don’s story, starting from humble beginnings born to uneducated parents in Yonkers, NY, through shaping the fabric of Silicon Valley itself first as head of Sales & Marketing at both Fairchild and National Semiconductor, and then for generations to come via his pioneering concept of “company building” at Sequoia Capital. No matter where you sit in the ecosystem today, Don and the companies he helped build laid the foundation for everything technology would become over the past 60 years.


Carve Outs:




We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
September 26, 2019

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
September 26, 2019


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
September 26, 2019

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
September 26, 2019

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
September 26, 2019

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
September 26, 2019

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
September 26, 2019

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
September 26, 2019

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
September 26, 2019

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

David: I love it. I've been intending to upgrade them when I was in New York. I was like, “I'm going to go to the flagship Nike store and get the latest, latest model.” They don't make it anymore.

Ben: They don't make the flyknits anymore?

David: They make flyknits but they don't make that free flyknits–the Nike free flyknits. I think this might be the last model. We need to stock up.

Ben: Yeah, I know what I'm doing this weekend. Welcome to season five, episode four of Acquired. The podcast about great technology companies and the stories behind them. I'm Ben Gilbert and I am the co-founder of Pioneer Square Labs, a startup studio and early stage venture fund in Seattle.

David: 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.

Ben: 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. 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 going to throw out one.

Since its founding in 1972, the firm has helped to capitalize companies that now represent $3.3 trillion of public market value. For context, the entire NASDAQ is $10 trillion. It is frankly absolutely unbelievable that a single firm can be responsible for helping to create so much of our modern economy. David, this is bananas.

David: For comparison’s sake, what did we say, Next—which is one of our A-pluses—we said, generated $1 trillion in market cap value, the Next acquisition, so here we are, talking about $3.3 trillion? Obviously, it’s a venture firm, not a company, but 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 Sequoia Capital.

Ben: Absolutely. Now, before we dive in, I want to thank the sponsors of all of season five, Silicon Valley Bank. This wonderful paragraph that I have been given to draw from as inspiration starts out, "Big ideas don't fit into standard packages." But before we go on, I want to dive into what that means in practice and why does it make sense for entrepreneurs to bank with Silicon Valley Bank.

Startups aren't normal businesses at all. I mean, what small 1-3 person company is going to somehow have millions of dollars in their bank account, but have little to no revenue for months, if not years? When you're running a startup, you need a bank that understands the way startups work and is used to something that we all take for granted, but is actually a quite recent modern and specialized type of business. Alright, tangent over. That's why Silicon Valley Bank has banking and financial solutions tailored for startups that help them reach their next milestones faster. Visit SVB.com/next to learn more. Thanks, as always, to Silicon Valley Bank.

Lastly, 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 7-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/acquired. I promise it's very easy.

David: I like that.

Ben: Alright, David. It's time.

David: It's time. Let's do it. One thing that is often forgotten these days because it's just a name, and it reminds me of the quote about fishes and water where you ask a fish, “How’s the water?” The fish goes, “What’s water?” That is that Silicon Valley is called Silicon Valley because of silicon even though it is mostly software these days and the internet. To set the stage for this episode, we need to rewind to the origin of Silicon Valley, and indeed silicon. We go back to 1957, and this is really the moment I think you could argue when Silicon Valley, as we know it both, in terms of silicon and in terms of the concept, was born. That was when a group of eight employees leave a company called Shockley Semiconductor Laboratory and start a new company that ends up being called Fairchild Semiconductor.

This group of employees goes on to be known as the traitorous eight. We’ll link, in the show notes, to this amazing photo. We’ll link it to Wikipedia page of these eight individuals. It's just so great, so 1957 in all the best ways. Why did these eight folks leave Shockley and start their own company? This was a radical thing to do at the time. Well, Shockley Semiconductor was started by Bill Shockley. Bill was a genius, he was the co-inventor of the transistor that he helped invent when he was at Bell Labs, and for that, he won the 1956 Nobel Prize. He literally helped to make computing. But he did have a dark side, and that dark side was that he was a terrible manager and people hated working for him.

To help you get the picture, at this point in time and then for the rest of his life, he became a white supremacist and was a proponent of eugenics. This is sort of the 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 rash. Who were the traitorous eight? Among them, there are 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, it wasn't actually a startup in the way that we think about it today; it wasn't an independent company. 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, so Fairchild was located back on Long Island in New York, and they owned the company.

Ben: This is so funny. I always assumed that Fairchild was like one of the traitorous eight.

David: I don't know. Not at all. Yeah, they didn't actually own the company; I believe they had equity, but no. 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 in forming IBM many years earlier. When the traitorous eight were trying to get their new company off the ground, they intersected with a man named Arthur Rock—who's going to come up again in a minute here—who was one sort of the early proto-venture capitalists in California, and he was a former investment banker. He was trying to get financing, it was really hard, and so he ended up going to Sherman Fairchild because he knew Sherman was the largest shareholder in IBM. He was interested in technology, and Sherman agreed to set this up as a division of his camera and instrument corporation.

Ben: Wow, creative.

David: Yeah, which is crazy. The way it happened, they loaned $1.5 million to the company, in return for which they got an option to buy all of the stock in a company for $3 million. Imagine if VCs structured deals that way today with founders, it wouldn't quite set up the right set of incentives.

Ben: No, “But you gotta crawl before you can walk,” as they say.

David: Yeah. Fairchild would lead to many things including, of course, Intel and we'll get into that a little bit later. I mentioned Arthur Rock. What was the financing environment for “startups” in California at this point in time...

Ben: 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’ve just mentioned.

David: Indeed. As you might guess from how Fairchild was financed, the “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 are doing it, all of them, in California, they would meet once a month at the Mark Hopkins Hotel in San Francisco at a regular table and they would sit around and talk about the various companies that they were working on. That was it. That was the entire industry.

For two, none of them actually came from technology, or a startup, or company background. Arthur Rock, who we mentioned, he was an investment banker and a few other folks that were instrumental at this point in time, Pitch Johnson and Bill Draper—the name Draper might ring a few bells for folks—they had worked in the steel industry, and had 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 sort of thing. That was really the state of things.

As evidenced by Fairchild, here you have eight of the most talented scientists and engineers working in the highest growth industry in the world, and it’s literally impossible to finance them; they have to get essentially bought by the East Coast Company to even get their company.

Ben: That’s wild. It’s so interesting. Venture capital falls under the broad asset class today of alternative investments, which always seems a little funny given how much—especially today with all late-stage money coming into startups—how much money is invested there. It’s silly to call it alternative. Now, when you look at it these days, you had to be a very alternative counter-culture person, to believe that this was the best way to go and invest your money.

David: It's right at this moment in time that a—quite a maverick as one might say—individual, comes on the scene and basically single-handedly, writes the playbook of what modern venture capital and alongside it, what a modern startup would look like and that man's name is Don Valentine. Don, of course, goes on and starts Sequoia Capital and we're going to tell the story here.

I cannot recommend highly enough, anyone, certainly if you work or are interested in venture, but even if you're not, if you're just interested in technology and startups, go do two things: (1) watch the Youtube video of a talk that Don gave at the GSB at Stanford in 2010 and (2) read this wonderful oral history that Berkeley did as part of the history department there with Don. You will get a sense for what an amazing character this guy is. A lot of the history of this show is taken from those two documents.

Ben: Yeah. Listeners, the way to think about part one and part two of the Sequoia story, part one that we're going to focus on here, this is really Don’s story.

David: Yeah. It’s really cool actually. The talk that he gave at Stanford, he holds up, towards the beginning of it, the resume of an individual who had just joined Sequoia Capital that week. That individual is Alfred Lin, of course, friend of the show and former guest.

Ben: That’s just kind of amazing, he printed out Alfred’s resume and brought it to his talk.

David: I know. I also love that Alfred had a resume at that point. He was COO and chairman of Zappos that had just been acquired for over $1 billion, but always hustling. Okay, so, who is Don? He was born in 1933 in Yonkers, New York, back on the east coast. His father was a teamster, so a delivery truck driver and a union member, if you can imagine it which Don ends up taking a very different path in life. His parents were completely uneducated, both of them; neither of them had finished grade school.

Ben: Wow. Not like hadn’t gone to college, like hadn't finished grade school?

David: No. Literally had not finished elementary school, but in good Catholic fashion, they do value education and especially Catholic and religious education. Don grows up in New York, going to Catholic schools, and then he ends up going to Fordham University, a Jesuit university. He graduates in the early 1950’s,  and promptly as most folks did back then, it was most men, gets drafted into the army. This is, I believe, either during or right before, when the Korean War was going on. According to Don, he, “Had a terrible attitude about the military.” He didn't like and doesn't like regimentation and this is going to become very clear. Don does things his own way.

But one thing that he loves is electronics and technology. He ends up getting put in charge in the army of in his words, “Trying to teach senior officers to use modern technology instead of the way that they were inclined to fight wars,” which was with horses and cavalry. All that said, the army and Don still don't really mix. He transfers to the Navy—and this is a 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. He gets out of the Navy. It ends up taking a little while. He first gets a job at Sylvania Electric, which was actually based in Pennsylvania. I believe he was working for them in New York.

Ben: Is that the vacuum cleaner company?

David: Well, it's a vacuum tube company. This is how he gets in the technology because this was still—the semiconductor, I believe, had been it invented by Shockley and others at this point. Most computing, such as it was, was being done with vacuum tubes. Remember the ENIAC, this is what we're talking about back in these days.

Ben: Yeah, I guess I know Sylvania as a lighting company. Did they make light bulbs? I’ve seen logo around Home Depot.

David: Yeah, I think they make light bulbs now, I bet. Who knows what the corporate structure of the company is these days? At the time, they're making vacuum tubes and selling them as computing components mostly to the defense department. Of course, Don had come from the military. Don ends up jumping ship to Raytheon and moving to Los Angeles. Here he is, he's achieved his goal, he's living in LA, out in California, loving life, surfing. He was a big water polo player and he's working in what, at the time, was the high technology industry, selling computing solutions to the defense department in the military.

He starts taking part time courses at the business school at UCLA, focused on sales and marketing, because he was really interested in, of course sales, which is his job, but also the marketing component like, “Who are we selling to and why?” He has a great quote, he says, “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 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 spend on building that product and how big is the market? Who's going to buy the stuff? All that happens within marketing in a primary position.

This really becomes Don’s life passion. That ethos ends up informing everything he does and everything [...] capitalist will see. After a short stint at Raytheon, he ends up getting recruited to move up to northern California and join a fresh start up in a really hot semiconductor company up there, Fairchild Semiconductor.

Ben: Was Fairchild independent at this point or were they still a part of the bigger umbrella?

David: No. This was still very early. They were part of Camera and Instrument, as we'll see. Don joins—he's not part of that traitorous eight—but he joins, he's like employee number 40 or 50. They're doing a couple of million dollars in sales, but still really small. At first, they put him in charge of selling Fairchild semiconductors to defense firms back in southern California. They sent him back down to southern California.

Ben: Which is kind of funny. It's exactly what he’s doing in the army—it's educating about modern technology to people who have been doing things an older way and trying to basically do a very complex sale.

David: Yeah, I mean it's kind of amazing that Don’s history from Yonkers New York, everything basically—it's like the Steve Jobs quote of like, “You can't connect the dots looking forward,” but looking back everything done prepares you for what you're doing now. Don basically knocked it out of the park, selling to defense contractors down in LA. He takes the company from this couple of million dollars in sales when he joins, to over $150 million in annual sales in just a couple years. 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 tap into like, “Hey, maybe we should be selling to other markets too and which other markets should we be selling to? 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…” God, to be at this moment in time, it was like to be there in the mid 90s when the internet was taking off, or the mid 2000s when Web 2.0 was taking off . You could see the roadmap of what all the applications were going to be and it was just like go build them first and best.

Ben: 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 equipment that required semiconductors. Now, we sort of take it for granted. Well, actually, we’re in this phase where we're sort of moving forward from IT departments into companies that don't have IT departments, but this was the development of IT. Every company that was starting to embrace technology would use something with semiconductor products in them.

David: Yeah. We're going to see this here in a minute with the personal computer and Apple, but then with the internet, then with Web 2.0, then with Mobile, like you have this tectonic shift and then it's like, “Okay, we know what the applications are. Let's go build the applications.” Don is really the first person in technology to recognize that this is the dynamic of how the broader technology ecosystem work.

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 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 highlight things that we did before we committed engineering.” You could think about that and think about like, “Gosh, that sounds a lot writing an investment memo for a venture capital firm.”

Ben: It's also what an incredible privilege to be in a position where you get to pick your customers based on who you think is going to be the most successful with your product.

David: Yeah, totally. Remember though, Don's working at Fairchild. He's taken them from a couple of million in revenue to over $150 million in revenue, and this is like the late 50s early 1960s, so $150 million wasn't just $150 million back then. Remember though, Fairchild, it isn't an independent company; it's a subsidiary of this Long Island based east coast conservative Camera and Instrument Corporation. Every time that Don is working on building a new customization and application, a new market that Fairchild wants to enter, he has to go to the board of the company and get their approval for what they're doing. Don says, “That goes well enough, incentives are aligned.” Of course, Fairchild wants the company to grow and do well.

But Don gets this idea, he's like, “We could really accelerate our market and our partners that were working with. 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 help them build themselves, because the bigger they get and the faster they get bigger, the more sales they’re going to have, the more sales we're going to have.”

Ben: Right, it's this ecosystem mindset. We need to help invest to build the ecosystem around our products.

David: Totally. He thinks this is brilliant. 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?” Don, in typical Don fashion, he says, “Well, screw it. If the board’s not going to do this, I'm just going to start doing this on my own with my own money.” When he would be working on the technology marketing roadmaps for Fairchild in working with startups to help build applications, he would just start investing small amounts of money personally in these startups that he knew that he was going to make them into big companies. The only problem was, he's doing this personally, he doesn't have enough capital to really get these companies all the way to working.

It's so funny how we joke here, “You’re raising money for a new startup,” and even today, in 2019, the answer for how much capital you need always comes back to somewhere between $1-$3 million to get off the ground and that was the case even back then.

Ben: This is totally amazing. This is like one of my biggest tech themes, but it is crazy looking at their first five investments. Two of them were at $2 million and one of them was a $2.5 million,  like it is today’s seed round and yet, what they're doing is they're building freaking semiconductor physical applications. They're using semiconductors to make another product physically manufacture it, like it is…

David: Yeah, they're setting up manufacturing…

Ben: …nuts to me. Totally.

Don: …even back in the 60s, a couple million back then was a lot more in today's dollars, but you had to do all this really hard stuff. Don’s starts doing this, fast forward to 1967 and there's another company in the valley that had been around for a long time, it was kind of foundering, called National Semiconductor. National makes a big play. They’re already are a public company, I believe, they poached a number of people from Fairchild including Charles Sprock, who becomes the CEO of National and Pierre Lamond, a name that's going to come up again, from Fairchild, who becomes the chief designer and head of engineering there.

Charlie Sprock, as CEO, he does a couple really interesting things. First is, everybody in Silicon Valley at this point, remember it’s called Silicon Valley because they're making silicon chips. They're making the chips, they're 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 chip production to Asia. He reasons that, “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 tips of the silicon as a commodity.” That creates a huge price war in the industry and massively lowers the cost of silicon which then ends up enabling all the things that come shortly thereafter, including the PC.

Ben: We should also say 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.

David: I believe before Fairchild, people are using germanium semiconductors, which is a rare precious metal.

Ben: Yeah.

David: National would actually go on later to acquire Fairchild and then do you know who would ultimately become the CEO of National Semiconductor? This is like the beginning of the Valley being a small place and all of these dynamics enabling the personal computer, Gil Amilio.

Ben: What?

David: Yes.

Ben: Of Apple fame?

David: Yes, future CEO of Apple.

Ben: Future floundering CEO of Apple.

David: Yeah, I believe his first CEO gig was taking over for Charlie as CEO of National. All of this is going on, Fairchild is on the ropes, in 1968 Gordon Moore and Bob Noyce leave Fairchild—so Don Valentine’s still there at Fairchild, and they start Intel and Don sees the writing on the wall and he's like, “Oh man, Fairchild is cooked.”

Ben: Brain drain.

David: Yeah, brain drain. It’s just like Silicon Valley today, these things start happening like the key leaders and really smart people started leaving, you know the writing's on the wall. He leaves, he moves over to National as head of sales and marketing at National. Now this is where serendipity completely strikes. If Don hadn’t made this move, I seriously doubt that there would be Sequoia Capital and there may not be a modern venture capital industry as we know it today. Charlie is obviously brilliant and this move of outsourcing production of chips is revolutionary to the industry.

Ben: And quite prescient.

David: Quite prescient. But there's one thing that he's absolutely terrible at and that is public speaking. That's one thing that Don is not afraid of. Remember, National is a public company and they have to do earnings calls with Wall Street even back in 1968. Charlie is 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.”

Ben: Which would be unheard of today. I mean, if you're CEO and you're CFO basically without exception.

David: Yeah. You have other executives on there from time to time but…

Ben: Sure. But not leading it.

David: Don starts leading the earnings calls. Through that, he gets to know a lot of the shareholders of National. It turns out that one of their largest investors is an enormous public investment fund based in Los Angeles back in Don’s old stomping grounds, at the time called, The American Funds. That was part of this institution called Capital Group, which I think a lot of people don't know about the Capital Group still today is one of the largest mutual funds and pools of mutual funds of money managers in the world. I believe they have well over $1 trillion in capital under management across many funds.

Capital Group, they had been seeing what was starting to happen up in the new proto Silicon Valley. They'd seen the Intel IPO that had happened. Intel was the first true venture backed company that had gone public and all the wealth of data created.

Ben: Who would originally backed Intel?

David: I believe it was Arthur Rock. Arthur Rock organized a syndicate that had backed Intel with equity. Well, it was a convertible instrument. It was a convertible debt, I believe–a story for another day. Capital Group, they'd seen this and they actually funded AMD. AMD also came out of Fairchild, which I didn't know until doing research for this story. Both Intel and AMD, both were Fairchild alumni. Really all goes back to the traitorous eight in this legacy of like leaving dying companies and starting new ones out of them that propels Silicon Valley to this day.

Ben: That is so much like all these other industries we've talked about. I mean Verizon and AT&T basically both coming out of the original massive AT&T company. It feels like chip companies are not unique in this characteristic of both modern giants coming from the same source.

David: Yeah. Capital Group, they've privately funded AMD, they're a big investor in National. As a public investment vehicle, they’re at the forefront of investing in Silicon Valley and its growth. They get to know Don and they learn from Don about all this private investing he's doing. They approached him with an offer, “How about you do this full time? Leave National and come and start working with them at Capital Group?” They'll give him certainly capital and they have more capital than probably just about anybody in the world, at this point in time, or access to capital and take him from the couple thousand dollar personal checks that he’s able to write to finance these companies up to enough that he can actually support them to get to a public offering where they need to get to.

Don jumps at this chance. This is his true passion. He loves this and this is a chance to take all of these road maps and marketing and marketing analysis skills that he's developed and just have this be his full time job.

Ben: This is of course the birth of the illustrious and a name we all know today, Capital Management Services Inc.

David: Yes. Well, it was part of Capital Group. We'll get into the structure in a second. I want to throw in a few great quotes from Don here. He talks about why he had the courage to think that you could do this full time. Remember, this is crazy, nobody is investing full time in private technology companies at this point in time. It's a bunch of folks who made money in other industries having lunch the Mark Hopkins Hotel and Don is going to make this his full time job. 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 Hold'em and put up more chips. The opportunity to have a large discretionary pool of money to continue to support the investment ideas what's the difference in the environment I was in and the environment I was interested in going to.”

“After 12 or 13 years in the semiconductor business, I had a very high profile reputation in this community.” Again, he was already doing the investing privately. He says, “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. 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 in the venture capital industry at this point, was from the semiconductor business. Nobody else knew marketing and nobody else knew the microprocessor.”

It's kind of amazing. Don has this…

Ben: It’s three pretty valuable things to be good at this point in time.

David: Exactly. If you think about what he's saying, it maps pretty exactly to the core functions of a venture capital firm. On sourcing, he has a network of super talented technical people and scientists with the right experience to start technology companies. There he is, I mean his name is Don, it's perfect. He's like the original Silicon Valley mafia, Don. That’s one. That's the top of the funnel, that sourcing, but then two, he has this unique experience that he knows all the road maps of Fairchild and National and the whole semiconductor industry. He knows what markets to attack.

He has the selection judgment of which founders and ideas to invest in 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. Now, finally through Capital Group, he has access to essentially an unlimited pool of capital, which again nobody else in the industry had. People are having to go back to the east coast to Fairchild to finance their companies.

Ben: 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?

David: Exactly. So this is 1972, Don leaves. He starts working with Capital Group and Capital Group sets up a new $5 million fund for their clients who want to invest in this high risk-high return startup in the semiconductor industry in northern California. Capital Group calls it the “Sequoia Fund.”

Ben: Capital Group came up with the Sequoia name?

David: Well, I don't know. I don't know if Capital Group or Don did, but it is within Capital Group, this 1972 $5 million fund is called the Sequoia Fund. Don starts working on this on behalf of Capital Group and Capital Goods clients, but again Don’s a maverick and he does things his own way. He’s not super interested in just working for Capital Group forever. He really wants to do this himself and Capital Group totally supports him in that. He starts making investments on behalf of them, but he also starts working in parallel on creating his own fund and own firm that he's going to call Sequoia Capital and raising an outside fund.

You would think this would be easy. I mean, Don has this amazing track record. He has a brilliant strategy that nobody else can replicate. He knows what's going to work.

Ben: Because there are no LP’s.

David: Well he has the stamp and imprimatur of Capital Group, one of the most storied money managers in the world at that point in time. Don learns a lesson that generations of people who start new firms have learned again and again. We learned at Wave, which was that even with all that raising a first time fund, is really freaking hard.

Ben: Yeah, and what Don was doing is raising a first-time fund for an asset class that didn't yet exist. For Don, there weren't a group of investors who were used to putting money in this risk-return profile. It was going and convincing them, “Hey, there's not really a historical data on this, but you should take a flyer, not only on me, but on this entire concept.”

David: Yeah, totally. I mean you got to remember, this is for listeners who know about David Swensen at Yale the chief investment officer at Yale. He really pioneered this approach that large pools of capital, especially tax-exempt nonprofit pools of capital, 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 ordinary folks.

This concept didn't exist. Most pools of capital, university endowments, foundations, family offices, and the like, all of Capital gets clients.

Ben: It’s bonds, it’s treasury bills, a little bit of stock.

David: Yeah, it's fixed income that they're investing in. These folks are targeting across their investments a 10% IRR, which is great and better than the average market returns, but it's nothing like what Don thinks he can generate, and what the venture capital industry promises. He goes down and he makes this pitch about, “Hey, I think I can at least double 10% IRR and if you look at my personal track record, it's much more than that,” and indeed, Sequoia’s first few funds would be well, well above 10% IRR, many multiples above that.

The reception he gets is like, “Well, this doesn't sound like the investing business, this isn't fixed income,” 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 great companies.” He’s right. That is what true early stage venture is. It's not investing, allocating money, and seeing what happens. It's really digging in and helping start something from scratch. That's where, to this day, the true outlier returns are, but the LP community don't get it.

Don tells us a great story. He goes to see Salomon brothers in New York, the story of investment bank, which I believe it was a Salomon brothers that was the subject of Liar’s Poker, Michael Lewis’ first book. He sits down with the folks there, he gives them the pitch, and they say, “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 they didn't laugh at all. They're like, “We're not going to invest with anybody who didn't go to Harvard Business School.” It ends up taking him almost three years while working with Capital Group to raise the first independent Sequoia fund, but finally in 1970…

Ben: And even that, that was single digit. How big was that fund?

David: I couldn't get the exact data. Well, I saw a couple conflicting sources, but I believe it was somewhere between $3 million-$5 million quite, quite small. That's worth three years of work on it.

Ben: Think about the tenacity. Most people would give up.

David: Yeah, totally. Think of Sequoia Capital today and then think back to the early 70s, and one man, Don Valentine, scraping together for three years just because he believes so deeply in this vision of the future to put $3 million-$5 million together and start investing. 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. This is the original Sequoia Capital investing checklist. One, must be in a very big market, 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. Five, must have the potential for Sequoia to make $100 million on the investment. That's incredible, a $3 million- $5 million fund and he's only shooting for the moon, but Sequoia alone could make $100 million on these investments.

Ben: Which is basically, by today's standards, saying it has to be a unicorn, because in general, an early stage, call it a Series A investor is going to get diluted to around 10% ownership by the time there's an exit. It’s sort of the finger in the air way you would think about this stuff. Sequoia’s had some examples where they've bought up more, think of Dropbox, and there's also examples that we're about to go into where the terms were much different and you didn't just by 15%-20% of a company, you bought much more in these early days.

David: These companies, most of them weren't raising multiple rounds. Sequoia was financing, that was the only private capital that they're raising, and then they were achieving profitability and going public. But still, if you think about it today, people talk about, “Oh, VC investing. You got under 8X-10X returns.”

Even from day one, Don’s underwriting to 20X plus returns. And still to this day, I think one of the things that Sequoia is really known for is they will only attack markets that truly have the potential to be large like $1 billion market is not enough for them. You need a multibillion dollar, ideally 10 plus billion dollar market, because again, they're aiming for each of their investments to make 20X plus. I love this. The final item on the checklist for Don’s criteria for investing is, must be positively responsive to our active participation, which is great. Obviously, Don has developed quite a reputation as we talked about with Drip on the EA episode.

Ben: Being very active and being very [...], not only governance, but influencing management of the companies.

David: This is really critical. Don has the credibility to be very active in these companies because he has helped build the previous generation of defining companies that are setting the roadmap for everything that's going forward. The other thing that he develops is a methodology for assessing entrepreneurs.

Ben: David, 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 times here, Don plays by his own rules and he sort of has this ethos of this early stage investment business is a subjective business. It's not a highly analytical data-driven business. It's a feeling business and yet in these ground rules, it's interesting to see what hard and fast financial things jump out.

Even in this high area of subjectivity and gut feel, must have high gross margin ability is in there. It’s one of these precious few rules. As an early stage investor, that's really ringing home to me and thinking about how important that is in the ability to scale a company, but generate outsize returns. The only number that you see in here is that that $100 million and then the only other thing that’s close to resembles a number is high gross margin ability. It's interesting to think about what makes the cut.

David: Yeah. This also leads into his methodology for assessing entrepreneurs. Don, as so many other things in pioneering the venture capital industry, 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. That is what is so incredibly awesome, fun, and rewarding about working in this industry in an early stage venture capital, but again, if you think back to the folks that we're doing this before, it was all art. If you think a lot of the entrepreneurs who are starting companies like the traitorous eight, it was all science. They weren't thinking about the art of, “How do we make this into a huge wealth-generating vehicle for ourselves and for the ecosystem?” It was, “I just want to go do science and let's find some way to do science.”

Don is really the first person, I think, to bridge this gap, the methodology for assessing companies and entrepreneurs. I assume he was doing this while he was working with companies, too. Remember, he has this Jesuit education and Catholic school upbringing background, and he goes to the Socratic Method. Still to this day, I think this is a lot of how Sequoia runs their interactions with entrepreneurs. They ask questions and then they just listen to the answers.

This is such a key to being a great VC. One thing that I struggle with a ton is, the temptation is always to insert yourself into what's going on. Don recognizes that what you need to do is listen to what the entrepreneurs are saying. You may agree or disagree, or understand or not understand, but you need to understand how they think about things, not how you think about things.

Ben: Yeah, and it's not about their answers, but why they're thinking that answer is the right answer, how they arrived there, and what the thought process is.

David: Yeah. Don talks a lot about—I don’t know if you watched the YouTube video of him at Stanford—how formulating a question he believes is the most important thing in his business. He has a rule, that questions can only be 20 words or less. He solicits questions from the audience at Stanford. He says, “Twenty words or less or I'll kill you.” It's great, but that's how he approaches things. He's really interested in the storytelling technique 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. We can tell that that person who can do that, explain it a very simple way, is somebody we want to be in business with.” Don has realized that, “The only competitive advantage that startups have is focus, and speed, and stealth. If you're all over the place, you're not going to be able to execute on those things.” That's still true today.

Ben: David, how do you square all of this with Don’s off-stated principle that he invests in markets not founders? How does this assessment of founders fit into that notion? I'm asking this as a technology historian. Obviously, you’re not in Don’s head.

David: Exactly. Well, I think of course they're going to relate it and like all investing, it is early stage investing. It is about both the market and the team. I think this is the key. The market is the important thing, but you need a team. This gets back to Don’s last point on this checklist of must be receptive to our active participation. You need a team that's going to be focused and able to quickly get the right solution into the market. He has this really great quote that I think encapsulates this. “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. 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 of Genghis Khan is running the company. We’ll give Genghis Khan some help. Give me a giant market always.”

Steve Jobs is going to come up in a minute here, but I think his point about Genghis Khan is that Genghis Khan may be Genghis Khan, but he was focused on winning, speed, and conquering. That's what they're looking for.

Ben: And to just beat this metaphor to death, Genghis Khan also has weaknesses, and therefore must have a team that surrounds and compliments. I think Don has some quote, I don't have it exactly, but about how the most critical thing for an entrepreneur when listening to these questions, what you're listening to 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 to being helped with those weaknesses.

David: Yeah. Think back to this moment in time. The people that were starting these companies were engineers. They were scientists by and large, and Don’s super power which he was able to augment these companies and these teams with folks like himself who are able to do sales and marketing, and go to market, and then Sequoia could help augment with finance, accounting, and everything around that, and the outsourcing of all that. What he couldn't have was folks who thought they knew everything.

What actually did they end up investing in once they closed the Sequoia Capital fund in 1975? It turns out, Don makes its first investment in indeed quite a giant market enabled by semiconductors, but a little off the beaten path and certainly different than the defense contractors that he started his career selling to, and that was Atari. We're going to talk much more about Atari later in the season here on Acquired.

It was the very first independent Sequoia Capital investment. Don invests $600,000 in the company in 1975. The very next year, the company ends up getting acquired by Warner communication for $28 million and Sequoia makes a quick 4X return which is great IRR, but does fall short of the 20X that Don is hoping to underwrite to.

Ben: Did I find a different source on that? I thought it was a $2 million initial investment or did he do a follow on for $2 million?

David: I believe the initial investment was $600,000. Atari had also already been around for quite awhile.

Ben: I think three years they had gone before raising.

David: Yeah, and Don had known Nolan Bushnell, the CEO for many years. I have to assume this was one that he had kind of waiting in the wings until he closed the fund.

Ben: Which every good venture capitalist should have when out raising their first fund is who is going to be your first investment.

David: Indeed. We did that too. It's amazing how much the industry is still the same. Then in 1977, Sequoia makes what could have been perhaps their biggest and most important investment ever, and unfortunately becomes perhaps their biggest and most important lesson.

Ben: Just to pile one more thing on before the big reveal which everyone probably already knows is responsible for about $1 trillion of that $3.3 trillion number that I quoted of public market value today.

David: Yeah. It's a good thing they still have another $2.3 trillion that they're part of. In 1977 as Trip alluded to on our EA episode, Sequoia invested another little company that was founded by an early former Atari employee that was Apple Computer. Steve Jobs had worked for Nolan Bushnell at Atari and Don had gotten to know him a little bit then. Jobs had started the company and they brought on Mike Scott as the first president of the company.

Ben: We should say, Don got to know 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.

David: I believe his quote on Steve Jobs was that he looked like Ho Chi Minh. Mike, the two Steves had brought on as the first president and it turns out Mike used to work for Don back in Fairchild and National. Don gets wind of the company, he meets with them, and Don also knew a very important guy in Apple's history, Mike Markkula also used to work for Don back in the semiconductor days, and Don sends him to the company with the intention that Markkula is going to replace Mike Scott as the president to run the company.

Ultimately though, as Trip talked about, Markkula makes a brilliant decision and says, “I don't actually want to run this thing day-to-day. I want to be the chairman and really help these guys,” but regardless, this is the perfect example of Don’s company-building at work and management team recruiting.

On the back of this, Apple raises their first venture capital around of just over $500,000. Interestingly, the lion’s share, the capital comes not from Sequoia but from Venrock which does a little over $250,000. Don and Sequoia do $150,000, and Arthur Rock does the balance. Apple is off to the races and they really, as we've chronicled many times and we’ll continue to chronicle the future, invent the personal computer and usher that wave of technology in. Two years later though, this is the…

Ben: David’s sigh there comes heavily.

David: I know, this is so painful, so painful, and clearly has left its mark on Sequoia. Two years later, I couldn't find all of the circumstances around this but to the best of my understanding, the first Sequoia fund did not have only tax-exempt nonprofit LP's in it, it also had I believe individuals, big corporations, not Salomon brothers, but other folks in a certain capital group, as a result of that, those folks needed to pay taxes. Apparently, some of these LP's were encouraging Don to make a distribution of some of the games in the fund so that they could pay their taxes on the gains.

Apple had grown quite a lot. It's now 1979 and Don, before the IPO, sells Sequoia’s stake which they had invested $150,000 for $6 million to make this tax distribution to LP's. Now, that's an enormous return, a phenomenal return, but oh my goodness, $6 million compared to what Apple would shortly become and then ultimately in the long term of course become, and it's this lesson that drives Sequoia in subsequent funds to take their capital only from nonprofit tax exempt sources, which becomes really not certainly the norm across the industry, but a goal, and the lion’s share of money that moves into venture capital ends up being university endowments foundations, folks that are super long-term impatient and aren't going to force VCs to make this terrible decisions like this.

Ben: Yeah. You can check me on this David, but my understanding is, Sequoia more so than your average venture firm, holds the stock in companies longer after they go public, and often sticks with the companies for a very long time. I think probably also inspired by this lesson.

David: This and others that we're going to talk about here in short order, we're going to talk about Sequoias playbook in a little bit, but one of the key lessons that they learned is, when things are going well, go along. Value creation in these companies that are building and creating enormous markets takes a long, long, long time. Just look at Airbnb, look at Google, look at Apple. 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.

Ben: Yup. It's fascinating to think about the first couple of investments or first two out of a handful of investments being Apple and Atari. In total return, the profit of about $10 million or a max of $10 million is wild to think that that is the sum total of Sequoia’s return on those two companies.

David: I know, but at that time, even pulling it into context today, if we, within 2-3 years of starting Wave, could be sitting on 2X cash distributed, I would feel great about that, but the lesson here is, that's not the game or the business we’re in, or the game we're playing. The game we're playing is 10X plus cash distributed and to do that, you really need to be in it for the long haul, especially when you're investing early.

Ben: The other thing to know here and, David, as you foreshadowed—you’ve been smiling a little bit, we'll get into this much more later this season—with Atari, the Atari boom that we all know of in the 80s was after it had sold to Warner. Sequoia didn’t even have an option in participating in that upside unless they were going to block the sale.

David: Yeah, totally. That also leads to another part of the Sequoia playbook which is, when things are going well, really try and convince these companies to stay independent and not sell. I mean look at Instagram. Selling Instagram to Facebook was a terrible, terrible mistake by the founders and the investors. Even though it netted them great returns at the moment. What's interesting is Sequoia ended up investing right before that deal happened.

Ben: That is a debatable topic.

David: You think that's debatable?

Ben: I think if it had gone a lot longer, then Facebook would have had to pay a lot more in the dozens of billions of dollars to acquire purely because there is a very, very high user account 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. A lot of that is because of what Facebook had done funneling all their existing advertisers there.

David: I think that's true and certainly they helped accelerate it more quickly, but at a minimum, Instagram should have waited longer and then had a WhatsApp-like acquisition at a bare minimum. I get it. It's easy to armchair quarterback this now and hard to be sitting in the seat of Kevin and Michael, and they have a $1 billion offer in front of them, but this is the value. Sequoia has learned these lessons over so many decades and seeing it time and time again.

The other lesson that they take from Apple is what Don and Sequoia call an aircraft carrier approach that they start taking to these big markets. Don realizes that Apple has created this PC market. It’s not just going to be Apple it's going to succeed in the PC market, they're going to usher in all of these other enabling companies that you need around the PC. Apple is the aircraft carrier but you need all the destroyers, the ships around it, all the planes, all the ships, and all that stuff.

They started financing component companies around the PC industry. Apple and Don helped start a company called Tandon Corporation that makes disk drives. They are the first investors in Tandon. Tandon goes public after a couple years, reaches a market cap of over $1.5 billion. This is in the early 80s. A company called Printronix that makes printers, a company called Priam that makes disk drives, a company called Dyson that makes magnetic disks for the disk drives. All told I believe Sequoia ends up making about 15 investments in this aircraft carrier strategy around Apple and it drives much of their returns in these early funds.

Some other notable investments that they make during the 70s and 80s, in 1981 they invested in a company called LSI Logic which makes, again around PC and computing. They make storage and networking products. In 1983, 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 which Don made $153 million. That’s a solid Softbank size around today. This is two years after Sequoia invested in the company.

Ben: Yeah. Inflation adjusted, that's in the $500,000-$1 billion range and the way to think about how much they raised.

David: Totally. In 1982 as we chronicled, they invested in Trip and Electronic Arts or amazing software in the beginning. They also invested in 3Com in 1982. Folks might remember 3Com which has made networking gear and eventually bought Palm and the PalmPilot. 3Com, I didn’t realize came directly out of Xerox PARC. That's the other thing that Sequoia on the back of Apple starts doing is they started raiding Xerox PARC, IBM's West Coast division, and all of these old school East Coast companies that have been training these technologists and developing advanced technology and they just commercializing them, left, right and center. 1983, they invested in Oracle and also Cypress Semiconductor, both of which become massive successes.

Ben: One point I want to make on Oracle, before breezing through—we need to do on an episode on Oracle and Larry at some point—there's a crazy thing here that Oracle went six years before raising money from Sequoia and I think they had bootstrapped off of $2,000. If you think about it, Oracle is really one of the first true software companies. They were wildly capital-efficient and Larry was very outspoken against pushing back this rising venture-capital industry and speaking all kinds of ill tongues of the venture capitalists, what they do, come in, try and control companies, raid and all these things. Of course, ends up partnering with Sequoia, six years in, but a very different start than a lot of these other companies which required much more capital to get going.

David: Yeah, and the reason I didn't want to dive to deep into it is that I might be speaking a bit out of school and 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—I’m going to speculate wildly—was so anti-VC was VC was anti-software. They don’t understand. Don didn’t understand software. He was a semiconductor guy. All of these companies we’re talking about, with the exception of VA, are hardware applications companies. I don't think Oracle could raise venture-capital when they got started. They were the first real software company.

Ben: It’s the highest gross margin of them all.

David: I know.

Ben: It fits that theses so well.

David: The venture world hadn’t woken up to that just yet. They would and Sequoia would, too, of course, but so much of the DNA comes from this hardware world. For Sequoia certainly, the greatest hardware investment that they make is in 1987. Don invests $2.5 million in an old company called Cisco for 30% of the company. Started on the campus, actually at the GSB at Stanford. Started on campus of Stanford. I can’t remember which is which. One of them was the IT administrator for GSB and one I think was elsewhere on the campus and networking was just becoming a thing and they were married. They were sending messages to one another.

Ben: This is this amazing romantic story that they had. Jerry rigged the network to be able to send messages to each other at work.

David: I know.

Ben: That turns into Cisco.

David: And that turns into Cisco. I mean it just goes to show you how these companies start. Don, having learned the lesson from Apple of, “Hey, we’ll finance Genghis Khan.” He doesn’t care. Most VCs would look at this team and be like, “We’re not going to finance this team,” but he cares about the market and the application. At the time there were no routers, local networking was just becoming a thing but networking networks was impossible, so Sandy and Len developed the first router. Sequoia still uses this example today of like the very best most elegant expression, simple expression of what a company does, its three words for Cisco, “We network networks.” That turns out to be not just an enormous market but really the enabling technology for the engine.

Ben: Cisco stock was the tracker for the Internet hype in the dot-com era. If you wanted something that was emblematic of people's excitement about this new technology, it was Cisco.

David: Now, we’re in 1987 or 12 years after the independent constitution of Sequoia Capital. Don has learned all these lessons. He's not letting this one go. Not only does he fully finance the company upfront with $2.5 million, gets 30% of the company, the company then goes public shortly thereafter. I believe there is 160 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-90s and they ride Cisco up and make enormous returns on this company. That really becomes the playbook for Sequoia Capital going forward.

Ben: Amazing run.

David: Also, just such a great example of like Sandy and Len weren’t thinking about the Internet. Nobody was thinking about the Internet when they started Cisco, but the market kept evolving and kept getting bigger and expanding. Don, again, and Sequoia being so focused on the market, they knew that even though this company was public, there were still enormous returns to be had because the market was nowhere near penetrated.

Alongside all these investments that they’re making, the funds steadily grow in size from that first fund of $3 million-$5 million. It stabilizes at around $150 million per fund in the 1990s that Sequoia is raising every three years or so and having that be their investment period.

Along the way though, of course, to do that, you have to not only build these companies but you have to build Sequoia. You have to build the firm. 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. Don starts adding partners to Sequoia and he talks about the process of doing this. Again, remember, back when they started, the number one requirement for being an “investor” was going to Harvard business school, not Fairchild semiconductor business school.

Ben: To be clear, investor in this sense was generally a public market investor or perhaps some other alternative investment, but not investing in startups. The Salomon Brothers, folks, probably looked at this more like gambling. What you're doing isn’t investing and you’re not a person that looks like an investor. What are we even talking about here?

David: The irony of it all is it’s the exact opposite of gambling, it's building. Don has this great quote. He says, “Adding new talent was and remains a continuous process. Conventional education was never a high priority.” Plenty of folks have gone to Harvard and Stanford business school, who worked at 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. 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 going to be confident and comfortable enough to put their thoughts out there and debate as part of the group. One of these lessons that Don has learned is that sometimes the most amazing companies like Apple, like Cisco, they look crazy. You need somebody that's willing to see the potential behind the craziness and stand up for them. Oftentimes, that's not folks who are coming from Harvard business school. I believe the first partner ironically the joins Don at Sequoia does come from the investing world.

In 1979, Gordon Russell joins Don. He had worked with Don at Capital Group. He comes from Capital Group, comes in and joins Sequoia and he built Sequoia's healthcare and biotech investing practice. In parallel, even from the 70s back in Sequoia, they're not only investing in technology and hardware and semiconductors. They’re also investing in healthcare and biotech, but of course it's technology that the firm finds its true success in. In 1981, we mentioned Pierre LeMond earlier, Don convinces Pierre, already had an amazing storied career as a chip designer and architect at Fairchild and at National, to come in and join him at Sequoia as a partner and Pierre has an amazing run.

He stays as an active investing partner at Sequoia for almost 30 years. Then, this is incredible, he moves to Khosla Ventures and joins Vinod over at Khosla in the mid-2000s and then he goes and he joins Formation 8. He is now, after Formation 8 and Eclipse, he is still an active general partner making and leading investments today. He just turned 89 years old. This is incredible. He was born I believe in 1930 in France. He is a true legend in the industry. That's the kind of folks that Don is looking for, is people who are literally going to die in the seat because their life blood is building technology companies. Pierre absolutely fits that to a T.

Then, in the late 80s, two very important people joins Sequoia from interesting backgrounds. In 1986, a gentleman, a true gentleman by the name of Michael Moritz, now Sir Michael Moritz who was from the UK, comes over to America and had become quite a famous journalist for Time magazine. I believe he wrote a book on Apple while he was still at Time. The Little kingdom, I think it was called?

Ben: Sounds right.

David: 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 that he wants to break into the venture capital industry and never do.

Ben: What’s old is new again, baby.

David: Other than his VC newsletter company, he has never built a company or worked in technology in his life. Remember, Don is looking for these mavericks and he has a soft spot for people that do things their own way. Don decides to take a chance on Mike and invite him into Sequoia and to join the partnership. That ends up being just an incredibly prescient decision that leads to Yahoo and Google and many other companies.

Ben: Does this count as how to hack your way into VC? Is this the first example? That’s so insane.

David: Start a VC newsletter. That actually would probably still work today.

Ben: 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. A friend said that about him. David, we’ve started a podcast and have a love for media, but I have this reverence for really good journalists who not only are able to really tell a great story but to get the truth out there. It's a special talent for someone to be able to cover an industry and yet have their respect in this way.

David: We talked about the Socratic method of questioning that Don holds so dear and I think this is what he saw in Mike. I would save a lot of this for part two of our Sequoia journey here too, but that's what Mike was so great at as a journalist. Don actually says that two people that he's met in his life who are the best questioners are Mike and Steve Jobs, high company. The other very important person who joins Sequoia Capital in the late 80s is a relatively young brash sales guy who comes from Hewlett-Packard and Son, that also is an Italian immigrant, decides that he wants to work in venture capital. He has called Don up one day, cold calls him and says, “Hey, I want to join Sequoia.”

If you know anything about the person they we’re talking about, this is exactly in character and this gentleman is Doug Leone who today of course runs all of Sequoia and all of their operations globally, and I believe will be the person that ultimately advocated for and took Sequoia into becoming a global firm. We’re going to talk much more about both Mike and Doug next time on part two, but just to wrap up part one, the story of Don, you can't extricate Don not only from Sequoia but from Venture Capital and the whole industry in total.

In 1996 after it had become clear that Mike and Doug were amazing investors, and not only amazing investors but had internalized all of these things that are meant to be Sequoia and then built on themselves, Don did something pretty amazing. He literally hands the keys of Sequoia over to Mike and Doug. Doug talks about this in an interview with Dan Primack. I don’t have the exact quote here, but he says Don one day in 1996 invited Mike and Doug into a conference room. He sat them down and he said, “I'm giving this firm to you and there are three things. One, you're going to run the firm. I'm not going to run the firm anymore. Two, you get to decide what I do. You can keep me around. I can continue making investments or I cannot. It’s completely up to you. Three, if you do want me around, here's the things I'm willing to do and not willing to do. One of the things I’m not willing to do is run the firm. You guys make all the decisions about what’s going to happen from now on.”

Even today, that's so rare. This is the first very successful, not the first in the industry but the first successful generational transfer at Sequoia. Most venture firms, most founders of venture firms don't have the ability to do this. It’s so hard. Don created all of this 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 you guys are the people that are going to lead the change.”

Ben: It takes a lot to do something like that. It reminds me a lot of another great venture firm that we may also cover, Benchmark.

David: Who has a very different way of doing this.

Ben: Very different, yes, but equal partnership. There's a great interview with Andy Rachleff and Patrick O'Shaughnessy on them, Invest Like the Best, where Andy talks about how. at the peak of their power, the original partners handed us the keys. I think it's well done very differently. There are definitely common elements between both of these great firms.

David: Yeah, and if you look at the firms that have managed to survive generation after generation, wave after wave of the technology industry and venture capital evolution inside it, it’s the firms that do this well. The firms that don’t, don’t make the transition and Don has a great quote about this. When Sequoia was started, the positioning to LPs was, “We’re going to deliver vastly superior returns to anything else you can get out there.” Well, we’ll about it in greeting, but I think that proved, too.

The positioning of Sequoia is now two things. He says, “It's the stability that comes with generational transfer. The stability is part of why we've had the same limited partners for almost 40 years.” When Don was saying this, now almost 50 years. “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 these things. Returns isn’t enough. You need the stability that accompanies those returns so that people will have confidence that you can get great returns but if the firm blows up,  then you’re useless to me.

Ben: Do you want to go to what would have happened otherwise?

David: Yeah, let’s do it.

Ben: All right, so listeners, the way that we want to do this section on this unique episode is what would the world be without Sequoia. There is a very Sequoia-centric view of the world which is all of the technology industry looks very different and without building this aircraft carrier strategy around Apple and financing all of that, and a very scarce capital environment like there was then, we may not have the Apple that we have today. We may not have some of the other tech giants that we have today. There is an alternative view that you could take it at that says, capital is capital and 99% of the value or maybe 110% 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.

David: Capital will always expand to fill all attractive opportunities.

Ben: Exactly. Despite some friction points, we live in an efficient market and if it's truly a great opportunity then capital will flow to go and fund that thing. The world would look no different today if there was no Sequoia. I think I fall slightly toward the former part of that scale and I’m not willing to say that we wouldn't have some of these amazing technology innovations without Sequoia. I do think in just pouring over the hours and hours of reading that we found about Don and really learning about the history of this firm, Don played a very active role in building a lot of companies that they invested in and deserves a lot of the credit for that.

David: Listeners, let us know how you like this type of episode focusing on venture firms. We, of course, love it as venture investors ourselves, but we’ve been talking all about Sequoia in this episode. There is really along the exact same timeline, there is a perfect example of what would have happened otherwise and that is Kleiner Perkins, which over this timeframe that we’re talking about was equally if not arguably more successful than Sequoia. What's really interesting and we’ll dive into when we ultimately do an episode on Kleiner, their philosophy was quite different and was a lot more interested in the entrepreneurs and the backgrounds of the entrepreneurs then necessarily where Don and Sequoia were.

I think to my mind what would have happened otherwise, of course Silicon Valley would have happened, of course the modern venture capital industry and startup industry would have happened even though Don helped catalyze all of it, somebody would have and certainly Kleiner Perkins would have indeed. I don't think there would have been as many chances taken and opportunities given to the “Ho Chi Minhs” out there that Sequoia was willing the fund.

It wasn't just in those days. Look at Airbnb in the early days and Sequoia is extremely prescient early investment in the three Airbnb founders. They didn't look like what a prototypical founder looked like at that time. Far, far from it. I think it's Sequoia and Don's DNA coming from a true incredible marketing background and markets focus that maybe wouldn't have developed in the same way without Sequoia.

Ben: Yeah. One way to look at this is if the Kleiner Perkins in 1978, you are backing founders and outsourcing a lot of your judgment to them and you're just saying, obviously they weren’t hands-off, but you run the company and the reason I'm investing in you is because I trust you to figure out how to run this company. What Don was looking at is, you’re really onto something in this killer market. We’re going to go build this thing together and I’m going to help you do that.

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 you’re in a market that deserves a team to really go and value maximize the way to tackle that opportunity, the terms of these investments, especially at this time were that often, firms would own 33%-51% of the company. They would have the right to buy the rest from you. They will have the right to replace you. All of these rights. Of course, much of this still exists today. The job of the board is to hire and fire the CEO, but it was much more prevalent back then especially within Don's view of the world is that I'm building this company with you right now. This company may outlast your leadership.

David: Well, what we said earlier about management can be augmented is, management, of course, can also be replaced. There are upsides and downsides there. If your focus is building a great company, sometimes that's the right thing to do. Sometimes, of course, Don and Sequoia would get that wrong, but sometimes it is the right thing to do. Thinking back to our conversation with Trip and what attracted Trip and EA to Don was this knowledge that you were getting what you saw with Don and he was going to force you to build a big company one way or the other. With you or without you.

Ben: Alright, we are in tech themes now, but to officially call it that and move through it here, the thing that really jumped out at me and of course being in this industry knowing folks funded by Sequoia, knowing folks at Sequoia, you know some of this tangentially, but it's worth taking a fresh look when preparing for these episodes to really ground yourself in what assumptions am I making. The thing that jumped out at me was Sequoia and all of their copywriting never says investments, but rather partnership. It's, “We decided to partner with that company.”

They have a 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.” It immediately jumps out at me as, David, you so often say company builders. We are partners and the way that we do that is we’ve got this huge fund that we manage that of course we have a fiduciary responsibility to our LPs, to maximize the value. The way that we decide to partner is through investing in you but we are your partners in this business. Five, six, seven, years ago, I always thought that was, when I heard, we we're so excited to partner with this venture firm on this thing and I was like, “Oh God, here it comes.”

David: VC speaking again.

Ben: They invested money in you, just say it. I finally am sort of seeing I think what firms like Sequoia—you can't really say firms like Sequoia because there’s firms like 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 on my cash. This looks pretty good so I’m going to throw it in and hope that I get a multiple out of it. For some reason, I believe that this is going to be a society-defining company in the next coming decades and I'd like to be a part of that with you.”

David: I think I’ve talked about on the show before, but when we were starting Wave, one of the first people we talked to was Greg McAdoo, who was a longtime partner at Sequoia, led their investment and initial investment in Airbnb, was on the board for many years, and was a big part of the reason why my partner Riley joined Airbnb. He said to us something that always stick with me. He said, “Doing venture extremely well and at the highest levels, early-stage venture, it’s all that alignment,” and I think this is what, 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. If your focus is that, you need LPs unlike the original set of LPs who wanted a tax distribution and force them to sell their stake at Apple. You need LPs who are were willing to sign up for an essentially decades to multiple decades long time horizon, because when there is true opportunity, the lion’s share of the value gets built at the end. Think about the run that Amazon’s had or even Apple’s had in the last 10 years in their market cap relative to the first 10–20 years of the company. That's the LP aspect.

But then, to this company-building aspect, if you truly aligned around that, you're optimizing for those outcomes, which means you aren't just sitting on the side and letting things play out. You are helping make the decisions, build the company, and build the culture that is going to enable a super long-term great company to be built like that. I think that really is their ethos. That's not the only way to do investing and we’ve talked about them and we’ll talk about many more on this show, but it's a really unique one that I think it’s been cool doing this episode to see exactly how this was developed.

Ben: My second tech theme is that it's called Sequoia not Valentine Capital or Valentine & Co, and Valentine Group.

David: Or Kleiner Perkins.

Ben: 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. It’s more importantly about the companies.

David: Not the founders.

Ben: Right. Even more so, it's not about the person, but it's about Sequoia. Even when you pop up that one level, it's not, “Hi I’m Don. I'm extremely public and loud and writing up ads all the time and doing all these… If you want to talk about the investment company, let's talk about the investment company and not Sequoia, and I happen to be a part of that. It's not all about me all the time.”

It's interesting. You talk to people and you say, “Do you think Sequoia has low ego?” and people would say, “No, absolutely not.” That is 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 seriously where we’re one of the best firms in the world but at this level it’s about the firm not the partners.

David: Well, I think it all comes back to this super long-term orientation. Does Sequoia have ego around that? Of course, they do. Go look at their website. It's all about long-term, it’s not about like look at this deal we just did. It's about looking at this company that was built over decades that we were part of. Look at all these companies and look at Sequoia itself which we’re going to get into much more in our next part of this series here.

I try for this section to kind of catalog and crystallize what are the elements of, if you have to distill the Sequoia playbook from this history and from Don’s experience? I think these are the points that I would put it. First and foremost, of course, is focus on the market, both the size of the market and whether the dynamics of the market will lead to rapid adoption by a new entry.

We didn’t talk about this as much in the history but another lesson that they learned at Sequoia is you don't necessarily want to create markets. You want to exploit markets early, because if you’re trying to create a market that doesn't exist yet, you’re going to spend so much money in marketing dollars trying to educate the market. This is the key to the dynamics of the market versus just the size. You can look at the size but that doesn't tell you, “Is the market ready to adopt a new solution?” I think they spent a ton of time focused on that.

The second is that change equals opportunity. This also didn’t make it as much into the history and facts, but Don has this great quote about this. He says, “One of our theories is to seek out opportunities where there is a 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 disk drive on a computer, then it's already too late in the cycle to invest in disk drives.”

“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,” which I think was just such a perfect way to frame it. Hard to do in practice but 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. Of course, you want the team to be great, but if the team doesn't look like a traditional team that you would pick from central casting to do this, don’t worry about it. You would better to pursue the opportunity and you can augment the team if they're receptive to working with you on it.

That gets to the next piece which his be a company builder, not an investor. To really do this at the early stages, you got to 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 careers as investors or their career as operators, but people who really know what they're doing, that can help the companies make good decisions and recruit great management teams around them.

Related to that, you can only do that at the early stages. Sequoia now of course, and we'll talk about this much more, invested all stages of company’s life cycle, but this type of company building and investing they were talking about, you can really only do it at the outset.

It’s interesting. I think Sequoia used to have one of these quotes 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 90 days of operation and after that, it's really hard to change it and having lived through that and now, making the whole focus of my investing at that stage of the market and you too, Ben, I completely agree with that.

Ben: Just reflecting on how crazy it is that this asset class exists, we all take for granted that there’s early-stage fundraising. En masse, a couple of million of dollars are going to get deployed into ideas, thousands of times per year and that there is a whole asset class of investors that are willing to do that. Now, it makes sense because we've seen a handful of those becomes so valuable that you index the whole asset class and sometimes it over performs, sometimes it underperforms, but it tracks other asset classes in terms of risk-adjusted return.

It's a pretty special thing that it exists—this is probably an ethnocentric statement—in our country. If you think about the impact it has had on GDP, the access to early-stage capital 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 having a 20 plus company portfolio, I think it's a really good thing that this system was created and that this type of capital is available today. Surely it is not deployed in the best way that it could or certainly the most fair way that it could. The fact that it exists at all is intensely value creative. We take it for granted that it exists today and it's mind-boggling how difficult it would have been to convince people at this point in history that they should plow money into it.

David: Remember the Salomon brothers meeting that we talked about that Doug had? One of the other reasons I was so excited to do this episode is we deeply believe that Wave or something that I think Sequoia also believes in this history shows which is, you mentioned this asset class exists now, you can have an index on it, and it works because a few companies out of these many, many seeds of small companies will get built into the giant Sequoia trees.

That's true, but I think there's a faulty logic conclusion you can draw from that which is that we should have an index fund on this. What this history illustrates is that, that defeats the whole cycle. The reason that Sequoia-sized trees get grown from seeds is because of the careful watering and feeding of them from people who are experienced gardeners who really know what they're doing.

Ben: I really want you to change your Twitter bio to experienced gardener.

David: Experienced gardener, I love it. Experience forest keepers, let’s put it that way. That's a big part of a change that we and you guys would hope to be in the early-stage ecosystem now is getting away from this. Like watering a million seeds and into tending a garden.

Ben: Yeah. We thought long and hard about that with PSL when we were first getting started. Should we be doing more companies? Should we be doing this in an accelerator style way. We talked about the studio model in the LP show. It’s very different and its much more concentrated that I think Sequoia is a great example, especially in the era that were talking about incredibly concentrated [...] and a lot of work into them after the investment.

David: My last two for the Sequoia playbook. One, let your winners run. Everything we’ve been talking about, if you've got something that’s growing into a Sequoia-sized tree, like most of the growth is going to become after decades plus into the company. Let your investment in them run and then the last one 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 if you’re running a venture firm. So much easier said than done. All right, should we move on to value creation and value capture?

Ben: Yeah. What's the best way to do this one?

David: Well, we don't have the exact data on the returns of Sequoia’s early funds. We have a general sense from a few sources that we can talk about but compare that to how the NASDAQ performed over a similar point in time which is the closest you can come to approximating this type of investment as an investor at this point time.

Ben: Yeah, and I guess what we’re doing here is we’re sort of rolling together value creation, value capture, 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, “Hey Shopify enabled $250 billion of sales,” or something like that, I can’t remember the number, last year. How effective were they at actually capturing that value that they created? I would say Sequoia has been surgically good at capturing the value that they create in the world with a few misses. I don't think Don had any trouble capturing the value he created in the world.

David: Certainly, knowing Sequoia today, no. I think it took them many years to learn how to do that. Even Don coming from the background and the personal investing he did. The Apple decision was such a huge mistake. Sequoia captured $6 million of value from Apple and lost out on dozens to hundreds of billions.

Ben: I said few mistakes.

David: A few mistakes. One very costly one. I think that's fair. The real testament here would be to ask the entrepreneurs that Sequoia works with. The successful ones, the value that Sequoia and their limited partners captured from the value that was created at those companies. Do they as entrepreneurs feel that it was worth what they got in return?

Ben: acquiredfm@gmail.com if anybody wants to know.

David: We didn’t ask Trip that directly in the EA episode but I think he probably would have said yes, right?

Ben: Yeah. That was definitely the sentiment I got from him.

David: Good point. We were mixing grading and value capture and value creation. Should we move on to grading?

Ben: Yeah, so I mean grading the way that we traditionally do it for folks that are new to the show is 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. When David and I were talking before the show on how to think about grading for this episode, I guess the way we landed on it is opportunity cost for LP capital.

If you had just put money into the NASDAQ to try and do some technology investing from 1975 onwards. How would that have looked? Just interesting to know the NASDAQ between 1975 conveniently when it was created in 1990 grew about 6.5X with a couple of pretty serious hiccups in the middle where it lost 30% of its value and took a long time to creep back up. Stock market like any other and so that’s the basis that that we decided to compare it to. David, how you think Sequoia stacks up against that public market accessibility?

David: It’s hard to compare exactly because we don't know the returns for any given fund let alone all the dollars in aggregate. I believe based on some quotes from Don, some of our research, and other data we have, Sequoia was probably averaging a 50%-60% IRR on their funds during this period. Actually, I’ve done the math of what that would be over 15 years but it's well above 6.5X. So now, if you assume Sequoia is taking carried interest probably in the early days 20%, I believe now they’re at 30% carried interest that they take on their funds.

Taking that out of the returns, I still believe you’re performing much, much better than that and there’s a great quote, there was a Forbes profile that they did on Sequoia in 2014 and there’s a great quote in there from the CIO at Notre Dame which is a great LP. One of the most sophisticated endowments out there and they say that Sequoia is the single best performing manager that they have had in their entire portfolio for the last 30 plus years and that is across all asset classes, which is pretty incredible.

Ben: Wow. Okay, how do we assign a letter grade to this one?

David: Clearly, it’s an A. I think the question is, is this an A+? I think it has to be an A+.

Ben: Looking at a whole bunch of funds bundled together is too difficult to assign a single letter grade to. We’re looking at one of significant size and had the highest IRR of all time, then we could go, “That’s an A+,” but it feels reasonable for me to say that the first 15 years of Sequoia's existence were an A, relative to other venture firms.

David: The reason I make a case for an A+ is twofold. One, how much Don really was a part of inventing so many things about the way the whole, not just venture capital but startup ecosystem works today. Two, is that quote from Notre Dame. Now, maybe there are other great managers that Notre Dame has not invested in, but to be the single best performing manager over 30+ years in a murky endowment’s portfolio. It’s hard not to assign that an A+.

Ben: All right, I’ll go with you.

David: All right, with that, this has been a blast for us. Audience, hopefully you guys have enjoyed it too. Certainly, hit us up at the Slack or acquiredfm@gmail.com if you have stories to share, thoughts or others you want us dig into, especially on our continuing saga of telling the story of Sequoia from Doug and Mike. Their generation when they're coming up and taking over and taking Sequoia into the now $12+ billion global growth behemoth that it is today.

Ben: Yup, we’d love your feedback. All right, carve outs?

David: Carve outs, let’s do it. You want to go first?

Ben: Yup, mine is an episode of the Daily, the podcast by the New York Times from a few weeks ago called What American CEOs are worried about. They report on an event that happened last month, where nearly 200 executives got together at something called the business roundtable, which I didn’t know was a thing. It's not like a governing body of any sort, but it's up 200 of the Fortune 1000 CEOs that get together and make proclamations.

One such proclamation that they made this year was that they are going to not just think about their stakeholders, their only stakeholder as their shareholders but also their employees, their customers, their community, a broader set of stakeholders. In my head, 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 a capitalist but that is my understanding of that.

David: Yeah, it’s a relatively recent phenomenon.

Ben: Yeah and I didn't realize. It got me thinking because I've always thought like you should do all these other things, that's bending the rules of the company to potentially sacrifice shareholder value to go and do things that you don't think long-term will accrue to shareholder values. Obviously, you should be active in your community and you should take care of your employees.

I always thought with this one, companies do that because it's going to accrue to shareholder value at some point. It's fascinating to, number one, listen to this proclamation, they dive deep into exactly, David, what you are talking about. The fact that if it's a relatively new phenomenon. One that grew up in the 70s and 80s in the professionalism of Wall Street and companies changing their by-laws to basically say, “We exist to be a publicly traded security. Then we are at the mercy of that.” It's this interesting if we actually drift in this direction that they brought up, it's much more a return to sort of the business as a pillar of the community from the early 1900s. I’ll be very curious to see if this comes of anything and if this stirs more serious sentiment.

David: Yes, super interesting and definitely reflective of the times we live in terms of corporations and the world at large. I hope things go more in that direction. It's interesting to see we have one of our five-point portfolio companies is a B corporation. Do you guys have any B corporations?

Ben: Awesome, we don’t yet, but we’re super supportive of that.

David: Yeah, it's been really cool to see that emerge as a way to institutionalize some of the governance rules around this idea. We invest in B corporations as in C corporations but no preference necessarily from one of the other but we and many other VC firms are super up into it and supportive of it.

Okay, my carveout is as listeners may know, for some reason that even I don't understand, I use Amazon music instead of Apple music or Spotify. I’m definitely going to change that, because Amazon does so many things great, but music is not one of them. One thing that popped up on the homepage of Amazon music last week, which maybe is worth the whole thing, is—I have no idea—last week was the 25-year anniversary of Notorious B.I.G.'s first album, Ready to Die.

Speaking of mafia Don, on this episode and Biggie, it's so good. 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 journalists and people that were there, producers, Puffy, everybody part of making Biggie’s first album. Just listening to it all again, it's so good. Maybe some of the content and the language he uses haven't aged too well but he was so good. I've never heard anybody that can rhyme like Biggie and just the music and the tracks and what he did producing it. It was really cool to rediscover and listening to that over the past week.

Ben: David, I love the incredibly eclectic collection of carve outs that you have. It’s this crazy place in France. It's this really hard to get through thousand-page book that I will never have a prayer of actually reading. It really takes me back to when I was really into Biggie. Love it.

David: Well the secret is I keep a little note in my Apple notes anytime something strikes me, I just put in there as potential future carveout.

Ben: That’s awesome. That’s a good idea. All right listeners, thank you so much. Thanks to our sponsors Silicon Valley Bank. Thanks to all the great sources that you can find in the show notes for helping us research and put together this episode. If you would like to either join the Slack, you can do that at acquired.fm or become a prestigious acquired limited partner, you can do that at glow.fm/acquired and it comes with a seven-day free trial.

Ben: One quick note on the Slack. We found a couple of questions about this. Slack is awesome, you absolutely should join if you’re not a part of it yet. The way to do it is go to our website acquired.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 set up and join the slack.

David: Alright listeners, we’ll see you next time.

Ben: See you next time.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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