Company Deep Dive: Sequoia Capital

By: Eli Levi  |  November 18, 2021

By Eli Levi, Business Editor

Sequoia Capital was one of the first in the field of venture capital (VC). To understand Sequoia Capital, however, it is necessary to understand the origins of Silicon Valley. The dawn of Silicon Valley can be traced to a group of eight employees that left Shockley Semiconductor Laboratory to start a new company, Fairchild Semiconductor. These employees went on to be known as the “traitorous eight.” Due to limited infrastructure for startups at that time, the eight went to Sherman Fairchild, one of the large investors in International Business Machines Corporations (IBM) and owner of Fairchild Camera and Instrument. Sherman set the eight up as a division of Fairchild Camera and Instrument called Fairchild Semiconductor.

Don Valentine, the founder of Sequoia Capital, was born in 1933 in Yonkers, New York. Valentine’s first job was at Raytheon Technologies in California where he also attended several marketing business courses at a local college. Marketing and product-market fit would be the key driver of Valentine’s strategy in later years. 

After working in California for a bit, Valentine was recruited by Fairchild Semiconductor and was soon promoted to head of sales and marketing. He immediately proceeded to blow Fairchild’s previous sales out of the water. Valentine worked closely with Bob Noyce (one of the traitorous eight) among others developing the semiconductors that Valentine sold. In this way, Valentine “knew the future” as he put it in a later talk at Stanford because he was there when the semiconductors (the tech industry’s future) were being created and developed. As Valentine was selling the semiconductors at Fairchild he began to make small investments in the companies to whom he was selling the semiconductors. Valentine knew the important role semiconductors would play in the future and in that way “knew the future” and where the market was going. Valentine also personally knew the network of people creating and developing the latest semiconductors working at Fairchild. Finally, Valentine had an amazing set of marketing skills that he had acquired. 

For the aforementioned reasons, Capital Group, which was an investment vehicle, recruited Valentine to make investments based on his unique insight. Valentine accepted and Capital Group gave him a five million dollar fund entitled Sequoia. This was a pretty risky move by Capital Group as five million dollars is a lot of money to give to one person to invest in a nonexistent industry. At the same time, Valentine was finding places to invest in the Capital Group’s fund, and Valentine wanted to start his own investment vehicle. Capital Group supported Valentine in his quest for his own fund, nevertheless, it was extremely hard to raise capital.

In 1975, after three years of hard work, Valentine finally secured the capital for his fund. Sequoia’s first investment was a $600,000 investment in Atari, the first and largest company in the video game space. The very next year Atari was acquired by Warner Communications for $28 million. This was an amazing 4x return for Valentine, but it was still less than his previously stated expected return of 20x on his investments. In 1977 Sequoia invested $150,000 in a small company called Apple, which became their biggest mistake. Valentine was forced to sell his stake in Apple for only six million dollars because the investors in that Sequoia fund needed money for tax reasons. This was one of the main reasons Sequoia would later only accept money from tax-exempt institutions; to never miss out on gains because the investors needed their money back. The second lesson Valentine learned from Apple was that the PC was going to be integral to the future. This spurred Valentine to invest in all of the supporting pieces to the PC, such as disc drives, printers, and magnetic discs. The main investments in the early years of Sequoia centered on the hardware of the future. The hardware world was what Valentine was familiar with and that is where he put his investor’s money. One of Valentine’s best investments was when he invested $2.5 million in Cisco for 30% of the company and Valentine stayed on the board of Cisco until the 1990s.

By the ’90s Sequoia was steadily raising about $150 million every three years or so. Valentine had to add new partners because a part of Sequoia’s VC model was to be actively involved in the companies they were investing in. For this reason, Valentine needed more people to help him run the show. Valentine wanted people as different from him as possible because the way things were run at Sequoia was through consensus, and if a consensus was needed then Valentine wanted as many dissenting opinions as possible. The first partner Valentine brought on was Gordon Russel who specialized in biotech and healthcare. Valentine also convinced known investor Pierre Lamond to work at Sequoia. Michael “Mike” Moritz was a journalist looking to write a newspaper about the VC world. Valentine saw Moritz’s potential and convinced him to come on the Sequoia team. Lastly, Doug Leone, who started his career at Hewlett Packard, was brought on to Sequoia in 1988.

In 1996 Valentine called Moritz and Leone into his office and told them the new age of investing was beyond his expertise. Valentine told Moritz and Leone, because they were the ones with the best track record, that they were the future of Sequoia Capital. Valentine gave Moritz and Leone the proverbial keys to run Sequoia. Valentine created Sequoia in a way that was never founder-centric. It was always about the market and where the market was going. When Valentine felt he no longer had an edge he passed the reins.

After Valentine passed the torch to Moritz and Leone, they wanted to expand into China, but Moritz and Leone knew that China was not their area of expertise. So following in their mentor’s footsteps they created a new team to invest in China. That team invested in some of the most lucrative companies there: Pinduoduo, Alibaba, Meituan, Bytedance (owns TikTok) amongst 50 or so others. Moritz and Leone worked in lockstep together for about twenty years and had some early successes with Yahoo and Google, among others. After three successive funds that did phenomenally well by any metric, Moritz and Leone had a bad fund and because of their prior success, most venture capital firms would take the loss and move on. But Sequoia worked with the companies they were invested in, to at least have some sort of return. They persevered and their investors were given a satisfactory return. Sequoia to this day is one of the most successful venture firms ever.