Arguably the greatest VC firm ever and another piece of the crypto puzzle

Sequoia Capital

Unlike Andreessen Horowitz that was looking to break into a pre-existing and well-established field, Sequoia Capital was one of the first in the field and in a major way wrote the playbook for venture capital from the time it was founded and on. So to set the stage for Sequoia Capital, it is necessary to understand the origins of silicon valley. Arguably the origins of silicon valley can be traced to a group of eight employees that left Shockley Semiconductor Laboratory to start a new company, Fairchild Semiconductor. They went on to be known as the traitorous eight. Bill Shockley, the CEO of Shockley Semiconductor Laboratory, was the co-inventor of the transistor (semiconductor), which he won a Nobel for, but he was a terrible manager and people hated working for him. Bill also became a white supremacist and a proponent of eugenics Some of the more notable of the traitorous eight were Gordan Moore (Moore's law), Robert Noyce (what an epic name, also co-founded Intel), and Eugene Kleiner (of Kleiner Perkins). In those days there was no infrastructure for startups so the eight went to Sherman Fairchild, one of the large investors in 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. When Don was older he was drafted into the army and learned two things there. The first, Don hated regimentation, and the second, that he loved the west coast. Don learned the second thing when the army transferred him there. Later Don went to work for Raytheon Technologies in California. While Don was in California he took some business courses at a local college, mainly in marketing. Marketing and product-market fit would be the key driver of Don’s strategy in later years. After working in California for a bit, Don was recruited by Fairchild Semiconductor and after a short time was promoted to head of sales and marketing. Don blew Fairchild’s previous sales out of the water. Don worked closely with Bob Noyce among others developing the semiconductors that Don sold. In this way, Don “knew the future” as he put it in a later talk at Stanford because he was there when the semiconductors i.e. the future was being created and developed. As Don was selling the semiconductors at Fairchild he began to make small investments in the companies he was selling them to. Don was in a unique position for a variety of reasons. He knew the important role semiconductors would play in the future and in that way “knew the future” and where the market was going. Don also personally knew the network of people creating and developing the latest semiconductors working at Fairchild. Finally, Don had an amazing set of marketing skills which played such an important role for so many reasons. For all of these reasons Capital Group, which was an investment vehicle, recruited Don to make investments based on his unique insight. Don accepted and Capital Group gave him a five million dollar fund entitled Sequoia to invest. This was a pretty ballsy move by Capital Group because five million was a lot of money to give to one person to invest in an industry that did not even exist yet. At the same time, Don was finding places to invest in Capital Group’s fund, Don wanted to start his own fund. Capital Group supported Don, nevertheless, it was extremely hard to raise capital.

After three years of hard work, in 1975 Don finally secured the capital for his fund. Sequoia’s first investment was a $600,000 investment in Atari. The very next year Atari was acquired by Warner Communications for 28 million dollars. This was an amazing 4x return for Don, 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 turned out to be their biggest mistake. This was because Sequoia was forced to sell their stake in Apple for only six million dollars. After all, the investors in the current Sequoia fund needed the 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 amazing gains because the investors needed their money back. Another lesson Don learned from Apple is that the PC was going to be an important piece of the future. This spurred Don 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 Don was familiar with and that is where he put his money. One of Don’s best investments was when he invested $2.5 million in Cisco for 30% of the company. Don stayed on the board of Cisco until the 1990s and the investment in Cisco became the playbook for Sequoia Capital.

By around the ’90s Sequoia was steadily raising about $150 million every three years or so. Don had to add new partners because a part of Sequoia’s VC model was actively helping and being involved in the companies they were investing in. For this reason, Don needed more people to help him run the show. Don 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 Don wanted as many dissenting opinions as possible. The first partner Don brought on specialized in biotech and healthcare. Don also convinced Pierre Lamond, another legen ... wait for it … dary investor to work at Sequoia. Michael “Mike” Moritz was a journalist looking to write a newspaper about the VC world. After speaking with Mike, Don brought Mike on the team as well. Doug Leone started his career at Hewlett Packard and was brought on to Sequoia in 1988. Doug is the current managing partner at Sequoia.

In 1996 Don called Mike and Doug into his office and told them the new age of investing was beyond his expertise. Don told Mike and Doug, because they were the ones with the best track record, that they were the future of Sequoia Capital. Don gave Mike and Doug the proverbial keys and said that they would be the ones to run Sequoia, and it was their choice whether to keep him around or not. Don created Sequoia in a way that was never founder-centric. It was always about the market and where the market was going. Even Sequoia itself was not founder-centric. When Don felt he no longer had an edge he passed the reins on.

The next place Sequoia wanted to expand into was China, but Mike and Doug 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) among 50 or 60 others. Mike and Doug worked in lockstep together for about twenty years. They had some early successes with Yahoo, Google, and some other names that did very well but are not well known. After three successive funds that did phenomenally well by any metric, Mike and Doug had a bad fund and at this point, most venture firms would “call it a mulligan” Doug’s words and move on. But not Sequoia they worked with the companies they were invested in to at least have some sort of return and they persevered making their investors some sort of return out of that hard time. Sequoia to this day is one of the most successful venture firms ever.

Credit to the Acquired podcast

Distributed Ledgers

The previous piece dealt with the cryptography associated with cryptocurrencies and the aspects that truly make them secure. Another piece of the puzzle of crypto is the idea of a distributed ledger. A regular ledger is something that keeps track of all the transactions within a network of people. In the case of the American economy, most quote-on-quote ledgers are kept by banks. Banks have fairly secure ledgers with many layers of protection, but banks only have whatever copies they made of the ledger and if all of those were to be hacked or corrupted there would be no more ledger. The basic idea of a distributed ledger is instead of one entity securing the ledger, the ledger is distributed among many people who are constantly securing it. In the case of Bitcoin, it is the ledger. Remember this is only a piece in the puzzle that is cryptocurrency so bear with me while we discover how all of these different pieces fit together.