Letter #72: Don Valentine (2000)
Founder of Sequoia Capital | Real VCs help build great companies
Today’s letter is an essay written by Don Valentine in the midst of the internet bubble. As the title succinctly indicates, Don laments the state of venture capital and argues that real VCs help build great companies over the long term—they don’t look for short term get-rich-quick schemes to flip.
Don founded Sequoia Capital in 1972 and helped grow it into one of the most legendary investment firms in the world. He started the fund in 1972, and they’ve gone on to invest in companies including Apple, Airbnb, Block, ByteDance, Cisco, DJI, DoorDash, Electronic Arts, Figma, Google, Hubspot, Instagram, Layer Zero, LinkedIn, Meituan, Nvidia, Palo Alto Networks, PayPal, Pinduoduo, Snowflake, SpaceX, Stripe, Unity, WhatsApp, YouTube, Zappos, and more. They’re also investors in Loom, Noom, Rec Room, Xoom, Zoom, and Zūm. In aggregate, the companies they’ve invested in had at one point created over $3.3tn in market cap (for reference, today, the market cap of the S&P 500 is ~$33tn).
Even famed value investor Charlie Munger has praised them, saying “The most remarkable investment firm in America is probably Sequoia. That venture-capital firm absolutely fanatically stays right on the cutting edge of modern technology. They have made more money than anybody and they have the best investment record of anybody. It's perfectly amazing what they have done” and “The best venture capital operation probably in the whole world is Sequoia’s and they are very good at this early stage investing. And I would hate to compete with Sequoia in their field. I think they’d run rings around me.”
I hope you enjoy this letter as much as I did!
PS / If you work at Sequoia, run a portfolio company, or are simply a friend of the fund, could you please DM me on Twitter (@kevg1412) or email me (kevin@12mv2.com)?
Relevant Resources:
The Letter
The short-term, get-rich-quick mentality particularly plagues our local entrepreneurs, specifically the over-educated MBA contingent.
The Internet hysteria of the late 1990s made venture capital look easy. Anyone and everyone with a sizable checkbook has been throwing money at even the most half-baked ideas. Getting in on the feeding frenzy has become the goal and somewhere along the line we lost sight of why venture capitalists exist-to build long-lasting companies and industries.
The promise of boundless riches from investing was destined to attract the wrong people-and it did. However, the evaporating fortunes of the dot-com losers these people backed afford us the opportunity to examine the role of venture capitalists with some historical perspective.
First, let's look at the late '90s or, more specifically, 1995, when the Internet gold rush began in earnest. The power of the Internet changed the business landscape. First movers, armed with reasonable business plans, passion and commitment were able to attract VC financing. Problems began when a half-dozen copycats sprung up in every category. First they got the money, then they tried to piece together a business plan, believing that e-commerce could overcome a lack of business sense.
The funny thing is that we should have seen it coming. In the last 30 years, other new technologies that brought similar waves of mania include microprocessors, PCs, disk drives and biotech.
Nonetheless, the great companies of the past were built to last in the same way the great companies of today are. I'm sure you know their names. The '70s list of venture-backed successes included Apple Computer Inc., Intel Corp. and Oracle Corp. In the '80s, Sun Microsystems Inc. and Cisco Systems Inc. joined the Silicon Valley success list. Today, Yahoo! Inc., Network Appliance Inc. and a few others have set the standard.
How are these companies doing today in 2023?
Apple: ~$2.6tn market cap
Intel: ~$140bn market cap
Oracle: ~$260bn market cap
Sun: Acquired by Oracle for $7.4bn in 2010
Cisco: ~$210bn market cap
Yahoo: Hard to say—Internet business sold to Verizon for $4.5bn and renamed to Altaba, which sold their stake in Yahoo Japan for $4.3bn, among other transactions. Verizon combined Yahoo with AOL to form Oath, which was later renamed to Verizon Media Group and then Yahoo before being acquired by Apollo for $5bn in 2021
NetApp: ~$15bn market cap
Back in the early days of the '70s, the "mission statement" for the evolving venture industry was that we were company builders, and, on occasion, industry creators. This small community included Arthur Rock, George Quist, Bill Hambrecht, Tommy Davis, Bill Edwards, Reid Dennis, Bill Draper, Pitch Johnson, Tom Perkins, Gene Kleiner and myself. We expected to spend 10 or more years on the boards of the young companies in which we invested, actively helping them grow. We were a small band who collectively had comparatively little money to invest-perhaps tens of millions. Compare that to the first quarter of 2000 when 'Net firms reaped more than $15 billion in venture capital. Obviously, we've entered an age of excess.
Information on these early pioneers are hard to find—if you’re interested in learning more about Arthur Rock, see this biography of him: Rock of Ages
The result is that thousands of totally useless e-commerce companies that do little and will never earn a profit are collectively weighing down the real innovators and creators. And, there are hundreds of so-called "new era venture capitalists" who claim business on the Web is all about market share or eyeballs or some other hallucination in order to "put money to work." Their orientation is to create a "great investment," not a great company or a new industry. There's a better name for these investors: I call them "day-trader VCs." For this group, the Internet is nothing more than a modern day gold rush.
And the short-term, get-rich-quick mentality particularly plagues our local entrepreneurs, specifically the over-educated MBA contingent. They've been seduced by Silicon Valley lore and now want their piece of the pie, without contributing anything to the societal bottom line. They're greedy, pure and simple.
Interestingly, it's the first-generation immigrant entrepreneurs who are setting today's standard when it comes to building sustainable companies. Every one of them I've worked with is a joy-they truly appreciate the opportunity to compete in Silicon Valley.
There's more good news to consider: The built-to-last strategy rewards patient investors. I'm still on the board of Cisco, 13 years after Sequoia Capital first invested. And Arthur Rock has been on Intel's board since the early '70s. We've maintained a long-term commitment to building lasting companies that contribute not only to Silicon Valley, but also to the national and global economies. And the results? Today, Cisco and Intel combined are worth nearly $900 billion in total market capitalization.
22 years later, Cisco and Intel are still giants, although not as giant as they used to be—now worth a combined $350bn.
As long as this long-term strategy, and these kinds of returns, are possible--and I submit that they still are—then venture capital will continue to be what it always has been: A company's builder's game. And real venture capitalists will still work to identify technology applications with monster markets that provide opportunities to build major companies for the benefit of the founders, employees and public shareholders.
Wrap-up
If you’ve got any thoughts, questions, or feedback, please drop me a line - I would love to chat! You can find me on twitter at @kevg1412 or my email at kevin@12mv2.com.
If you're a fan of business or technology in general, please check out some of my other projects!
Speedwell Research — Comprehensive research on great public companies including Constellation Software, Floor & Decor, Meta (Facebook) and interesting new frameworks like the Consumer’s Hierarchy of Preferences.
Cloud Valley — Easy to read, in-depth biographies that explore the defining moments, investments, and life decisions of investing, business, and tech legends like Dan Loeb, Bob Iger, Steve Jurvetson, and Cyan Banister.
DJY Research — Comprehensive research on publicly-traded Asian companies like Alibaba, Tencent, Nintendo, Sea Limited (FREE SAMPLE), Coupang (FREE SAMPLE), and more.
Compilations — “A national treasure — for every country.”
Memos — A selection of some of my favorite investor memos.
Bookshelves — Your favorite investors’/operators’ favorite books.
Oh man. That was a good one. He was fired up 🔥🤘🏽