What makes Sequoia Capital successful? “Target big markets”

Don Valentine, who founded Sequoia Capital, talks about what makes Sequoia Capital effective. It’s one of my favorite talks, and I find myself watching and re-watching it from time to time, and I’d encourage everyone to hear the wisdom themselves.

Markets, not team
In the beginning of the video, Don Valentine asks, why is Sequoia successful? He says that most VCs talk about how they finance the best and the brightest, but Sequoia focuses instead on the size of the market, the dynamics of the market, and the nature of the competition.

This is, of course, super interesting because in many ways it’s contrarian to the typical response that investing is all about “team.”

Creating markets versus exploiting markets
Another choice quote: “We’re never interested in creating markets – it’s too expensive. We’re interested in exploiting markets early.”

In consumer internet, when the divisions that separate product categories are so fuzzy, it can be hard to understand when you’re creating a market versus when you’re attacking an existing one. My rule of thumb is that:

If people know how to search for products in your category then you are in an existing market.

I’ve written more about this in posts here and here

Watch the video of Don Valentine of Sequoia capital on “Target Big Markets” on YouTube or in the embed below:

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http://twitter.com/semil Semil

This is one of his classic talks and yes, totally contrarian. Very much in line with more of a “portfolio approach” theory — pick dynamic markets and maintain different positions within those markets.
http://twitter.com/rohit_x_ Rohit Sharma

just proves the point there is no single recipe in venture capital. it’s a weird system where ‘wins’ prove the insight – many years and often many partners/people later. given the multi-year lag between inception and ‘proof’, difficult if not impossible to build corrective feedback in to the system. early marketspotting trains the selection filter to then pick the right entrepreneur and bet on the right idea within the market.
so good VCs do what founders do – focus on what separates them from the median, do that well, obsess about it and refine it. use data where available, insights where data is sparse or won’t exist for a few years.

picking markets works – if you’re good at it. (Sequoia)
picking people works – if you’re good at it (YC)
picking ideas works – if you also pick the right person bolted to that idea and a market exists (VCs circa ’95-’00)
picking people+ideas works – if you’re good at it (@500)

the ingredients are many, few good recipes though.
http://www.facebook.com/saumil07 Saumil Mehta

This is a great talk.
http://andrewchenblog.com Andrew Chen

I think you’d be surprised by how common this POV is, but it’s not what is commonly trotted out by VCs because it’s not as complimentary and deferential to entrepreneurs.

Here’s another important datapoint:

“Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter — you’re going to fail.”

From http://pmarca-archive.posterous.com/the-pmarca-guide-to-startups-part-4-the-only

In the same blog post, quoting Rachleff (formerly Benchmark):

“Andy puts it this way:

- When a great team meets a lousy market, market wins.
- When a lousy team meets a great market, market wins.
- When a great team meets a great market, something special happens.”

I’ve heard/read many other references to the same.
http://andrewchenblog.com Andrew Chen

Hard to build a “one size fits all” rule when you just care about the outliers :)
http://akp-blog.com/ Arpan Punyani

Wondering to what extent VC firms actually adhere to a particular investing thesis (e.g. Sequoia’s “portfolio” approach) over time and across partners. Seems difficult/rare for a firm to actually stick to a particular view over those two vectors.
http://andrewchenblog.com Andrew Chen

It’s hard to talk about VCs in general because there are so few good ones :) But I think of the ones who’ve stuck around and been successful over decades, that some key ideas/themes around their investing. Plus the guys who invented the industry are still around, so they can still instill many of the original ideas to the new generation. All that said, you’re right that there are a few firms that kicked ass early on but missed the generational handoff and are now in the failing category.
http://primitus.com/blog Vincent Chan

In your opinion, what are the characteristics of a great market? And what markets are great today?

I guess some of the key elements are big market, fast sales cycles, fast growth, slow witted competitors…etc. Great markets I can think of – mobile payment, mobile commerce, big data, cloud security…etc. Anything else? Thanks for your advice.
http://twitter.com/andyidsinga andyidsinga

this was really cool – thanks for sharing
Sebastian Tonkin

Picking markets first makes sense to me. Seems like there’s a lot more risk involved in understanding whether an entire large market will emerge than in evaluating whether a particular team is the right group to win.
http://twitter.com/AndrewKorf Andrew Korf

Thanks for sharing… being just back from a month and half in India, I am suprised that there arent more startups targeting the enormous markets of south and south east asia … or asia in general for that matter.
http://ultralightstartups.com/ Graham Lawlor

Great post and great video. Sequoia has a very intriguing approach.

My question is how do you estimate the size of a market to know whether it’s big enough.

Have you come across anything like an “industry standard” approach to answering this question. I’ve been searching for such a thing for weeks and can’t seem to find one.
http://www.getacho.com Samee Ullah Feroz

you are right friend.

@andrewchen