Secretive and Sequoia seem to go together like Kim and Kanye, but there is nothing mysterious about their success (Sequoia’s) and the success of other top venture capital firms along Sand Hill Road. Fidelity, Blackrock, Tiger Global, T. Rowe Price, and others have come to find out, but the secret is simple, probably known, and worth repeating.
In fact, it was stated by Yale University’s David F. Swensen (more on him later) in 2013:
“Top-tier managers benefit from extraordinary deal flow, a stronger negotiating position, and superior access to capital markets, and thus are well positioned to outperform their peers.”
Top venture capital firms like Sequoia have created a “franchise” by mastering different forms of capital: social, intellectual, and financial.
Social. Top venture capital have established an extensive social network which bring deals from past entrepreneurs and others. No surprise here right, but why the surprise when Sequoia uses “scouts” to find the next deal?And did Don Valentine “just take a risk” on Michael Moritz? Or was Valentine’s odds hedged by Moritz’s existing social capital of Oxford andWharton MBA alumni networks, relationships from running Technology Partners or connections built working the Silicon Valley beat for Time Magazine?
Intellectual. The top firms have “hard-won investment insight”. For Sequoia Capital, this could be encapsulated by Don Valentine’s large market concept: “If you don’t attack a big market, it’s highly unlikely you’re ever going to build a big company or “I like opportunities that are addressing markets so big that even the management team can’t get in its way”. This thinking may be the reason for Don Valentine’s backing and building companies such as Cisco Systems.
Financial. The firms along Sand Hill Road also have “access to capital markets” from established relationships with investment bankers. The top firms complete the venture capital cycle of investing in entrepreneurs and the exiting their portfolio companies with a public offering. Entrepreneurs seek out the top firms to insure success. Could this be reason why Page and Brin sought out Sequoia and Kleiner Perkins in 1999?
Top firms are successful because they are successful: they attract talented people who contribute to the firm’s success and then the process repeats. The virtuous circle makes it difficult, but not impossible for other firms to leap into the top tier.
The “insider”, David F. Swensen, is the Chief Investment Officer (CIO) of the Yale Endowment. He started as CIO in 1985 and pioneered the use alternative assets such as venture capital for institutional investors. David F. Swensen wrote Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment.
At the end of June 2014, the Yale Endowment had total assets of $23 billion and was a Limited Partner of Sequoia as of 2007.
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