#159 Lessons from Don Valentine
What I learned from reading “DTV” by Michael Moritz on Don Valentine and the beginning of Sequoia Capital.
Today’s Chapter is based on the book “DTV” by Michael Moritz on Don Valentine and the beginning of Sequoia Capital.
Don Valentine was an American venture capitalist who founded Sequoia Capital in 1972 and became one of the central architects of Silicon Valley’s venture industry. A former semiconductor salesman at Fairchild and National Semiconductor, he led early investments in companies such as Apple, Atari, Cisco, Oracle and many others, earning a reputation for a blunt, market‑driven style that focused above all on backing companies in very large markets.
Here’s what I learned:
Asking Why?
“It is very important for young people keep their sense of wonder and keep asking why.”
— Stephen Hawking
Don Valentine, the founder of Sequoia Capital, approached business and investing with an unwavering commitment to questioning everything, a habit that was rooted in his early education and experiences. By having a skeptical mindset, he was able to cut through noise, identify opportunities and avoid pitfalls. Valentine questioned everything in order to foster a deeper understanding through persistent inquiry.
As a matter of fact, Michael Moritz writes that Valentine “went on to study at Fordham University, where his professors were Jesuits and whose teaching approach was based on the restless, open-ended questioning style of Socrates. It was this style of inquiry, aimed at rooting out answers to intractable topics from a collection of people with different points of view and experiences that, more than the details of his studies, influenced Don throughout his life. It made him doubt everything—particularly conventional thinking—and was the source of some of his favorite, terse ways of ferreting out answers. ‘Why?’ ‘Who cares?’, ‘Who needs it?’ ‘Why does it matter?’, ‘What does it do?’, and ‘So what?’ were the plain verbal thrusts he came to employ to gauge whether prices could be raised, a product made sense, a new market should be attacked or the significance of a milestone.“
The Socratic method became one of Valentine’s core reasoning when evaluating ideas, markets, and people at Sequoia Capital. In fact, this constant approach of questioning everything made Valentine dislike any policies and procedures, as he believed that rigid structures stifled creativity. Moritz mentions that Valentine ”was no fan of policies or procedures since he was convinced that they stifled creativity and were promulgated by mediocrities.” An example to illustrate this was the fact that Valentine always used to wear his nametag on his right breast at functions while the convention was to wear it over the left.
“It’s disobedience that gets you innovation.”
— Don Valentine
Furthermore, Valentine’s approach to hiring was also against conventional thinking. In fact, Valentine disliked hiring experts as he believed that they would have difficulty admitting being ignorant on a subject. Valentine had little patience for self-importance or assumed expertise, valuing intellectual honesty above all.
Moritz writes, *”Among the many things I did not know in 1985 was that Don was not seeking what the leaders of other firms sought. He had seen plenty of people deeply versed in the intricacies of an arcane technology, who were incapable of expressing themselves clearly, let alone tell a story. He knew these types would not flourish at Sequoia. He did not like pontificators or poseurs, people who were full of themselves or thought they had many of the answers, particularly those who made the cardinal error of pretending to know something about which they didn’t have a clue. ‘There is nothing wrong,’ he would remark, ‘in saying “I don’t know.”’“ *****As such, when hiring, Moritz reiterates that “In his mind, this ruled out consultants, business school graduates, lawyers, investment bankers, anyone with an HR background, people with hyphenated names or roman numerals after their last name, direct descendants of immigrants who arrived on The Mayflower, people who had enjoyed living on the East Coast, and those who wore Hermes ties, suspenders, cuff- links, signet rings, and monogrammed shirts.”
For Valentine, the ability to admit ignorance was a sign of strength, creating space for genuine learning and discovery. He sought this humility in others, famously filtering out candidates who overused “I” instead of “we.” This foundational habit of mind to constantly ask “why” and to have the courage to say “I don’t know” protected him from the herd mentality and allowed him to see potential where others saw only implausibility.
Similarly, Valentine hired people based on attributes rather than credentials. He believed in imagination, observation and creativity and disliked “hiring industry executives with name recognition and large reputations who by the time they gravitated to the venture industry had been too successful, had lost some spring in their step, were not hungry enough, had too many outside commitments and, most of all, were not prepared to become rookies again.”
“For Don, the most important attributes of a venture investor were the power of observation, a lively imagination and a good dose of creativity. (To which I would add raw hunger and street smarts.) Don had a much easier time answering the other two questions. He said the road to success at Sequoia would be determined by two things: ‘chemistry’ and ‘when we trust you.’”
— Michael Mortiz
This reminds me of Edwin Land’s “an education without a degree” motto which influenced his way of hiring employees. Land often did not require them to have any technical experience. Since his company’s office was located nearby, he frequently hired fresh graduates or students from Harvard or MIT. Furthermore, Land preferred to hire bright young liberal students over applicants with technical experience. As a matter of fact, he believed that they could learn the routines of the laboratory and the structure of scientific discipline as rapidly and, more importantly, they had little to unlearn.
While Land did not expect his new hires to have technical knowledge, he expected his employees to continue their education as an integral part of their working career. He fully believed that individuals in the industry would be better qualified to increase their technical competence and at the same time make their job fully satisfying through continuous learning.
Frugality
“The way to wealth is as plain as the way to market. It depends chiefly on two words, industry and frugality: that is, waste neither time nor money, but make the best use of both. Without industry and frugality nothing will do, and with them everything.”
— Benjamin Franklin
Other than the Socratic approach, I believe another core reason for Valentine’s success at Sequoia Capital was his frugality. Valentine had a no-waste mentality all about maximizing resources. However, this wasn’t only about penny-pinching, he was also focused on efficiency to avoid time wasting. This mentality was instilled in him at a young age. As Moritz writes, “From his Danish grandfather, who only spoke partial English and had fought in the Spanish-American War, Don learned that he should never waste any food—a lesson he came to apply to most things in life.”
As such, when Valentine was running Sequoia, all unnecessary expenses were systematically removed. Moritz mentions, “For some reason he considered semi-colons and parentheses pretentious, broke out in hives when a management ever contemplated the construction of a ‘campus,’ saved paper-clips, was wary about subscribing for a second copy of The Wall Street Journal, and banned filing cabinets because he thought the amount of energy spent storing and retrieving documents was a colossal waste of time.”
Similarly, when he first established Sequoia he outsourced all of the non-core functions to maintain a lean operations. Mortiz mentions that “Our paychecks, healthcare benefits and business expenses were all administered from the Capital Group’s offices on South Hope Street in Los Angeles. We had no chief financial officer, accountant, book-keeper or lawyer—for Don had outsourced all financial administration to the Capital and all legal matters to Wilson Sonsini. No surprise, that in 1985 the nameplate on the front door still read Capital Management Services and Don often chuckled at the idea that until the early 1990s Capital was still footing Sequoia’s telephone bill.”
A great example of Valentine’s frugality came from a meeting he had with the principals of Burr, Egan Deleage & Company who were seeking his advice on how to establish and organize their business. They asked Valentine how much room they should dedicate to filing cabinets. Valentine’s answer was zero. He believed that if a document was important, someone else would have a copy.
By consequence, it is not surprising that Valentine was a big fan of other leaders who embodied frugality. Notably, he was an admirer of John Morgridge of Cisco.
“He was a big fan of the way Cisco’s CEO, John Morgridge, described at an all-hands meeting how he always traveled first class–by sitting in a row in economy with an eyeshade over his brow and pretending to enjoy the amenities of a more expensive cabin.”
— Michael Mortiz
This reminds me of the importance of what we have learned from Alan Greenberg, the ex-chairman of Bear Sterns who was known for being frugal. As a matter of fact, Greenberg believed that a business’ success should be evaluated on its Return on Equity (”ROE”). And the secret to improve its ROE is simple: to increase revenues while cutting expenses. However, considering that sales are quite dependent on various external factors, Greenberg prefers to focus on what he can control: cutting expenses. As he once said, “The only statistic I care about is return on equity. After many sessions with some of our business school graduates (yes, we do have some), I think they have helped me understand the secret to improving our R.O.E. It seems that if we increase revenues and cut expenses, return on equity goes up and that is what makes me happy. Please make me happy! I can be very unpleasant when I’m not.”
As such, Alan Greenberg was an expert at cutting cost and he made sure to remind his employees to do so in his various memos. One way he did this was by asking his staff to save up on office supplies such as paperclips, rubber bands and scotch tapes. While these may seems excessive, there is no need remind you that even a small expenses can compound into a big ones at a large scale.
Greenberg mentions, “I have just informed the purchasing department that they should no longer purchase paper clips. All of us receive documents every day with paper clips on them. If we save these paper clips, not only will we have enough for our own use, but we will also, in a short time, be awash in the little critters. Periodically, we will collect excess paper clips and sell them (since the cost to us is zero, the Arbitrage Department tells me the return on capital will be above average). This action may seem a little petty, but anything we can do to make our people conscious of expenses is worthwhile.”
“Because of your cooperation, I would like to extend our cost-cutting efforts to a larger matter. Bear Stearns will no longer purchase rubber bands. If we can save paper clips from incoming mail, we can save rubber bands, and my hope is that we can become awash in those little stretchies also.”
— Alan Greenberg
And it didn’t stop there, Greenberg was also on the lookout for new ways of cutting costs and to improve the company’s bottom line. For example, after realizing that the company’s electricity bills was over five million a year, he required his staff to turn off the lights when they leave a room or call it a day to save on electricity bills. He also requested them to use U.S. Mail over Federal Express as he considered the latter a luxury after being charged an invoice of $68.32. He explains, “I have never enjoyed the smell of money burning, particularly when it is my money. The careless wasting of electricity is burning money. (Our electrical bill is running at the rate of five million a year.) From this day on we have two revolutionary new rules. Turn off lights when you leave a room and turn off equipment when you call it a day.“
Large Markets
“And when these new businesses come in, there are huge advantages for the early birds. And when you’re an early bird, there’s a model that I call “surfing” – when a surfer gets up and catches the wave and just stays there, he can go a long, long time. But if he gets off the wave, he becomes mired in shallows….
But people get long runs when they’re right on the edge of the wave – whether it’s Microsoft or Intel or all kinds of people.”
— Charlie Munger
Sequoia Capital’s success can be stemmed from Valentine’s laser focus on identifying businesses in large, expanding markets and on essential business metrics like high gross margins and cash flow. He understood that groundbreaking technology alone wasn’t enough, it needs to address massive opportunities to yield extraordinary returns. This principle that guided Sequoia’s investments was built from Valentine’s experience working at Fairchild Semiconductor. Moritz mentions that “Fairchild Semiconductor taught Don about the importance of large markets, technology, hiring, speed, aggression, frugality, outsourcing, marketing, and, as he used to say, ‘The two things in business that matter: high gross margins and cash flow.’ It also gave him an education in how to achieve business success and the sort of people required to pull it off.”
As such, Moritz summarize Valentine’s investment approach to fixating on “large markets—sometimes asking how many large companies have been built in small markets. He relished high gross margins believing that they provided lots of cushion for management mistakes and, in well-run businesses, would lead to large amounts of free cash flow and high valuations. He did not bother himself with financial projections since he was convinced they might as well have been published by Marvel Comics.”
A perfect example of a company that Sequoia Capital invested in was Cisco. Moritz mentions that the investment in Cisco taught him two lessons. First, the decline in computing cost would continue to expand the size of markets that Sequoia-backed companies could pursue. And second, that a leading company in a rapidly growing market can flourish for years if not decade. Moritz writes, “As Cisco’s revenues and profits continued to grow, the value of the company followed suit. By 1993 Cisco’s market cap reached $7 billion and by 1994 (the year in which Cisco first appeared on the Fortune 500) it exceeded $10 billion. At the end of 1998, before the world was completely swept up in the dotcom hurricane, Cisco had a market value of $176 billion. “
Furthermore, Moritz mentions that Fairchild Semiconductor also taught Valentine on what not to do as a company. In fact, it is often for large corporations to stagnate and to stop innovating.
“Finally, and perhaps most importantly, if you ever wonder why large companies fail you have to look no further than Fairchild Semiconductor. The East Coast management of Fairchild Camera and Instruments, instead of feeding the business needs of the thriving semiconductor division and rewarding its employees with stock options, used the cash generated by its west coast semiconductor division to invest in sleepier and more traditional areas such as graphic arts, office equipment, home movie cameras, and printing presses. When business at Fairchild Semiconductor started to slow in the late 1960s, competitors picked off its key employees with option packages and an exodus began.”
— Michael Moritz
This reminds me of Andy Grove’s unrelenting focus on staying ahead of the competition and anticipating the next big shift in the technology landscape. At the heart of the former CEO of Intel’s philosophy is the idea that healthy paranoia is an essential quality for business success. As he once said, “I believe in the value of paranoia. Business success contains the seeds of its own destruction.” This notion may sound extreme, but Grove’s logic is hard to refute. In fast-moving, hyper competitive markets, complacency is the main reason for the downfall for even the largest companies.
This risk comes from the fact that when companies are doing well, the leadership teams can become complacent as they fail to recognize the warning signs that the industry is slowly changing beneath their feet. Grove saw this dynamic play out time and again, as once-dominant players in the tech sector found their fortunes suddenly in free fall.
Grove illustrates this point by recounting the experiences of his own company, Intel, as it navigated a strategic inflection point in the computer industry, where there are often changes to the rules of the game. He observes that “sometimes these rules change—often in very significant ways. Yet there is no flashing sign that heralds these rule changes. They creep up on you as they crept up on us, without warning.”
His solution was to encourage a guardian attitude among his management team, where vigilance against potential threats was the default mindset.
“I believe that the prime responsibility of a manager is to guard constantly against other people’s attacks and to inculcate this guardian attitude in the people under his or her management.”
— Andy Grove
This is especially true considering middle management are often the first to sense the shifting winds of change. He explains that “middle managers—especially those who deal with the outside world, like people in sales—are often the first to realize that what worked before doesn’t quite work anymore; that the rules are changing.” Heeding the insights of these frontline employees can be instrumental in anticipating and adapting to the new realities of the market.
The lesson here is that business leaders cannot afford to be passive observers, waiting for the next crisis to emerge. Instead, they must be actively scanning the horizon, stress-testing their assumptions, and empowering their teams to voice concerns without fear of repercussion.
Similarly, this constant need of healthy paranoia is also useful when talking about one’s career. In fact, Grove mentions that an individual’s career should be treated like one’s personal business. He states that “It is your responsibility to protect this personal business of yours from harm and to position it to benefit from the changes in the environment. Nobody else can do that for you.”
“It is fear that makes me scan my e-mail at the end of a long day, searching for problems: news of disgruntled customers, potential slippages in the development of a new product, rumors of unhappiness on the part of key employees. It is fear that every evening makes me read the trade press reports on competitors’ new developments and leads me to tear out particularly ominous articles to take to work for follow-up the next day. It is fear that gives me the will to listen to Cassandras when all I want to do is cry out, “Enough already, the sky isn’t falling,” and go home.”
— Andy Grove
Beyond the Book
Read "Socrates and the Search For Wisdom" by Farnam Street
Read "What is First Principles Thinking?" by Farnam Street
Read "Latticework of Mental Models: Surfing" by Safal Niveshak
Watch "Don Valentine, Sequoia Capital: "Target Big Markets"" on YouTube
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