1960s: first venture capital with single round of funding from time-limited fund with 20% of profits model for founders of Intel (Robert Noyce) from Arthur Rock

1970s: beginning of Sequoia and Kleiner Perkins

  • They start the multi-round model with de-risking between each round
  • Don Valentine from Sequoia starts by backing Atari
  • Kleiner-Perkins starts with computer companies and Genentech and discovers that market risk is inversely proportional to technical risk
  • The venture network of the valley develops a lot and Apple in funded through word of mouth - from its start in 1976 to its public offering in 1980, Apple’s value jumps to $1.8B, the largest IPO ever

Early 1980s: after the Apple and Genentech IPOs, the VC industry in Silicon Valley explodes

  • One hypothesis for Valley’s success: the porous boundaries between companies (lots of information and people flow) and the abundance of weak network ties - the reason for this? VCs cultivate these weak ties
  • In contrast, the Boston ecosystem doesn’t develop as much because VCs are risk averse and only invest in proven companies with revenue instead of rolling up their sleeves and helping to de-risk and build from scratch
  • The biggest success of the period is Don Valentine’s early investment in Cisco - just like the first generation of startups was built around the PC, the second is built around Cisco and networking

Mid 1990s

  • Netscape backed by John Doerr from Kleiner-Perkins does a massive exit
  • Yahoo becomes the golden child of the valley - it has very little defensible technology and must maintain its dominance through marketing in a winner takes all market, it announces the beginning of the dotcom bubble
  • Masayoshi Son, the founder of SoftBank, backs Yahoo and makes the first check of $100M (huge at the time) - a few weeks later, Yahoo exits at 2.5x and he makes $150M (largest profit ever in VC, bigger than $100M of Sequoia from Cisco)
  • In the late 1990s, he makes $15B by investing in 300+ tech startups in Silicon Valley and across the world, 2 orders of magnitude more than any other VC, he pioneers late stage investing with large checks

Late 1990s

  • Benchmark emerges as an alternative model: lean ($85M fund smaller than a single check from Masa, focused, and involved as board members) - their first home-run is eBay ($7M turns into $5B at a $20B valuation)
  • The dotcom bubble: public markets start valuing internet startups with barely a product at crazy billion dollar valuations, the rational thing to do for VCs is to go with the flow
  • Google, through early angels, manages to get backed by both Sequoia and John Doerr from Kleiner Perkins (12.5% each for $12M at a $100M valuation) during the dotcom frenzy - the balance of power is on the entrepreneur side as money is flooding the market
  • Google’s later success has a deep impact on the valley: founders feel empowered to stay CEOs, startups raise early from angels and look for a high VC valuation
  • The crash is sudden: in 2000, VC investment is $100B, in 2002 it’s $9B; Masa loses 90% of its fortune; Silicon Valley loses 200K jobs
  • Google’s 2004 IPO marks the end of the depression

Early 2000s

  • PayPal (backed by angels) and X.com (backed by Morritz from Sequoia) merge
  • Founder’s Fund from Thiel represents a new form of VC: super focused on the power law (big bets on the most promising startups) and not involved in company direction, leaving the business of making the startup work to the founders
  • Zuckerberg shows up in pajamas at a Sequoia meeting, representing young founders’ irreverence toward established VCs
  • Paul Graham starts YCombinator: the novelty of the concept is in the batches of super early angel investments toward mostly young engineers to grow them into founders
  • The first generation of Chinese internet companies (including Alibaba) has nothing to do with government backing and everything to do with VC investment (first Goldman Sachs then SoftBank for Alibaba - while Masa gets out with $58B, the biggest VC win ever, Goldman gets out way too early with nothing)

Phases of VC

  • Phase 1: scarce capital and investors (early Valley, China in late 1990s with start of Alibaba)
  • Phase 2: capital flows in (valley in 1980s after Apple IPO, China in 2010s)
  • Phase 3: VCs coordinate the network of startups with mergers and funneling entrepreneurs in blue ocean areas (valley during 1990s with PC and internet ecosystem startups, China post 2015 with Chinese Groupons and Ubers)

Growth investing picks up after the Russian Yuri Milner invests in Facebook in 2009, giving Zuckerberg his voting power and buying back illiquid employee shares; Tiger Global is another early growth private equity fund

Andreessen Horowitz differentiate themselves as a venture partnership coaching technical founders to become seasoned CEOs (when Founders Fund does not intervene and traditional VCs like Benchmark, Kleiner or Sequoia might replace founders with professional CEOs)

Kleiner Perkins loses its reputation after a series of unsuccessful funds dedicated to clean tech in the 2000s

While Kleiner declines in the 2000s, Sequoia remains the best VC firm of the 2000s and 2010s

  • Extremely hard work ethic
  • Morritz and Leone put great emphasis on training the next generation - mentorship and shadowing, early boards
  • Successful expansion to China by empowering the local team to make decentralized decisions while imbuing the firm’s culture
  • Systematic process recording every vote for every investment and running post-mortems a few years later