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Silicon Valley's Sequoia says tech investing is all about the team

The cast of HBO's TV series Silicon Valley show teamwork is everything.

The cast of HBO’s TV series Silicon Valley show teamwork is everything.

The leading venture capital firm in Silicon Valley, Sequoia Capital, provided residents of Stone Chalk last week with a rare insight into its thinking when it weighs up turning start-up dreams into thriving digital businesses.  

As the federal government considers how to create in Australia a culture of innovation that encourages more risk-taking to spur economic growth, lessons from Sequoia – one of the technology industry’s most prolific and successful investors – can help identify the way forward for policy. 

Headquartered on Sand Hill Road in Menlo Park, California, Sequoia certainly knows a thing or two about the ingredients to bake a successful start-up. Founded in 1972 by Don Valentine, Sequoia was fortunate enough to have backed Apple in a capital raising two years after it was founded. Apple’s co-founder, Steve Wozniak, had been Valentine’s technology mentor, giving him an early Apple “Home Brew” computer, with an attached audio tape memory device, at a time when the cheapest commercially produced computers were $250,000, according to Valentine’s profile on the Sequoia website. 

Since then, Sequoia has partnered hundreds of entrepreneurs. Those that have won funding have offered some insight into a problem others had failed to come up with. The firm provides capital and management expertise, in return for some equity, and through playing the role of leading venture capitalist in the valley, it has helped shape the digital world.

Early games’ backer

Sequoia was an early backer of the emerging video games industry, funding Atari and Electronic Arts; it saw the power of the big hardware manufacturers by backing Cisco and Oracle; and it also funded Google in 1999, the year after the search giant was founded. Sequoia partner Michael Moritz, a former journalist, sat on the Google board. More recently, Sequoia has funded the who’s who of the global internet brands, including Airbnb, Uber, Instagram, reddit , LinkedIn, Yahoo and YouTube. In fintech, it has invested in PayPal, Stripe, Klarna and Prospa, among others. 

The aggregate public market value of Sequoia investments is $US1.4 trillion, about a fifth of the capitalisation of the Nasdaq and close to the entire market capitalisation of the Australian Securities Exchange. It is this world of technology that the federal government’s forthcoming innovation statement is desperate to tap Australia’s economy into. 

So, what does Sequoia look for in a start-up? What are the potential qualities of a budding business that might see it transformed into a taxpaying corporation and a big employer in the economy of the future? 

Well, Andrew Reed, one of the 15 US partners of Sequoia, reckons it is all about the people. 

“The most important variable for us is the early team,” Reed told a dozen entrepreneurs residing in the fintech hub Stone Chalk on Bridge Street in Sydney via a teleconference from Silicon Valley last Wednesday. 

“The DNA of the company should be a technology, and [in order to invest] there has to be a faith that the people can turn the company into a great, great business.”

People are especially important for fintech companies, he adds, given that financial products are easily copied. “You want to invest in a company knowing this is the early team that we want to build the product around – not this is the product that we want to supplement with team members. It is hard to invest in a fintech company with the expectation the team someday will have to be augmented by people better.”

The quality of the start-up team also reflects on the quality of the entrepreneur. “It’s the famous saying that A players hire A players, while B players hire C players,” Reed continues. “The really strong founders surround themselves with really strong teams. It is the first eight to 12 hires that will form the DNA.”

Talent pool crucial

Why are these insights relevant to the policy debate that is set to unfold in Australia about the right policy settings to foster more risk-taking and innovation? Because they suggest that the key policy priority needs to be ensuring Australia produces, attracts and retains a deep pool of talent, both entrepreneurial and engineering. 

The government’s innovation statement, which will be released in December, can address technology skills shortages by making it easier for start-ups to hire from abroad. This could involve creating more competitive tax settings for entrepreneurial talent, making visa application processes less stringent and the 457 visa system more flexible. It could also create a deeper pool of local talent from which start-ups can draw, by creating programs to re-educate local workers (whose traditional careers might have been cut short by automation). Establishing a HECS-style scheme for technology-focused short courses is one idea that has been floated.

The innovation statement will also need to ensure that start-ups stay put in Australia’s big cities. This will involve ensuring pools of capital are deep enough and that entrepreneurs are supported with management expertise by the various hubs, incubators and accelerators. 

Sequoia’s Reed told the Stone Chalk briefing last week that there is no “hard and fast rule” that start-ups it funds need to move to the US. But in what should be read as a warning to local bureaucrats and policymakers, he said: ”What matters at the end of the day is maximising the equity value of the companies in which we invest. Sometimes that does involve moving the business to the US – because that is there the market and talent is.” 

Last week, one of the start-ups resident in Stone Chalk, Inamo, met with Reed at Sequoia in Menlo Park.

Inamo is manufacturing a wearable wristband that can be used to monitor fitness and make payments. It is already working with Visa and Heritage Bank but founder Peter Colbert says after a one-week trip to California last week, he secured, in principle, support from two of the largest apparel brands in the US to work on the release of Inamo wearables by Christmas next year, while one of the largest talent agencies in Los Angeles is considering putting them on the wrists of clients in active sports. 

Colbert, who started work as a sports manager including nurturing the careers of professional surfing champions Tom Carroll and Martin Potter before founding the world’s first online sports registration portal, says San Francisco and Silicon Valley ”runs on maximum optimism, vision and entrepreneurship” and his experience there last week suggests the future of Australia’s innovation economy is certainly not assured. 

“People can talk about innovation, setting up innovation labs and VC’s raising $200 million, but unless the Prime Minister of Australia takes a similar approach to that of the Israel government, and actually mandates real change and support, then it’s all bluster, and companies like Inamo will keep looking to move to San Francisco or New York on a regular basis. 

“After all my meetings here in the States, I can state categorically, it is going to take a lot of convincing for me not to move Inamo’s headquarters to San Francisco or Los Angeles in 2016. I didn’t want to come across negative, but this is my experience, and it angers me – because nothing would make me more proud than saying we are conquering the United States and the world and our HQ is in Sydney.” 

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