Line of Engineers as Due Diligence

"DON, WHO KNEW a good story when he made one, was fond of saying that Sequoia was put on the map by its first investment, a $150,000 wire to Atari. In reality the $600,000 invested in the videogame company started by Nolan Bushnell, who was one of Silicon Valley’s more colorful figures in the 1970s and 1980s, became Sequoia’s second investment. (The first investment of $150,000 was made in Xciton, a maker of gallium phosphide diodes, and resulted in a 64% loss of capital.) Don’s due diligence on Atari included a trip to Andy Capp’s Tavern in Sunnyvale where he saw a line of engineers standing outside the bar juggling quarters and waiting for the chance to play Atari’s first coin-operated game, Pong. Don was also attracted to the idea that the stand-up game was powered by microprocessors."

"While at Fairchild Semiconductor Don, unwittingly, was given a lesson in the basics of venture investing: he had to gauge the relative prospects of customers to help determine which were worthy of special treatment. This required evaluating the markets they were attacking, the competitive merits of their products and the capabilities of their managements. As he gravitated towards marketing he figured out the destiny of a company fell between a marketing department that could figure out what customers needed and an engineering department capable of designing them. Don"

"He was fixated 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."