VC’s are all the rage at the moment. Australia is hopping even further onto the bandwagon with news this week that the ‘father of Australia’s venture capital industry’ Bill Ferris (now, Chairman of Innovation Australia) is asking for more superannuation money to be used as venture capital, and for the country to embrace a more entrepreneurial ‘ecosystem’.
With all this hype, you’d think it’d be pretty easy to pick and back a winner.
But maybe it’s not that simple (of course it’s not).
As we’re seeing more ‘unicorns’ popping up (aka. companies that have a $1B valuation or higher from fundraising), there’s noise that this very proliferation is the sign of yet another tech bubble.
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Ok, so unicorns aside, one of the most successful (and secretive) VC firms in Silicon Valley is Sequoia Capital.
Sequoia Capital has made a name for itself for knowing what’s next to invest in – and, therefore, being one of the first investors in these start-ups. It’s worked with Steve Jobs (Apple), Larry Ellison (Oracle), Elon Musk & Peter Thiel (Paypal) and with Sergey Brin & Larry Page (Google)…just to name a few.
Sequoia were one of the first investors in Uber (with US$25,000 during it’s first fundraising round). That $25,000 is now worth something like $40 million. Sequoia hasn’t invested in the business since this initial round.
So how do Sequoia go about finding such luck?
With a very different model for investment. They use ’scouts’ – people who are on the ground, with their own start-ups or enterprises, to secretly invest in new companies on their behalf.
According to the Wall Street Journal these ‘scouts’ are like ‘very early warning systems, like having a bunch of little satellites installed across the Valley, picking up blips on the radar’.
Let’s take the example of Uber. That $25,000 from Sequoia was invested by Jason Calacanis, on their behalf. Sequoia made Calacanis an angel investor, he ran an online news start-up called Inside.com that Sequoia had already invested in. Inside.com used Sequoia scout capital to invest in Uber (now the world’s most valued private tech company).
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So how do Scouts works?
According to a couple of different sources – these scouts ‘propose new investments by submitting a short questionnaire about the start up to Sequoia, it then makes sure the company is based in the US and does a background check’. According to scouts, Sequoia rarely says no.
So in this new era of ‘venture capital’ investing and start-ups, it’s still all about who you know (and who’ll invest on your behalf).