In 1972, Don Valentine founded venture capital firm Sequoia Capital, and in that role was one of the original investors of Apple Computer, Atari, LSI Logic, Oracle Corporation, Cisco, Electronic Arts, Google, YouTube, Zappos and many other companies.
Sequoia’s success is indeed remarkable but is based on core principles that any company; technology based or otherwise can learn from.
This podcast series will investigate each of the 10 elements in detail. Although, Sequoia applies these principles to startup companies, they provide a nice framework for existing small and medium businesses to grow and prosper.
In this first episode we will begin our journey.
What is an element?
A fundamental, essential, or irreducible constituent of a composite entity.
The basic assumptions or principles of a subject.
The American Heritage® Dictionary of the English Language, 4th Edition
Those definitions help us understand that we are discussing the principles that go into a composite entity. In our case, an enduring company. One that is durable and built to last.
Clarity of Purpose – Summarize the company’s business on the back of a business card.
This seems very simple on the surface. Just about all businesses would say they know what business they are in. Yet, when pressed it may take some explanation to describe or worse, there are so many business areas that there is no real focus. Imagine the hypothetical Joe’s Taxidermy and Donut Emporium. A combination like that would be non-sensical but there are combinations that may seem more reasonable but still cause the company to lack a real clear purpose. This has a negative effect throughout the company as goals are not crisp and clear. Employees are uncertain how they will be measured and customers will find it easier to bypass any confusion and just go elsewhere. Sequoia says that a clear business can be written down on the back of a business card. Writing in really small type does not count.
Large Markets – Address existing markets poised for rapid growth or change. A market on the path to a $1B potential allows for error and time for real margins to develop.
More than anything else this is how Sequoia determines whether to invest in a company. In fact they will actively look for companies to invest in that are targeting the markets they desire to move into. Existing companies need to not only have a clear understanding of the current market but can often foresee where the market is heading. For our purposes, a market does not have to be $1B potential. However, even a lifestyle small business needs to have a clear market of adequate size.
Rich Customers – Target customers who will move fast and pay a premium for a unique offering.
This has some obvious advantages for a startup since cash flow is so critical when getting started. When we begin our interviews of businesses it will be very interesting to see how the cash flow of their customers impacts their success.
Focus – Customers will only buy a simple product with a singular value proposition.
This relates closely to clarity of purpose but is aligned more with how your customers view your offerings. Imaging a hypothetical device that “slices, dices, and even cuts hair!”. A customer might assume that any device that claims to do so many different things, it is unlikely to be good at any of them. Instead there are lots of great examples of products with a simple focus. This is a very powerful principle that has a big impact on customer behavior when they can very clearly see the value of your product. One of my favorite examples is the restaurant Raising Cane’s. Basically they sell chicken fingers with crinkle-cut fries, texas toast, and their secret sauce. As a customer all you really need to think about is how many pieces do you want. Nice and simple.
Pain Killers – Pick the one thing that is of burning importance to the customer, then delight them with a compelling solution.
It seems that there is no limit to problems faced by customers. Problems are a pain to deal with and are a huge motivation to take action. If you provide a product that takes away a customers pain, then they will give you money as fast as they can. Ask any salesperson how they close deals and they will highlight how they need to understand pain points and can then sell a solution that eases the pain. What are some pain points that many businesses face?
How do we get more customers?
Our website is really slow.
We can’t find any of the data we need. Why don’t we have an app for this on my phone?
Our projects come in over budget and really late.
Its hard to track progress on action items after meetings.
I hate mowing my lawn. Can’t someone just take care of this for me?
Where can I get some good chicken fingers?
And many, many more.
There are lots of business opportunities from understanding customers pain points. However, many businesses have created products that don’t address a real pain and are frequently much less successful.
Think Differently – Constantly challenge conventional wisdom. Take the contrarian route. Create novel solutions. Outwit the competition.
How successful could a restaurant that only sells chicken fingers really be? Cain’s business plan was submitted as a class assignment at LSU and only got a B-. The business plan was rejected multiple times by investors. To raise money the founders fished for sockeye salmon in Alaska before getting a SBA load. They now have over 100 restaurants in 18 states with plans of expanding nationwide.
Team DNA – A company’s DNA is set in the first 90 days. All team members are the smartest or most clever in their domain. “A” level founders attract an “A” level team.
Sequoia is focusing this of course on startups. However, having a strong team is a valuable asset. Again, it will be very interesting to see how companies approach hiring once we get to the interview portions of the podcast series.
Agility – Stealth and speed will usually help beat large companies.
Don Valentine, the founder of Sequoia calls boards of directors at legacy companies sleeping dinosaurs. They are generally set in their ways and are not really paying attention to the market or what technology is enabling. This is an area that small and medium business should absolutely be exploiting. The ability to fly under the radar and then quickly produce quality products gives a huge advantage.
Frugality – Focus spending on what’s critical. Spend only on the priorities and maximize profitability.
We’ll no doubt see many suggestions from our interviews of frugality since this is frequently an area that small businesses can control more easily than increasing revenue.
I hope you enjoyed this introduction to our new podcast series and will subscribe to the full series. I’m sure it will prove to be interesting and useful. Sequoia’s elements of enduring companies provides a great framework for analyzing all kinds of businesses. Be sure to visit http://rainydaylabs.com for show notes and other interesting tidbits. Thank you for joining me for episode 1 and we’ll see you next time on the RainyDay Labs Podcast series Elements of Enduring Companies!