“Sequoia is transforming itself from financial capital to production capital. Instead of LP’s investing in funds that make speculative investments in risky endeavors, Sequoia wants to keep long-term positions in companies that have proven business models and are embarking on the decade (or longer) process of improving their products and expanding their markets to the entire world.
This also, I suspect, represents the formation of a sort of “Silicon Valley Inc.”; while the big 5 can entirely self-fund, the nature of the SaaS business model is such that companies with proven product-market fit are better off losing more money up-front rather than less:
- Customers, once acquired, are like annuities that make money years into the future, but the cost to acquire them has to be paid up front.
- The core software product represents a huge fixed cost investment that is leveraged by scaling to as many customers as possible.
Moreover, while Sequoia’s announcement feels so momentous because of their long history in the Valley, institutions like Tiger Capital are already playing the exact same game; the era of production capital is firmly upon us, which means we are clearly in the Deployment period of Perez’s model.”
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