Don it!

In the summer of 1974, soon after he had raised his $5 million, Don Valentine showed up at the old roller-skating rink that was now Atari’s makeshift factory. He was fit and in his early forties, but as he made his way around the factory, he appeared to be struggling. He coughed uncomfortably, then seemed to gulp and hold his breath. As he described the scene later, the building was bathed in enough marijuana smoke to “knock you to your knees.”

“What’s the matter?” Nolan Bushnell asked him.

“I don’t know what those people are smoking,” Valentine answered. “But it’s not my brand.”

That’s Don Valentine, founder of Sequoia Capital.

It took Valentine a year and a half to raise $5 million for his first fund. He succeeded by tapping pools of capital that enjoyed charitable status: the universities and endowments that escaped not only regulation but also capital-gains tax. The Ford Foundation came in first, later to be joined by Yale, Vanderbilt, and eventually Harvard. In so doing, the endowments set in motion one of the great virtuous cycles of the American system. Venture capitalists backed knowledge-intensive startups, and some of the profits flowed to research institutions that generated more knowledge.

In the summer of 1972, a trio of West Coast engineers produced something called Pong, one of the world’s first video games. Atari, their company was called, infiltrated bars all over the nation in a couple of years and was attracting venture capitalists. Atari involved business risk, marketing risk, and what might be termed wild-man risk.

Nolan Bushnell, Atari’s twentysomething founder, had no time for the basic disciplines of business. He was semi-sober, unkempt, creative, and compelling. He kept an oak beer tap outside his office and liked to hold business meetings in a hot tub — either the one in his house or the new one he had installed in Atari’s engineering building.

Venture capitalists had visited Atari before and retreated quickly. Valentine wouldn’t back out because Atari was too chaotic; the opportunity was too terrific. Instead, he would get involved cautiously, in stages, and he would start by rolling up his sleeves and writing an Atari business plan. Atari had to invade the home of every American rather than just the bars. It needed adaptive technology (Home pong) and a partnership with a prestigious retailer (Sears). Valentine would invest only when Atari had been at least partially de-risked. Activism and gradualism would thus combine to make a hot tub culture backable.

At the beginning of June 1975, Valentine duly invested. He bought 62,500 shares for $62,500, making what would now be termed a “seed investment” in Atari. But it was only the start. Once the partnership with Sears had matured and the risks in Atari had gone down some more, it would be time to put together a larger round of financing. To scale up its production of Home Pong, Atari would need much more than $62,500.

By the end of August 1975, Valentine felt ready to go forward with the next investment round — the “Series A” in modern parlance. He put together a syndicate that would provide a bit over $1 million.

Atari soon needed more — nearly $50 million. Blessed with the personality of a steamroller, Valentine informed Bushnell that his child needed a new parent. He proposed the entertainment company Warner Communications. Bushnell had agreed to sell Atari for $28 million. For Valentine and his fledgling fund, it was a satisfying exit. Sequoia notched up a useful 3x return.