Don Valentine's Investment Checklist
The five-to-six-rule filter that launched modern venture investing
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 6
- Confidence
- 90%
In the early 1970s, Don Valentine codified an ad hoc set of criteria he'd developed while running sales and marketing at Fairchild Semiconductor into what became Sequoia Capital's founding investment checklist. Rather than relying purely on gut feel or pedigree, Valentine built a short list of hard filters -- market size, geography, technology type, margin structure, return potential, and founder receptiveness to help -- that a deal had to clear before Sequoia would commit capital. It formalized venture investing as a repeatable discipline rather than a one-off bet, and it remains recognizable in how top-tier venture firms screen opportunities today. The checklist's genius was combining rigid financial thresholds (100x-style return potential, high gross margins) with a subjective read on whether the team would actually let the firm help.
Origin
Valentine developed an 'ad hoc technique for evaluating different companies' while at Fairchild, deciding which customer applications were worth committing scarce engineering resources to before he ever ran a fund.
Core principles
- 01Filter for very large addressable markets before anything else
- 02Prioritize proximity/ability to be actively involved
- 03Require high gross margin potential to support long-term compounding
- 04Underwrite to outsized (100x-fund-moving) outcomes, not modest multiples
- 05Only fund teams that will accept help augmenting their weaknesses
How to run it
- 1
Confirm the market is very big
Screen out any opportunity that isn't targeting a large, expanding market, since even a dominant position in a small market can't produce outlier returns.
Pro tip Ask whether the market is a multi-billion dollar opportunity, not just a billion-dollar one.
- 2
Check for proximity to enable active involvement
Valentine originally required investments be based in Northern California so the firm could be hands-on with the company.
Watch out This geographic rule became obsolete as Sequoia globalized, so treat it as 'ability to be actively involved,' not a literal location rule.
- 3
Require advanced technology
Look for companies building on frontier technology rather than incremental or commoditized products.
- 4
Demand high gross margin potential
Evaluate whether the business model can eventually support high margins, which fuels reinvestment and long-term compounding.
Pro tip This is one of the only hard numeric filters in an otherwise subjective process -- treat it as non-negotiable.
- 5
Underwrite to a fund-moving outcome
Only invest if the position could plausibly return $100 million (in Valentine's era) or a comparable fund-moving multiple today.
Pro tip Modern equivalent: underwrite each investment to 20x+ returns, not just 10x.
- 6
Test receptiveness to active participation
Assess whether the founding team will accept the firm's help recruiting, strategizing, and building out the organization, since Sequoia planned to be deeply involved.
Pro tip Listen for self-awareness in founders about their own weaknesses -- that's the signal they'll accept help.
Watch out A brilliant market and unreceptive team is a red flag under this framework.
In the wild
Sequoia's very first independent investment was $600,000 into Atari, a company clearly serving a massive emerging market. The next year Atari was acquired by Warner Communications for $28 million.
→ A quick ~4x return that satisfied the market-size and technology criteria but fell short of the 20x return the checklist targeted.
Don knew Steve Jobs from Atari but doubted he was 'venture backable.' He instead sent Mike Markkula, a former colleague from his semiconductor days, to help run the company -- satisfying the checklist's 'receptive to active participation' criterion even without a conventional founding team.
→ Apple went on to define the personal computer market, though Sequoia sold its stake for $6M in 1979 before the IPO to satisfy LP tax needs.
Sandy Lerner and Len Bosack were a married IT couple with no traditional founder pedigree, but they'd built the first router at a moment when no routers existed and networking networks was an enormous unmet need.
→ Don invested $2.5M for 30% of the company, which fully satisfied the big-market and high-margin filters and became one of Sequoia's largest returns.
Common mistakes
Selling winners too early for liquidity reasons
Sequoia sold its Apple stake for $6 million in 1979 to make a tax distribution to LPs, missing out on what would become tens of billions in future value -- a direct violation of underwriting to fund-moving outcomes.
Discounting non-hardware markets due to unfamiliarity
Because Valentine and early Sequoia came from semiconductors and hardware, the firm was slow to recognize software (e.g., Oracle bootstrapped for six years before Sequoia invested) even though software ultimately had the highest gross margins the checklist prized.
Is it for you?
Not ideal for
Investors in small, niche, or low-margin markets, or those without capacity/desire to be hands-on with portfolio companies.
From the transcript
“One must be in a very big market, the the potential investment. Two, must be in Northern California. That's changed. Three, must be in advanced…”
“The final item on the checklist for for Don's criteria for investing is must be positively responsive to our active participation.”
From the episode
Sequoia Capital (Part 1)