What Don Valentine Saw in the Market for Personal Computers

When Don Valentine explained why he backed Apple, he began with the price of a computer. A machine designed for consumers could cost far less than what people expected to pay for one. If Apple could get that product to market, the buyers could include people who had never considered owning a computer. Valentine’s account of the Apple investment

Valentine had spent years selling semiconductors before founding Sequoia Capital in 1972. At Fairchild Semiconductor, he had seen how advances in chips changed what customers could build. As an investor, he followed those changes into video games, personal computers and networking. In a Computer History Museum oral history, he described the investments as related decisions about what people could do with cheaper computing and what they would need once they had it. Valentine’s oral history · Computer History Museum biography

The customer comes into view

Atari, Sequoia’s first investment, gave Valentine a way to see consumer demand up close. He visited the company’s Sunnyvale factory several times before investing in 1975. Atari was already selling an experience people understood. A customer could play a game and decide whether it was worth paying for. The technology inside the machine could improve without the customer having to learn much about it. Sequoia’s interview with Atari co-founder Nolan Bushnell · Valentine’s account of the Atari investment

Apple posed a harder question. A general-purpose computer could do many things, but that flexibility left room for doubt about what a household would actually do with one. Valentine’s account of the investment emphasizes a product made for consumers and a price that brought it within reach of more buyers. The bet was that those two changes would expand the pool of customers for a computer. Valentine’s account of the Apple investment

That distinction is easy to miss in hindsight. A cheaper component improves the economics of making a product. A lower retail price can make the product available to people who were previously priced out. Those buyers still need a reason to use it. The games business let Atari see that reason directly. Apple had to sell a machine whose uses would grow as people found more things to do with it.

A problem created by success

Valentine later recalled that early personal computers largely operated on their own. As more machines reached offices and institutions, businesses had a reason to connect them. They also had equipment that communicated in different ways. Cisco made routers that could move data among networks using different protocols. Sequoia invested in 1987. Computer History Museum’s Cisco oral history · Sequoia’s account of the Cisco investment

Cisco’s opportunity depended on something a router company could see by then. Customers had already spent money on computers and networks. They needed those investments to work together. The spread of computing had created a separate purchasing decision, with a problem that could be described to the people paying to solve it.

There is a useful contrast with the early Intel financing. Arthur Rock could point investors to what Robert Noyce and Gordon Moore had accomplished at Fairchild before their new company had sold a product. Valentine’s recollections put more emphasis on what was happening on the buyer’s side. Both kinds of evidence mattered. The weight an investor could place on each depended on how far the technology had spread and what customers were already doing with it. Rock’s Harvard Business School oral history · Valentine’s Computer History Museum oral history

The question for AI investors

AI gives investors a chance to test the same distinction. A cheaper model can make it practical to build an application that would have cost too much to run a year earlier. Whether that becomes a business depends on what the customer does next. A demonstration, a paid pilot and a renewed contract each answer a different question. The demonstration shows what the software can do. The pilot shows someone will spend money to try it. A renewal starts to show what it is worth after the customer has used it.

There is also a question for companies selling to businesses that have already adopted AI. Once customers put several tools into use, what new work do they have to do to keep them running? If the same problem appears across customers, who has the budget to fix it? That is the kind of demand Cisco’s early history gives investors a reason to look for.

The question for an investor considering an AI deal today is one Valentine’s record makes concrete. Before you invested, what had the customer already done that made you believe there was a market?