If you're anything like me, you pay attention when rich investors show you how they got that way. One I know has 10 criteria for investing. They are:
- Clarity of purpose. Great companies can be summarized in a single sentence.
- Large markets. Buy where there's a billion to be made. At least.
- Rich customers. You don't need me to explain this, right?
- Focus. Simple products with obvious value are easy to sell.
- Pain killers. Great businesses solve a real problem facing consumers.
- Think differently. Inventive firms drive their competition nuts.
- Team DNA. Talent attracts talent, and talent usually produces excellent returns.
- Agility. Being first to new markets matters.
- Frugality. Great managers allocate capital only where they must.
- Inferno. Excellent businesses produce huge returns from even small doses of capital.
Now, if you had to guess who this rich investor is, would you say:
(a) Warren Buffett
(b) Donald Trump
(c) George Soros
(d) Michael Moritz
The answer is "d," Michael Moritz of Sequoia Capital -- worth roughly $900 million by Forbes estimates, but also probably the least well-known of these names. For more than three decades, he and his partners have invested by these 10 principles, which internally have come to be known as the "Elements of Sustainable Companies."
It's a fitting phrase. By sticking to its checklist, Sequoia has funded some of the most enduring and alluring stocks in Silicon Valley history, many of which were bought for big premiums. Consider this list:
- Hyperion Solutions, acquired by Oracle (Nasdaq: ORCL ) earlier this year for $3.3 billion.
- Documentum, acquired by EMC (NYSE: EMC ) in 2003 for $1.7 billion.
- Abrizio, acquired by PMC-Sierra (Nasdaq: PMCS ) in 1999 for $400 million.
- Guardent, acquired by VeriSign (Nasdaq: VRSN ) in 2003 for $140 million.
- Medicode, acquired by UnitedHealth Group (NYSE: UNH ) in 1997 for $140 million.
And, of course, there is Apple and Electronic Arts (Nasdaq: ERTS ) , which have created hundreds of billions of dollars in value on their own. Not a bad track record, eh?
The art and science of sustainable investing
Indeed. But, again, Sequoia's outsized gains are the result of a better process that -- unlike with some venture capitalists -- can require years of hands-on commitment. Ask Sequoia founder Don Valentine. He was on the board of Cisco Systems, another Sequoia find, from 1987 through 2005. Cisco became a public company in 1990. Look what's happened since.
See what's going on here? By investing in sustainable companies early and then holding for the long haul, Moritz, Valentine, and others at Sequoia have earned billions for themselves and their partners.
Rules breaking, fortunes in the making
Now, here's the really good news: You don't have to be a venture investor to earn market-crushing returns for your own portfolio. David Gardner proves it. He invests like a venture capitalist all the time as the leader of our Motley Fool Rule Breakers service.
We've yet to earn billions as Sequoia has. But I dare say that we're building an enviable record by recommending early-stage growth stocks that meet the firm's 10 criteria. You can check out all of our research and recommendations at Rule Breakers with a free 30-day pass.
This article was originally published on July 6, 2007. It has been updated.
Fool contributor Tim Beyers owned shares of Oracle at the time of publication. Electronic Arts and UnitedHealth Group are Stock Advisor selections. UnitedHealth is also an Inside Value recommendation. The Motley Fool's disclosure policy wonders how much silicon actually resides in Silicon Valley.