On Saturday, February 7th, the Venture Capital & Private Equity Club held its 10th Annual Conference. The day was a huge success, thanks to the 50+ organizers, panelists, keynote speakers and sponsors.
Prior to his keynote, The Harbus was lucky enough to get some words of wisdom from Michael Moritz, a partner at the California-based firm Sequoia Capital, on the venture capital industry. Mr. Moritz helped start, organize and finance companies that now account for about ten percent of the value of NASDAQ. Among the successes attributable to Mr. Moritz are Yahoo!, Google, Paypal, and Flextronics, to name just a few. Sequoia Capital also provided the original financing for Apple Computer, Atari, Oracle, Cisco Systems and nVidia.
Harbus: Given the proliferation of VC firms over the past decade, what differentiates Sequoia Capital from other venture capital firms?
Michael Moritz: The fact that we are still in business! If you look at the venture landscape of a few years ago, there were a lot of entities and people who wanted to be in the venture capital business. They barreled into the venture business and hung out their respective shingles. I don’t know how many of those entities were, but it wouldn’t surprise me if there were 200. All the new breed of venture firms who wanted to be in the business: the very well-heeled European and Asian billionaires, the angel investors, the corporate venture people, and the incubators. They have all gone away.
People misunderstood how difficult the VC business is so you have a huge winnowing of the list of companies competing. There are not very many firms around that have two attributes which are very difficult to attain and maintain. One is that they have more than a plausible record. And second is that they remain incredibly competitive. Sometimes it’s very difficult to do the latter if you have a plausible track record because people get complacent and get lazy. They rest on their laurels and forget how to compete. We have always operated under the premise that our next investment is our most important investment.
Harbus: What sector in technology investing are you excited about today?
MM: That’s independent of where we chose to invest. One of the wonderful things about the venture business is that you are perpetually surprised by things you haven’t thought about or contemplated. You are invariably in an atmosphere with extremely smart, young, and very driven people. And that is an enormously stimulating place to be. As soon as you begin to ossify or get ridged or wonder where the hell things have gone when something has already happened, your spirit begins to age. The venture business is a fantastic way to stay mentally young. That is very difficult to do, and I don’t think there are many other pursuits where you have that potential. And that to me is the great unsung lesson in being in the venture capital business. You are surrounded by twenty-some-things.
Harbus: In your view would you compare and contrast the investment opportunities between Europe, Asia, and the US?
MM: We have always been a very parochial partnership and make no secret of the fact that while we’ll invest in more mature companies outside of the west coast; for the very early stage companies, in things that are probably too small to even deserve the name “company” – its just three or four people, we will always do that on the west coast: practically all in the Bay area. Now, it’s also clear that with more experience, improved communications and vigorously growing economies elsewhere there are plenty of begging opportunities in. Pick your favorite geography, but I would focus much more on the emerging markets like India, China, Tripoli thank I would the European markets. Having said that, we have no ambition to set up shop in India or China. But, we do have great ambition that our companies understand that these are good, new markets.
Secondly, that we capitalize on the human capital potential that is resident in these geographies. We wouldn’t dream of investing in a software company today without asking the people associated with it what their plans are for doing development in India. It may even be in the first thirty days of formation of the company, but capitalizing on this enormous talent that is deployed elsewhere I think its going to be increasingly important in the venture business.
Harbus: One often hears that there is too much money chasing a small proportion of good deals in the Venture Capital and Private Equity business. Would you agree with this statement?
MM: I’ve been in the business since 1986 and I can never remember a period, a year, or a quarter during which somebody hasn’t moaned or whined there is too much capital chasing to few opportunities. It is the perpetual momentum that they have chosen in this business. To some extent it is true, and part of the reason we had the explosions at the end of the 1990’s was because the supply of capital into these companies was far too abundant. If you had to finance all the reasonable early stage companies in the Silicon Valley – the new investments not all the follow-on rounds – you probably don’t need more that $500-$700 million a year to finance all the adequate opportunities that really deserve financing. That’s a purest and perfectionist way of looking at the world and then there is the reality.
Now the supply of capital into the venture capital business clearly dropped off a cliff as did the stock market and the last couple of years in California have probably been the best investing environment for the last fifteen or sixteen years in the venture capital business. But now as people regain their footing, emerge from hibernation, and build their confidence the supply of capital is increasing. The investment returns will decline in correlation to the increasing supply of capital. It’s a fact of life. If you are interested in the venture business or interested in investing in venture partnerships, we’ve always cautioned people who can’t afford to do market timing. You have to dollar-average your investments over periods when capital is both scarce and plentiful.
Harbus: What advice would you give someone considering a career in venture capital right now, especially since jobs are extremely competitive and positions are limited?
MM: You have to be very humbled. Not by the individuals in these firms but by the challenge of the business. It’s a very hardening business and every time we think we have it figured out we get our clocks cleaned. It is not a business that gets any easier. No matter how long you’ve been at it, investments you’ve participated in and how successful some of these investments have been, the very next investment that we make may end up losing 100% of our capital.
Harbus: In your opinion, what makes a good venture capitalist?
MM: I don’t think there is any perfect recipe for picking somebody from the Harvard Business School or else where who wants to join venture partnership. It’s very difficult to figure out from somebody’s background whether they will be successful in the venture capital business. I can think of numerous examples of people with glittering resumes and burnished credentials who you would have thought would thrive in the venture business, and they flame out. I can think of people with very unlikely backgrounds who have flourished in the venture business. We’ve given up on trying to predict who will and won’t do well in the venture business.
Obviously, when we bring somebody into our partnership we’re looking for a particular set of attributes. We want people who are clear thinkers, very driven, and very enthusiastic about being in the business.
Harbus: With the changes of capital flows into the venture capital business and the ever changing competitive landscape, what does Sequoia Capital do to remain competitive?
MM: We raised our 11th ea
rly stage partnership last year. I went back and read the initial memorandum that was put together for the first Sequoia partnership that was raised in ’72 or ’73. And, if you listen to the proposition and ignore the numbers, it’s investing in companies that a shift in technology gives them a slight advantage, it’s investing, for us, parochially, and it’s working very hard as self extended members of the founding team to try and develop a little idea into a small company. And we think the small company will evolve into a more permanent part of the landscape.
Harbus: We assume you have a busy and full schedule, how do you spend your free time?
MM: In remarkably boring ways. Like any pursuit, it does not matter what you do whether you are in academia or running a company, if you want to remain at the top of your game you have to work pretty hard. So, we work pretty darn hard. And, beyond family it does not leave a lot of time for anything.
Harbus: If you could give one piece of advice to HBS students, be it professional or personally, what would it be?
MM: Skip Business School! (laughing)
Harbus: Could you please elaborate.
MM: There are a lot of wonderful graduates from some of the best business schools in many of companies in which we are investors. But, you can get hell of an education working in small and large companies as well. Some of the best companies have been organized, created, and developed by people who don’t have incredible credentials.
And if the question is focused much more on advise for somebody from HBS going into the venture business, it would be the same observation and counsel that I would give somebody 45 years old going into the venture capital business. Which is, if this is a new endeavor for you; don’t expect it to come easily. It’s very much an apprentice business. That doesn’t sit well with a lot of people because people think the venture business looks reasonably easy from the outside. “What could be that difficult about it?” People think that on a personal basis I might have been fairly successful investing my own money so this is just another aspect of the investing business. And yet it turns out to be as I mentioned in the beginning a pretty humbling business. To marry the real determination and enthusiasm with a considerable amount of patience; it takes time to figure out if you are any good in the venture business. This is not something where you can measure, at the end of the week or at the end of twelve weeks, if you have written all the lines of code you promised or achieved the sales target that your manager gave you. This is a very difficult business to measure your progress. You go into the venture business in 2004, it may very well be 2009 before an investment that you have been associated with today blossoms.
Harbus: We believe that people learn from their mistakes, could you elaborate on a lesson learned from a mistake you’ve made in the business.
MM: Well, our history is littered with carcasses of investments that have not worked. We try to adopt the lessons of the successes that we’ve gotten from the companies that have flourished and not to forget the lessons of yesteryear. Probably, the biggest of the lessons is that capital intensive businesses are not suited for venture capital investing. So we had an investment in a calamitous fiasco called Webvan which was an enormous, capital intensive undertaking. Those sorts of infrastructure investments are best left to others. The best venture returns are those that come from investing very small amounts of money.
Harbus: What could you tell us about Google and the excitement around the company?
MM: I could tell you a lot, but then I would have to shoot you!
Harbus: Thank you for your time!