This week we had the extraordinary opportunity to meet and talk with Sir Michael Moritz, Chairman of Sequoia Capital, who was at Bocconi to talk at the Lectio Inauguralis Rodolfo De Benedetti Chair in Entrepreneurship.
Sir Moritz gave us a speech for about an hour, here we summarize the contents of our meeting.
BSIC: For the success of a startup, do you believe it is more important to have an innovative idea or the right person? I imagine you have had prior experience of working with someone with no track records as well as more experienced entrepreneurs, could you share the positive and negative aspects of working with either of those sides?
MM: It is the power of the idea connected to extraordinary individuals that give birth to the most interesting companies. I think the two are connected: extremely interesting people tend to have the very best ideas, and some of those individuals have great business instinct and commercial drive. The choice is between helping somebody who is young but has an imaginative idea and having the opportunity to partner with someone that has a lot of experience and knows how to manage people and hundreds of million in revenue. The second person might be a great part of the management team of a startup, but if/she does not have the creative spot his/her business will not go very far.
All the investments Sequoia made during a long period are heavily focused on young people that latched onto something that strongly interested them. For example, one is Airbnb: we first met the founders and they were only three people, but they had a new way of thinking about lodging. The idea of Airbnb would have never stroke an executive manager within the hotel business, because it is so unorthodox, against any customs. But these three people had not worked in the hotel industry and it is because they were so far from the business that they were allowed to begin a company that will become standalone for a very long time.
Having no management experience does not matter: you can hire the right men.
BSIC: What qualities do you think a good Venture Capitalist (or a VC employee) needs to have? What kind of background would you recommend? And, more interestingly, how much of art and how much of science is there in this job?
MM: If we are talking about people who became successful in the VC business for a long period, I think that the majority of them tend to have technical backgrounds. I am a former journalist, and the majority of people told me that I had not a technical background when I first tried to join the VC business; I am not so confident that I know what background works in the VC business, there is not a standard recipe.
But the industry requires you to make decisions without enough information, and being a journalist helped me to get familiar with the topics I was unfamiliar with. After the investment decision, the company you invested in is going to be around for ten-fifteen years: only when the company is in the growth phase and the key people are recruited to fill the roles, our activity level decreases.
If you are in the VC business, you need to have balanced skills, for both the identification of the investments and the assistance to the companies.
BSIC: Recently, the VC Marc Andreesen claimed that the The Sarbanes Oxley Act and its regulatory requirements are killing the early growth companies IPO, delaying them until the companies are big enough to pay for a number of lawyers and accountants. Despite the current boom in tech IPO, Andreesen’s claims seem to be consistent with the IPO valuations and with the number of billion dollar private companies. What is your view?
MM: It is definitely true that companies in US have taken longer to become public in the last fifteen year, but I do not think it matters. Raise money and allow shareholders to sell their stakes are the main reasons to go public: I think that both can be achieved in private markets if you have a good company. There are a lot of benefits for companies to stay private for a longer period: 1. You stay out of the radar screen of the big companies that can kill you: one of the reason behind Google’s success is that they remained private for a much longer than everybody expected, as it was not under the radar screen of Microsoft. 2. There is a less liquid market for employees, as you can give them shares at a lower price.
Facebook went public actually two years before its IPO: any kind of institutional investors bought stakes in Facebook when it was still private: a company can do privately what can do publicly.
There are many CEOs in US that do not want to be the head of a public company: first, because of the publicity, second because everything is scrutinized closely, and last because the moral of the employees is heavily influenced by the behavior of the stock price.
BSIC: Some months ago Sequoia revealed an internal memo written by Roelof Botha about Youtube, one of the most successful investment of your firm. Would you define the memo as a standard example of your internal communications?
MM: I would define it as a typical internal communication. We nearly missed the investment on Youtube: There had been a bunch of photo-sharing services before Youtube had started, the most successful was Flickr that Yahoo! had bought for $25M, but a similar amount was not enough for us as investment firm. So we had more negotiations with the founders, and deal was about not to happen. I remember that Andrew Grove, one of the most important people in Intel, gave a speech in which he said that there is nothing more mesmerizing to people than video: with Youtube we saw that happening.
BSIC: Apart from the unique elements of a company, does Sequoia use a macro approach in order to identify potentially fast-growing sectors or businesses?
MM: We try not to have our head in the sand: it is easy to lose the sight of what is happening around you. What we do always in the VC business is to keep ourselves acquainted with the things that are happening around us so we do not have blind eyes. For example, it would have been very easy in the earlier 1990s to miss the internet: everyone was investing in semiconductor, software, PC and network companies. But you cannot invest in the trends: you have to invest in people, and what we do is trying to find the intersection between imaginative people and fast-growing trends.
BSIC: Throughout the course of your career, have you experienced significant shifts of opinion and paradigms? How did these come about and what has been their effect?
MM: There are always the rollercoasters: I started in 1986, the world fell apart in 1987 and during the early 1990s there was little money around the VC business. Then we had that huge spike of interest at the end of the century and from 2001 to 2005 everybody was under the desk trying to get out of the mess he created, while the last couple of years the business have been very good.
There are always shifts and one of the good things about being in the VC industry is that even if your body gets older you have to stay youthful in spirit, because if you do not do that you cannot think about what is going to happen.
BSIC: Have you ever personally come up with an innovative idea?
MM: Sequoia started its business in China twelve years ago, and when we went there everyone was saying that we were going to fail: now our Chinese business is as important as our American business. We also started a long-term asset management business, which is very different from our business as we invest in liquid and illiquid assets all around the world, and even this time none thought we would succeed. We take risks ourselves, we build things ourselves, and try to make them become successful.
BSIC: Do you think that the Silicon Valley culture is unique and not exportable?
MM: Sadly, yes. The general environment does not welcome small companies and innovation with the same degree that you find in Silicon Valley, even in the rest of America. Another important thing is that, even if in Europe there are spectacular universities like this one, the density of universities with deep technical strengths is unique. Third, proximity: there are examples on campus of people who are running companies and were student just some year before you. Steve Jobs had the help of Bill Hewlett in the first years of Apple and in some way he was returning the favor when he offered help to Jerry Yang of Yahoo! some years ago: all the people you need are just one hour away from you.
BSIC: Do you think it is possible to replicate the Silicon Valley environment?
MM: We certainly can, but usually who makes this question is forgetting an important thing: how long it took to build Silicon Valley. It started in the late 19th century, and nothing much happened for a long time: Stanford was founded in 1885, the first companies started before World War II and the aerospace companies came in California during the war. The semiconductor companies moved in the 1950s: those are the building blocks. That is sixty years ago! When you see the layers of the Grand Canyon: that is Silicon Valley.
If someone wants to transplant it, he will have to be very patient. The good news is that the internet is so powerful that today in any part of the world anybody has the same tools they have in Silicon Valley to start a company. That is the biggest opportunity of your generation.