Few venture capitalists in recent times can claim as hot a hand as Michael Moritz, partner at Sequoia Capital in Menlo Park, Calif. The former journalist, now in his 18th year at the outfit, was a key investor in Yahoo! (YHOO) in 1995. He hit pay dirt again with an investment in search phenom Google (GOOG), which recently went public in one of the largest initial public offerings (IPOs) in history.
Moritz has also missed big-time, most notably with Webvan Group, the defunct online grocery-delivery company. Having seen both success and failure, he's as good a person as any to ask about the mercurial process of innovation in Silicon Valley and the technology industry at large.
On the day before Google's recent up-and-down IPO, Moritz found time to talk with BusinessWeek Silicon Valley Bureau Chief Robert D. Hof. Thanks to a mandated quiet period, Moritz couldn't comment on Google, but that didn't stop his acid tongue. While he's confident about technology's future, he also worries that a resurgence of venture capital might endanger the fragile recovery. Following are edited excerpts from the interview:
Q: Innovation often seems so random, especially in Silicon Valley. Can it be managed in any real sense?
A: Our approach has always been very simple, which is to try not to manage innovation. The last thing you want to do is try to manage it. We prefer to just let the market manage innovation.
Q: What do you mean?
A: Many of the major companies have sprung from people pursuing their own interests. Look at the founders of Sun Microsystems (SUNW), the founders of Apple Computer (AAPL), the founders of Cisco Systems (CSCO), the founders of Yahoo!, the founders of Google -- all of these people were developing their own interests and backed into marketplaces.
In all of those cases, it was the satisfaction of personal curiosity colliding with a market current that was underappreciated. That might perhaps explain the randomness. There are so many companies where people developed a product to solve a problem that they were confronting and almost accidentally toppled into a market that was much larger than anybody had ever anticipated.
Q: Is there a way for entrepreneurs and venture capitalists to be a little more organized about opportunities?
A: Oh, I love the disorganization and the unpredictability. Why even try to judge whether it's good or bad? It just happens to be nothing more than a reflection of human nature. Remember ring tones? Somebody found it amusing, and today it's a $2 billion-a-year market.
Q: In Silicon Valley, companies often fail after having used what looks like a lot of human and financial resources, compared with doing the same work inside an existing company. How much of a problem is that?
A: At times, when there isn't much money in Silicon Valley, the Valley is much more efficient in winnowing out potential successes and failures than it is when there's a lot of money sloshing around. When a lot of money is around, you can absolutely guarantee that the inhabitants of the Valley will concoct incredibly wonderful ways to waste all the money -- and they will be endlessly inventive in discovering new ways to waste the money.
Q: A lot of people seem to be happy that venture investment is again on the rise. Are you?
A: The fundamental investment characteristics in the Valley are deteriorating. Caution is beginning to evaporate. Careless things are being done. You can hear the distant echoes of loony tunes. There's more money coming into the venture business again, and that's never good. On the whole, the venture business is a very bad investment.
Q: What do you mean?
A: The returns are very concentrated. For many investors, T-bills would be better than the venture business. In all the businesses that you and I know very well -- say, the personal-computer business -- the profits are concentrated in a handful of firms. I think that's true in the venture business. You don't want to be an investor in the 15th venture-capital firm any more than you want to be an investor in the 12th personal-computer company.
Q: A lot of large companies, from IBM (IBM) to Procter & Gamble (PG), say they're reaching out to outside firms for innovations, in hopes of tapping into the energy of more entrepreneurial companies. Do they seem serious to you?
A: I think they're full of good intentions and very well-meaning. It's very hard for little guys like us to make meaningful inroads into large corporations. But we're always happy to try. None of our little companies can afford to be self-sufficient islands. They need lots of partners.
The opportunity and the challenge of working with a large company is to avoid getting squashed or suffocated. Working with a large company can absolutely drain the resources of a little company. It's not because there's any malicious intent. It's just because they're very demanding.
Q: Some people worry about the future of Silicon Valley as a wellspring of innovation. What do you think?
A: Where else would you prefer to be? I don't want to sound too parochial, but it's very difficult to find anywhere where there's as much brewing as here -- certainly for an American investor. Silicon Valley is doing well if, in every five- or six-year period, we spawn two or three stand-alone, enduring, large companies. There is no other place in the world that does it.
Think of the number of people in Silicon Valley in 2004 who either have participated directly in or brushed up against success. And consider that population pool compared with 10 years ago or 25 years ago. The depth of experience in Silicon Valley today is greater than it has ever been. It's an enormous pool of capability that has been built up around the formation of companies.
Q: After all these years, has Sequoia changed how it approaches potential investments?
A: We're only as good as our next investment. Whether you're a large company or a small company or a venture-capital firm, if you begin to rest on your laurels, that's the day you start to decline.
Q: So you won't be resting on Google? That's a heck of a laurel.
A: We've had worse. We've sometimes rested on thorns.
Q: Has the Valley's style of risk-taking rubbed off on the rest of the business world?
A: I don't think so. I still get the impression that we live in this little pocket that's insulated from most other places, where the quirks and practices and idiosyncrasies of what happens here are viewed with a mixture of skepticism, envy, and disdain by people elsewhere.