Michael Moritz: Lessons from a Long-Ball Hitter
In 1984 a young British journalist named Michael Moritz wrote a short piece in Time magazine about the legendary venture capitalist Arthur Rock with the title "The Best Long-Ball Hitter Around."" Today, the 54-year-old Moritz is the guy who swats investing home runs as a partner with the Silicon Valley venture capital firm Sequoia Capital. Moritz joined the firm in 1986 after leaving Time (TWX) and writing a book about Apple (AAPL), The Little Kingdom: the Private Story of Apple Computer.
The deal that made Moritz's reputation as one of the top venture capitalists in the business came in 1999. That year he pushed Sequoia to make a $25 million co-investment with Kleiner Perkins in a little search company called Google (GOOG). When Google went public five years later in 2004, Sequoia's $12.5 million investment was worth just over $2 billion—160 times its original bet. Before then, Moritz had put himself on the map with investments in Yahoo (YHOO), eToys, and Flextronics (FLEX), among other successful Web startups. Since the Google deal, Moritz has maintained his slugging percentage, scoring another big win with his investment in PayPal, which eBay (EBAY) bought in 2002 for $1.5 billion.
Moritz typically shuns publicity. But in early February I met him at his office on Sand Hill Road, in the last office park on the lane that serves as home to the kingpins of venture capital. A secretary ushered me into a conference room, but when Moritz showed up he invited me to sit in his office.
Efficiency, Even While Eating
Moritz wore the standard business casual uniform of the Valley: striped dress shirt and slacks, with a sport coat hanging on the wall. He has a small and simple office, with a desk and a table with a few chairs, and a window overlooking the woods. An old and weathered notebook case rested on the table. On his desk sat an Apple (AAPL) iMac computer, an Apple laptop, and a BlackBerry (RIMM), all plugged into the wall. Having visited China seven times last year, Moritz needs to recharge his batteries when he returns to the Valley.
When reporters interview people over lunch, they often can't find enough time to eat. But Moritz was extremely efficient, downing a fruit plate and Cobb salad, even while picking out the eggs and bacon to set them to the side of the plate. As we discussed the history of Sequoia Capital, the state of Silicon Valley, and the future of investing, Moritz would stab a fork into a group of berries, stick them into his mouth, and gaze off into the distance, before offering up some quip or bit of insight.
Moritz's presence belies his firm's reputation for toughness. While Sequoia has made many bold bets over its 36-year history, it has also gained a reputation in some quarters for walking away from portfolio companies that fail to perform. As one head of an investment firm that invests in venture firms put it: "They take the portfolio out back and shoot it. They stop funding companies quickly if they are not working." Moritz calls the criticism "unfounded" and says there are several instances when Sequoia and its startups "soldiered forward together when times were very bleak."
Pivotal PowerPoint Presentation
Sequoia's hard-nosed nature was accidentally put on display last year when Moritz's firm put together a PowerPoint presentation detailing the coming economic downturn in stark terms. The 56-slide presentation advised companies to cut costs and become cash-flow-positive more quickly in order to avoid falling into a death spiral. Although the presentation leaked out on the Web, Moritz swears the leak was not intentional. "A couple of the CEOs asked us to send them the presentation to help them convince their management teams that this was the deal," says Moritz. "It was not a cynical attempt to spread the Sequoia name."
Even though Sequoia was early to ring the alarm bells about the weakening economy, Moritz says he remains optimistic. He is particularly excited about two recent investments he led. One was in digital camcorder maker Pure Digital Technologies, which he claims is the world's leading maker of digital camcorders, having shipped 1.5 million units last year. He is also bullish about another investment in Green Dot, which he says is a leader in prepaid credit cards. And contrary to word on the street, Moritz says Sequoia still invests in young seed-stage companies from time to time.
The day I met him, in fact, he said he was talking to a 20-year-old about investing $500,000 in an embryonic idea. (He wouldn't discuss the venture in detail.) "It's as easy for me to be excited today by the unknown 23-year-olds as I was in the past," he says. "Those sorts of encounters lift your spirits in imagining what is possible."
Here's an edited version of my interview with Moritz:
Can great companies be built in bad times?Some of that is true. In bitter and cold times only the brave are going to venture out into the cold and the lily-livered posers are going to stay tucked into their bed clothes. It makes life easier for us. The people we are meeting are the genuine article as opposed to the pretenders. The only people who venture out are on a mission, which is what you need.
What about Cisco (CSCO)? (Sequoia invested in Cisco two months after the 1987 stock market crash.)For us, Cisco is always the company we think of when we think about bad times. I had been here a couple of years. I was the guy who sat around the table and said nothing. The one thing I remember was the vociferousness with which they talked about the business. They had a mantra: "We network the networks."
Many investors had already passed on the opportunity. What people forget is that many companies were doing something similar: DEC, IBM (IBM), 3Com, and many startups. There were 20 companies.
So why did it succeed?They had a very good understanding of what the customer wanted. They didn't have to run any advertisements until Year Five. They had a very aggressive sales machine. John Morgridge, the CEO, had lived through some tough experiences. He had this wonderful mixture of experience and an avuncular calming presence and a taste for frugality. They didn't do anything extraneous. They outsourced manufacturing. It allowed them to ramp up quickly.
There's some talk about the dearth of innovation today. Is Silicon Valley dead?Things get overblown in the Valley. As the obituaries are currently being penned, those are overstated, too. Last time I checked Stanford hasn't stopped producing wonderful 23-year-old graduates. And Silicon Valley houses many companies with frustrated engineers. Good ideas and brilliant people will find us very willing to step out into the cold with them.
So what has changed?What has changed is that there are more smart people elsewhere. Good ideas spread more quickly.
Are there any benefits to building a business in a downturn?There's less frenzied money. There's more time to think. The hiring environment is a lot easier and the money goes a lot further.
Do you still do seed-stage deals?We do seed stage. Thirty percent of the companies we finance were incubated here. We are very selective. We are doing it with a few rather than a lot. My guess is more of it happens over the next few years because of the dearth of financing.
What about Google? Didn't they crack their business model during the downturn?The chilly aftermath of the Internet bubble was a big benefit to Google. It helped with hiring. It made it difficult for startups to get financed. Its larger competition had to tend to the home fires. There was not a clamor to go public so it helped them stay out of the crosshairs of the competition.
Do you think the Valley will help lift us out of the recession?If certain Valley companies can come up with enhancements to U.S. productivity, that is a benefit. That is the Valley's major contribution. That's been a bigger boon than the jobs directly associated with the Valley.
I don't think anyone should expect Silicon Valley to create tens of thousands of manufacturing jobs. It could create lots of service-oriented jobs. The Valley can't help a displaced auto worker or an uneducated 23-year-old.