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OCTOBER 22, 2006
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The Building Boom
Is an asset price bubble building up in the real estate market? Flats in posh Mumbai areas sell at the rate of Rs 50,000-70,000 a sq. ft. and housing plots in Gurgaon are going for Rs 1 lakh a sq. yard. This may sound like music to those who have been clinging on to their assets, it portends danger to buyers. The high real estate prices keep the majority out of the housing market and make the dream of owning a house more distant.


The Learning Curve
India's investment in education-as a percentage of GDP-is lower than not just of countries in the West but also some of the emerging economies, including China. The percentage of population in the relevant age group enrolled in higher education too is the lowest among countries with which it must compete. Clearly, there is a need to scale up substantially the physical infrastructure and attract better faculty by offering market wages.
More Net Specials
Business Today,  October 8, 2006
 
 
Michael Moritz Partner, Partner/Sequoia Capital
"The Shrewder American Investors Are Pulling Back On Their India Investments"
 
"There is a common thread running through sequoia's successful investments and
the misses"

American investors might think India is an overheated market for venture capital, but with 35 of its portfolio companies having set up outposts in India, Sequoia Capital had little choice but to step out of its den in Silicon Valley and sniff out the opportunity. And to do that, Sequoia partnered with Sumir Chadha and K.P. Balaraj-founded WestBridge Capital Partners in May this year "because they know the country and business dynamics better than Sequoia ever would". Coming in alone, says Michael Moritz, Partner, Sequoia Capital, would be like lambs walking into the slaughter house.

Sequoia, through separate entities in the US, Israel and China, manages funds worth over $3.5 billion (Rs 16,100 crore). In India, having just closed a $400 million (Rs 1,840 crore) late-stage investment fund, they manage funds worth $750 million (Rs 3,450 crore). The new fund hopes to replicate in India the success that Sequoia has seen in late stage investment in the US. "There is a common thread running through Sequoia's successful investments (Yahoo!, Google, Apple), and a similar one running through the misses (Webvan, eToys)," says Moritz, a former Time reporter. The better investments, he says, are made from the place where the brain and the belly meet. The bad investments are those where the belly rules and the boring investments are the ones where the brain dominates. Moritz, 51, is hoping to increase Sequoia's portfolio in India with the first kind of investments, irrespective of sector. In an interview with Business Today's , Moritz talks about the venture capital business, his big bets and the India opportunity. Excerpts:

The Sequoia name has become a way to ensure business success. What does a business do to catch your attention?

We want to be an investor in a company for a very long time. Now, there is obviously opportunism in our business, but our very favourite investments are investments in companies where we think that 'Boy, if the sun shines and we get fortunate, we can be shareholders, we can still hold these shares 10 years from now'. So, some of the very best investments we have made that has certainly been the case. There are a couple of companies where we bought shares in California in the late 1980s, I still own all the shares that were mine 18 years later. So those are the best kind of companies where we invest fairly early in the evolution of the market and the chronology of the company.

For the benefit of companies looking to Sequoia for investment, tell us, what are you evaluating when a company makes a presentation to you?

It's a combination of three things. It's the size of the market opportunity, how special the product or service is that the company provides to its customers and the calibre of the founders and the management.

What kind of value can you add to the companies you invest in?

It varies by company, but we would always want the founders to look back and feel that one of the best decisions they made in the evolution of their company was to have Sequoia as their partner. This means, therefore, that we're helping them in ways that go beyond just writing a cheque. I don't want to (exaggerate) the extent of our contribution because I think all companies that prosper do so because of the founding management. But there are a variety of ways we can help-in recruiting more people, with relationships with other entities that they want to do business with, which as a small company they would have trouble doing. We think of ourselves as extensions of the company, while not confusing the difference between being an investor and management.

The venture capital business rewards bold, unconventional moves. What are your rules in the business?

The venture business, oddly enough, I think, is about not taking too many risks. That's a politically incorrect thing to say, it doesn't make for good headlines, but the idea is to eliminate as many risks as possible. Life is too short to live with risks. We want to be able to spot things that others either don't see or pooh-pooh. In the investment world, it doesn't pay to be where everyone is.

What is your opinion on the venture capital business today?

I think it's a fool's game. With the exception of a very short list, venture capital as a category has been a very disappointing place for most people to invest for a long period of time. And for some reason, I think there is a whole conspiracy around the venture business of people conspiring to fool investors and prospective investors into thinking that they are going to make a lot of money by being an investor in venture capital, while the history of the last 30 years shows that you will not unless you are with a very short list of firms.

Silicon Valley is once again dishing up a lot of money to technology start-ups. How is it different this time?

It is a new set of people who will lose money. It's the age old story and every time around brings a new parade of suckers.

Venture capital is an intensely competitive business today.

It's always been competitive, ever since I've been in it.

It was a smaller group back then...

That's what everybody says. I've never believed in this nostalgic look through the mirror. If you want to be the best in the business, it's a very competitive business because you've got to beat everybody else.

"The venture capital business, oddly enough, I think, is about not taking too many risks. Life is too short to live with risks"

How did you land up in the VC business? You used to be a journalist before.

In my first job, I worked with Time magazine for a few years. But I got bored and left and started a small publishing company. It was through this company that I got to know lots of people in Silicon Valley and I'd also been writing about the venture capital business. So I got interested, knocked on a few doors of people I'd come to know and knew a little bit from afar and respected and I joined Sequoia.

How did you convince Don Valentine, Sequoia's founder, to give you the job?

There are two schools of thought. One believes you have to come out of a particular mould to be in the venture capital business, you have to be a computer scientist; you have to work at Intel or Hewlett Packard. That is the school to which the majority subscribes. Another school says it is very hard to tell who would be a successful venture capitalist. Arthur Rock, a very well known early venture capitalist in America, had nothing in his background to suggest that he would have been a successful venture capitalist. Oddly enough, some of the most successful venture people of the '60s and '70s did not have the conventional background. And I think, Don, in many ways being an open-minded person, understood that. Being street smart and having common sense gets you a long way in the venture capital business.

Sequoia invested in Yahoo when it was just two Stanford grads working out of a trailer. What potential did you see in their company?

We felt we had been a little late in recognising the evolution of the internet. We were introduced to Jerry Yang and David Filo (Yahoo founders) by a friend of ours. It was pretty clear that if you were effectively operating the front door to the internet, it was a very strategic place to be in. That was the reason for the investment, knowing fully well that other people could open others doors around the rest of the internet.

Tell us about the big misses as well. Did you get caught up in the dotcom frenzy?

I've forgotten them all. I remember asking Tom Perkins that question, he was the founder of Kleiner Perkins (Editor's note: Another legendary Valley VC firm) and I was on the other side of the table... and his answer was, "That's when amnesia sets in!" We've made lots of mistakes and had lots of misses. The venture capital business is a very humbling business. Your firm can be associated with a lot of well-known companies and then for some reason you analyse everything and it doesn't work out. We were investors in Webvan and eToys and these were investments that didn't work and we lost a tremendous amount of money. We have learnt to lose money in a lot of different ways. We could probably write a book on how to lose money. But that's also in the early stage venture capital business where you are taking a fair amount of risk as well.

"We have learnt to lose money in a lot of different ways. We could probably write a book on how to lose money"

The Google investment happened during the dotcom boom. How did that come about?

Google was introduced to us by the founders of Yahoo. This sounds odd now, but no one knows how the world is going to evolve. Yahoo had always used search technology provided by other companies and they were contemplating a switch from their previous vendor but they were very apprehensive about switching to this little company called Google, where although they liked the technology, it didn't have any backing, it didn't have anyone behind it, they didn't know if the company was going to be around. The Yahoo people were very interested in having us as investors in the company and Google people were very interested in having Yahoo as a potential customer. That's how we ended up as early investors in Google.

How much is the $12.5 million investment in Google worth today?

I don't know. We own about 10 per cent of the company (Ed's note: At last count, Google's market cap was more than $120 billion, or Rs 5,52,000 crore).

Sequoia had a presence in India before it merged with WestBridge.

Not directly. One of the things that interested us so much about India was that so many of our companies, for all the predictable reasons, had wound up with a footing in India. Some of the footings were more than just purchase, but some of them were also very extensive. So, before we had the good fortune of connecting with WestBridge, there were about 35 companies that we had helped organise in California that already had operations of some sort in India.

Is it easier to convince investors today to invest in an India fund?

I think it has been. I think American investors today understand that a lot of money has rushed into India and the shrewder American investors are pulling back. The shrewdest investments and shrewdest investors in India will be sitting on their wallets. Because of their very justifiable concern that this is already a very overheated market.

How does India compare to other developing countries where you operate?

Well, besides the US, we are here, in China, and in Israel. People are more interested in India and China. I just spent a few days in China and there are obviously very big differences between the two countries, but there is obviously the similarity of two very large emerging economies in need or desiring lots of products and services which they don't have. But if I were younger today, I think, I might be in China or India and not in California.

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