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"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 Shivani Lath, 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.
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"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.
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"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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