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Interview: Michael Moritz of Sequoia Capital
3 October 2001

SURVEY - FT-IT: Confidence amid the risks: INTERVIEW: MICHAEL MORITZ: US-based Sequoia Capital takes pride in its hands-on approach to nurturing start-ups.

Welsh-born Michael Moritz pre-empted his career as one of the technology industry's most successful venture capitalists when, as a young reporter at Time Magazine, he made the unprecedented suggestion that the magazine's annual Man of The Year Award for 1982 should go neither to man nor woman, but to the computer.

Mr Moritz's turned his aptitude for spotting the Next Big Thing and turning it into gold when he joined Sequoia Capital, the Silicon Valley venture capital company, in 1986. Today, his portfolio includes some of the most creative and resilient names in the high-tech sector, from the number one internet portal Yahoo to Google, a leading search engine company.

Mr Moritz's discovery of Yahoo in particular soon became legend around Silicon Valley: for a total investment of less than Dollars 2m, Sequoia received nearly a third of the company, which became worth Dollars 57.6m a year later when Yahoo's stock made its debut on the Nasdaq at Dollars 13 a share.

His interest in technology was sparked during his tenure as bureau chief at Time's San Francisco office at the end of the 1970s, when companies such as Apple, Genentech and Microsoft were just beginning. He then went on to found his own technology publishing company, Technologic Partners.

No illusions

The Oxford and Wharton graduate's decision to join the world of VC was highly premeditated. "I was under no illusion that the venture capital business would be an easy business," he says. "But if I was going to be in the business, it made sense to be with a market-leading partnership." So he drew up a hit-list of the top four firms and decided he would either join one of them or forget about the VC business altogether.

Sequoia occupies a modest building at one end of the Sand Hill Road, the epicentre of Silicon Valley's VC world. The company was founded in 1972 by Donald Valentine, an original investor in Apple and Oracle and vice chairman of Cisco.

Along with many of its neighbours and competitors down the street, the privately-held company with interests in the components, systems, software and services sectors, runs a tight, close-knit operation with 30 employees. One of 16 partners, Mr Moritz invests in 16 companies.

"When I joined the venture capital business it wasn't very big. It still isn't today. The top 25 venture capital firms have fewer employees than Morgan Stanley would hire in a bad summer," he says.

Widely considered to be one of the top VC firms alongside Kleiner Perkins Caufield & Byer and Benchmark Capital, Sequoia prides itself on its hands-on approach to nurturing start-ups. "We like to establish the DNA of a company within the first eight or nine months," says Mr Moritz, aged 47.

Working with pairs of Stanford students, such as Yahoo's David Filo and Jerry Yang and Google's Sergey Brin and Larry Page, has involved anything from hiring photocopiers to recruiting key staff and board members. The firm also runs an "Entrepreneur In Residence" programme, which gives "the smartest people" who come to Sequoia with a promising business idea, "squatters' privileges," such as office-space, and expertise.

Typically, Sequoia Capital holds a 25-50 per cent stake in an early stage company, depending on the level of the venture capital company's contribution to the new start-up. "We have to own enough to want to care," says Mr Moritz.

In the case of companies, such as networking systems provider RedBack Networks where Sequoia's intellectual contribution included coming up with a skeleton business plan on behalf of the entrepreneurs, Sequoia's ownership will usually err on the greater side. "It makes no sense to own 2 per cent of a company if we're going to have to work that hard," he says.

Despite its hefty investments in young companies, Sequoia almost always maintains minority ownership of any start-up. "In Europe, people think that holding a majority stake means you control the company," says Mr Moritz. "But you're far better off being a minority shareholder in a company run by clever people than being a majority stakeholder in a company run by the slow-witted."

Even the smartest entrepreneurs and the wiliest VCs have not been able to stem the technology industry backlash of the last 18 months. According to a recent PricewaterhouseCoopers MoneyTree survey, funding for venture-financed companies as a whole fell to Dollars 8.2bn during the second quarter, from Dollars 10.4bn in the previous quarter.

A number of Sequoia-backed companies, such as the online grocer WebVan and internet toy vendor eToys (both formerly of Mr Moritz's portfolio) have not survived. "The venture capital business is a very humbling business," he admits.

While the partners might do what they can to rescue a floundering start-up, from shuffling the management to redirecting the sales force, Mr Moritz concedes that at some point you have to let go. "If it looks like a company is heading for oblivion, we're not going to stand in the way of nature."

Mr Moritz does not think the overall failure rate has drastically increased in recent months. "Given the degree of risk, there are always a fair number of fatalities in this business."

'Nutty ideas'

He remains upbeat about the investment climate. "Thank goodness the rate at which nutty ideas arrive in our inboxes has declined," he says, with reference to the firm's policy of reading every single proposal that gets sent in.

Notwithstanding the political turmoil, the company recently expanded into Israel. "In Israel we can carve out a market leadership. We couldn't do this in Europe because there isn't a significant enough deal flow."

Mr Moritz is confident about the direction in which Sequoia Capital is heading, but as every wise venture capitalist knows, the element of risk is high: "We are only as good as our next investment," he says.