The Mercury News Interview: Sequioa's Michael Moritz on long shots and how he picks companies

Jun 05, 2009 (San Jose Mercury News - McClatchy-Tribune Information Services via COMTEX) -- PYPL | Quote | Chart | News | PowerRating -- One of the world's pre-eminent venture capitalists, Michael Moritz of Sequioa Capital, has picked winners like Flextronics, Cisco Systems, Yahoo, PayPal and Google by focusing on small teams or individuals that on first glance might appear to be unfundable. In a rare interview, Moritz spoke with the Mercury News about one of his latest long-shots, a call-center company founded in India, how he picks companies to back, and the silver lining in the financial meltdown. Following is an edited transcript.

Q How has the financial crisis reshaped the economy and affected the way you pick winners?

A I think tougher circumstances just serve to shine a brighter light on everything. The manner in which we pursue the business hasn't changed.

Q Has it affected the way you view your portfolio companies?

A I think the managements of companies all across America understand that the sooner they don't have to rely on the kindness of strangers to support their operations, the better off they are going to be. Again, I don't think that is a startling new insight. It's just when money is harder to get and credit is tight and investors are less giddy, I think companies and managements become much more disciplined. It means the people who start companies in times like these are people who are genuinely interested in starting companies. You have to be very determined to venture out into atmospheric circumstances like the ones that

we've been through in the past nine months. Which means that the pretenders and posers and people who are really much more interested, if they are honest about it, in becoming rich than starting a company -- those sorts of people will stay on the sidelines and wait for the weather to improve.

Q The determined entrepreneurs, the ones who embrace frugality, those are the folks you have always invested in.

A We just love them. Particularly people who perhaps to others look unbackable. That has always been our leitmotif of doing business.

Q So to get Sequoia's backing a company should look like no one else will fund them but have the world's greatest idea?

A When we help organize one of these companies at the beginning, it never looks like the world's greatest idea. I think it's the marketing and PR department that rewrites history and tells you that it was always the world's greatest idea. What they don't say is that at the very beginning there was great uncertainty and a great lack of clarity. It was murky and confused and messy circumstances. I can't think of any investment that we made in a startup company or with just a few people where things didn't get worse before they got better.

Q That may be true but you still have an uncommon knack for picking winners. Ten years ago you and Ram Shriram invested in a small startup with lots of competition and no business model. Today that company is Google and you and Shriram are invested in a company that was founded in India called 24/7 Customer. From the outside this appears to be a glorified contact center. What do you see in it?

A For many years in the '90s, people were puzzled about why I invested in a company called Flextronics, which is a manufacturing-services company. The commonly received wisdom was that this is not a fruitful place to invest for a variety of reasons. As circumstances played out, that entire industry blossomed. We financed 24/7 very much based on the premise that the need for customer service was only going to grow and the ability to provide it from distant locations all around the clock as the Internet connected everyone and communications improved -- that was only going to grow.

Q Why this particular company? There are lots of contact-center companies all over the world.

A I think in this case as with others we were enamored by the sense of purpose that P.V. Kannan, the founder and CEO, had about the company. We are enormous believers in the ability of an individual or a few individuals to not just build companies but to provide either products or services that others haven't really done before.

Q Is part of how you pick winners, taking a read on an individual and deciding "I believe in this person?"

A I have always felt that the very best companies are the ones where founders build the companies and stay with the companies for a very long time. There is nothing that beats that. And P.V. always struck us as one of those people.

Q How did you find 24/7?

A P.V. had been referred by a friend. We hadn't financed it right then but we liked him a lot and told him to stay in touch. Then I bumped into him on an airplane going to London. We started to talk.

Q Sequoia famously invested in Cisco two months after the crash of 1987. Have you found a new Cisco following the current financial debacle?

A We will find that out seven or eight years from now. We have been busy ever since the world fell apart last year continuing to make investments, here and elsewhere. I will offer you one snapshot of what is possible in the times of recession. There's a company that we invested in during the last downturn. A company called Pure Digital that makes Flip video cameras. We financed that company when it was two or three people, when others were somewhat skeptical about the proposition. And oddly enough, here, right in the worst recession that any of us have ever encountered, it was just very successfully bought by, of all companies, Cisco Systems. The sale actually closed in the past few weeks.

Q Has the financial calamity in some ways made your job easier?

A I think it has because it gets rid of all the riffraff. There isn't as much chaff in the air. There is more time to be thoughtful. You don't spend your day reacting to all sorts of fruitless entreaties. So to some extent it is easier. It is easier to hire and find places to locate companies and in some respects also it is easier to get customers. Oddly enough in recessionary times, customers are prepared to take more risk with a young company if they believe that that company offers them a tremendous advantage that will help them become more efficient or lower their costs.

Contact Elise Ackerman at eackerman@mercurynews.com or (408) 271-3774.

Michael moritz

Age: 54

Birthplace: Cardiff, Wales

Position: Venture capitalist at Sequoia Capital

Previous jobs: Silicon Valley bureau chief, Time magazine; founder of Technologic Partners

Education: Master"s degree (history), University of Oxford, Christ Church.

Family: Married; two children

Residence: San Francisco

Other interests: Painting, road bikes

Five Things To Know About Michael Moritz

1. He wrote "The Little Kingdom," the first book about Apple.

2. Companies nurtured by Sequoia Capital currently make up more than 16 percent of the value of the Nasdaq.

3. Famously frugal, Moritz once asked Jerry Yang and David Filo, cofounders of Yahoo, to choose between paper clips and staples.

4. He believes a sizable gas tax would be good for the U.S. economy.

5. He says the best ideas he turned down are Netflix and Slingbox.

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