MICHAEL MORITZ IS THE chairman of the venture capital firm Sequoia Capital. Before his venture career, he was a journalist and once worked at Time, where he was the San Francisco bureau chief. Moritz wrote an influential biography of Steve Jobs in 1984 and cowrote Going for Broke: The Chrysler Story. Of Moritz, Vanity Fair has said, “Michael Moritz is one of the only journalists to become a billionaire.” Moritz’s investments have included businesses such as Apple, Cisco, Flex, Google, Kayak, PayPal, Yahoo!, YouTube, and Zappos. In a Forbes interview, he once noted,
Every time we invest in a little company, it’s a battle against the odds. We’re always outgunned by companies that are far larger than we are who have threatened founders and us with extinction. It’s incredibly thrilling to prove everyone wrong. You can’t get a bigger rush than that.
His investing style is eclectic, covering a range of different types of businesses. Born in the United Kingdom, Moritz was knighted for his business and philanthropic contributions. He received a BA and MA in history from Christ Church, University of Oxford, and an MBA from the Wharton School of the University of Pennsylvania.
1. “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.”
We just love people who perhaps to others look unbackable. That has always been our leitmotif of doing business.
The best venture capitalists understand that success in the venture capital business is about buying mispriced convexity. Something “not looking like the world’s greatest idea” is actually helpful in finding convexity since uncertainty is the friend of the wise venture capitalist. In other words, it is uncertainty that causes others to misprice convexity. Without some elements that make the startup’s ambition seem a little crazy, the potential financial return is unlikely to be the type of grand slam needed to make the venture capitalist’s fund a success.
2. “Every single time you write a check, you expect, or pray depending on your inclination, for that investment to succeed.”
In order to harvest convexity, a venture capitalist must believe that each swing of the bat may potentially produce a grand slam—even though statistically about 30 percent of startups fail outright with no return of capital, and even more will survive but with poor outcomes. And many successful startups nearly crash into the ground before they soar. Of course, others just crash into the ground. But in the beginning, the venture capitalist must believe that all startups have the potential to succeed. As time passes, however, the venture capitalist must decide which startups deserve more attention and funds. These choices are neither simple nor easy. Deciding not to support a startup further is one of the most painful aspects of being a venture capitalist. Real people whom you get to know are impacted in a significant way by these decisions.
3. “While there is danger in the venture business in getting too far away from the crowd, it can often pay to be unconventional. Don Valentine, the founder of Sequoia Capital, told me to trust my instincts, which lets you avoid getting dragged into conventional thinking and trying to please others.”
In order to outperform any given market, it is mathematically true that you must not essentially be that market. This may seem like common sense, but you would be surprised how much herding happens since many people would rather fail conventionally than succeed unconventionally.
4. “If you have been around the start of success, it is far easier to recognize it again.”
The venture capitalist Bruce Dunlevie of Benchmark once said to me, “Pattern recognition is an essential skill in venture capital.” While the elements of success in the venture business do not repeat themselves precisely, they often “rhyme.” In evaluating companies, the successful venture capitalist will often see something that reminds them of patterns they have seen before. It might be the style, chemistry, or composition of the team or the nature of the business plan. Some things will be fundamentally different, but other things may be familiar. And while the pattern will be similar, something in what the team is doing will seem to break a rule in a significant way. Part of the pattern being recognized is a rule-breaking innovation of some kind that will drive new value. One of the best ways for a venture capitalist to become more skilled at pattern recognition is to actually be a founder or an early employee in a startup.
5. “There’s nothing more invigorating than being deeply involved with a small company and everybody’s betting against us.”
Great venture capitalists love the process of creating companies and more importantly creating customer value. Venture capital is a service business. Making others successful is the driving activity in the work. Finding vicarious joy in the success of others is essential.
6. “The very best companies are the ones where founders build the companies and stay with the companies for a very long time.”
The most successful founders have a passion for building a business. This passion is highly correlated with a desire not to flip the business for a quick financial profit. A venture capitalist can help convince founders to stay the course by allowing them to generate some reasonable liquidity to lower their risk and making efforts to increase their confidence.
7. “The venture capital partnership that invests small amounts of money judiciously is almost always going to outperform the venture capital partnership that tries, to use an ugly phrase in the business, ‘to put a lot of money to work.’ ”
At a certain point, the size of a fund works against performance. Emotional errors kick in when people have more to spend than they need or than their ideas require. Even worse, people can end up investing too many times, which can lead to a lack of focus. A top venture capital firm may hear thousands of pitches and invest in only eight to ten new companies a year (depending on the firm). A few outlier venture capital firms may make investments in twenty new startups a year, but that is not the norm.
8. “Five-year plans aren’t worth the ink cartridge they’re printed with.”
Great teams are able to respond to a world that changes in ways that cannot be foreseen. This is why venture capitalists spend so much on the people employed by the startup. A strong team of people means the startup itself has convexity. The ability to “steer” as conditions change is more valuable than the ability to create medium- and long-term plans.
9. “It takes a tremendously long time to build a company of value. In many cases, the best venture returns don’t happen in the private phase of the company; they happen in the time that the company is public. It takes a long time for sales to grow, and it takes a long time for true value to be achieved.”
People would be staggered at the length of time that we hold investments. It’s not uncommon for us to hold investments for ten years or more. It’s certainly not uncommon for the partners at Sequoia to own stock for fifteen or twenty years.
Most outsiders underestimate the importance of patience in venture capital. Building great companies takes time. Unfortunately, a few stories about relatively short-term payoffs from someone selling out for a big return have warped the views of many people about the time required to find success in the venture business. An overnight success can take many years to make happen.
10. “A downturn can be a very good time to build a company. The parvenus and the pretenders are gone. The only people who want to start a company in a time like this are the ones with the greatest conviction. 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.”
Howard Marks likes to say that business cycles are inevitable. The best time to be planting seeds is often when others are in a panic and depressed. Thinking countercyclically pays big dividends in business and not just in venture capital. People too often see the recent past and then extrapolate it into the future in positive and negative ways. Volatility is actually the friend of the investor with control over their emotions.
11. “My wife calls me the Imelda Marcos of books. As soon as a book enters our home it is guaranteed a permanent place in our lives. Because I have never been able to part with even one, they have gradually accumulated like sediment.”
The most effective way to learn is by making personal mistakes, since the experience is so direct and vivid. Because some mistakes are quite painful to make yourself and so you can learn faster, learning from the mistakes of others through observation and reading is also a good idea. Charlie Munger has been described as a book with legs sticking out. He believes that it is far better to learn vicariously when it comes to many of the more painful mistakes one can make in life. At one shareholder meeting, when describing Berkshire’s mistakes in the shoe business, Munger quoted Will Rogers: “There are three kinds of men. Some learn by reading. Some learn by observation. The rest of them must pee on the electric fence for themselves.”
12. “A chimpanzee could have been a successful Silicon Valley venture capitalist in 1986.”
I know there are millions of people around the world who have worked as hard and diligently as I have, and weirdly enough, like [former U.S. president] Jimmy Carter said years and years ago, “Life’s unfair.” I just happen to have been very fortunate.
Luck has way more to do with outcomes in life than most people care to admit. The benefits of luck compound as successful people attract other successful people. Adding to the bounty that luck can provide is the fact that being around other successful and skilled people makes you more skillful. If you happened to be lucky enough to be working as a venture capitalist in 1986 somewhere near Stanford, you very likely were the beneficiary of a massive tailwind that not only made people richer but more skilled. If you were that lucky but are not humble, you have not been paying attention. Are these people more skilled? Yes, because being lucky puts you in situations in which you acquire new skills. Luck feeds back on itself not only to create more luck, but also more skill.