Silicon Valley 4.0 Sessions

Following is an excerpt from one of the sessions at Garage’s Silicon Valley 4.0 conference. To read comments from reader’s, please visit Always On. Another session, Why VCs Love Young Blood, is also available.

For VCs, Success Is Staying Awake

Michael Moritz of Sequoia Capital and Eric Schmidt of Google were asked about the relationship between “The Venture Capitalist and the CEO”at the Silicon Valley 4.0 conference by moderator Guy Kawasaki, managing director of Garage Technology Ventures. In this segment, they discuss how Sequoia’s investment in Yahoo led to Google, and the evolutionary method of technology investing.

Kawasaki: When we originally came up with the idea for having CEOs and venture capitalists, we wanted to do it in the newly-wed format, with three CEOs and then we’d ask them a question like ”Who’s the most valuable board member?’ And then we would bring back the VC and ask them the same question and compare the answers. But we couldn’t get any CEOs or VCs to agree to this format. So we focused on Sequoia and Google as the most visible possible combination. First, could both of you just introduce your backgrounds?

Moritz: I’m a partner with Sequoia Capital, and we’ve just been investing up and down the Peninsula for the last 25 years, just trying to invest in people coming off of the Stanford campus. We decided that actually it’s a fairly good business proposition, to be prepared to pay those excessive parking fines that you always get when you visit the Stanford campus, in exchange for purchasing Series A shares in a company of a kind that comes off the Stanford campus. So that’s our business practice.

Schmidt: I’m a scientist who’s classically trained in Unix but nobody uses Unix anymore, they use Linux. So I became a businessman.

Kawasaki: That’s your background? Can’t you talk about Sun or Novell?

Schmidt: Well, I’m a businessman now, but I used to be a computer scientist.

Moritz: He went straight.

Kawasaki: Mike, if you talk to many VCs today on Sand Hill Road, they all say ”Oh, we love to do early-stage deals. We love two guys in a garage, two gals in a garage. We like to work with a company. But as long as they have a proven team, proven technology and proven traction...’.

Moritz: And they’re publicly traded.

Kawasaki: And they’re publicly traded and doing $100 million and they have $50 million gross margin, that’s a Series A deal. But by marked contrast, Sequoia has proven its ability and willingness to pick companies that–I got to admit, looking back on some of your investments, I would have said ”Wow, does the world need another search engine?’

So other than the Sequoia theory of investing in companies that have five letters in their name–in terms of Yahoo and Google and Cisco and Apple–can you explain the Sequoia track record? What’s the Sequoia secret?

Moritz: I don’t think there is much of a secret, beyond the fact that our business is a lot more straightforward than everybody always assumes. It’s like any successful company or enterprise, there isn’t one secret, there isn’t one big mystery. When you build a nice, successful, enduring company, that company is the offshoot of a bazillion little things done well or relatively well or possibly or adequately for a very long period of time. That same thing is true whether you’re in a company, or in a service business, or in the venture capital business.

On the whole we’ve had the incredible benefit of having been investors in a whole slew of companies over the years. And if you’re an investor and you remain awake and alert to the possibilities of tomorrow, those companies inevitably wind up as lamplighters that illuminate the future.

My partner, Don Valentine, who started Sequoia, offered this example very frequently. This is way before I was at Sequoia, but Don was in 1977 or so an investor in Apple Computer. And it was a fairly natural progression, if you’re an investor in Apple Computer, to knowing what the shortcomings were to using cassette tape as a storage mechanism for personal computers in the late 1970s, to understanding the implications of what disk drives could do for personal computers.

So Sequoia went ahead and invested in a couple of disk drive companies. And if you invest in a disk drive company, why, you’re alert to the importance of the magnetic heads inside a drive company, so you invest in those. And if you’re an investor in a PC company and disk drive company, you knew you had to have software running on top of it, so you went off and invested in a software company like Electronic Arts. And once you had your PC software enabled all over the place, you kind of understood that you needed to connect the computers, so you invested in an Ethernet company like 3Com. 3Com in turn led to Cisco.

So all we’re trying to do, in a way, is stay awake. Staying awake is probably the secret in the venture capital business. That’s all you need to do, to be fortunate enough to be an investor in a company like Google–stay awake and inevitably it will illuminate the new market horizons and segments that are opening up. I think that’s all we’ve done for 25 or 30 years, we just stayed awake.

Kawasaki: But something like Google specifically–two grad students show up and they say they’re going to build a better search engine by counting the links to a page. This was when there was already AltaVista, there were all these other things out there. So no, this is not a proven team, there was no proven traction, there was no proven technology–besides that, it’s perfect. So what got into your brain to invest?

Moritz: Well, we had a big advantage, that Larry Page and Sergey Brin, the cofounders of Google, had originally been introduced to us by a guy called David Filo, who is one of the cofounders of Yahoo. David had liked Larry and Sergey, knew them from Stanford, was trying to help them. And maybe in 1996 or so, both of them were still working on some thesis project at Stanford and had come by and visited. We had a nice sort of inconclusive meeting and they disappeared and we didn’t hear anything more for a couple of years. Then word got around that they were thinking about starting a company.

The Yahoo guys were very encouraging, thinking that it would be beneficial to everybody if we were to become investors in Google, because search, and having a healthy panoply of different search vendors, was a very important thing for Yahoo. Yahoo had used AltaVista, Yahoo had used OpenText, they’d used Inktomi. They were interested in having a really fertile field of healthy suppliers from which to pick. And it was pretty obvious, too, even a few years ago, that along with mail, finding stuff on the Internet–which was part of the original policy of the Yahoo investment that we made–was going to be an ever more important part of the business.

So the Yahoo investment acted as a lamplighter. David and Jerry were extremely helpful and supportive and encouraging us to become partners with Larry and Sergey, and one thing led to another.

Audience Question: I have a question for Mike. Let me get this straight, the PC is connected to the disk drive, the disk drive is connected to the magnetic head, the magnetic head is connected to the modem, the modem is connected to the software, and–I’m going to make this leap here–that the software is connected to the Internet. What do you think is next? What things get you excited now?

Moritz: Internet-connected diapers.

Audience Question: You don’t need any help with those, you know that right away. But what’s the thing you’re interested in, or that you think is too hyped, or maybe something that’s hyped that you’re still interested in?

Moritz: Because of all the hype surrounding the venture business, everyone feels that people like us invest in revolutionary things. It’s unfashionable to say it, but we tend to invest in–and where you make really wonderful amounts of money [is in]–evolutionary things rather than revolutionary things.

So the sorts of things we’re investing in today may well wind up being awfully mundane, but they won’t seem very exciting to you. We’re working on some next generation storage companies, the next generation communication systems companies, some wireless companies, some second wind Internet investments. All sort of quiet and small and below the radar. Who knows if any of them are going to flourish. But I wouldn’t point you to any company in our portfolio, the Kleiner Perkins portfolio or some of the other better known venture firms where you would say ”This little company of 12 people is the next great one.’

Schmidt: It seems to me that one of the exercises to do, is try to figure out what is in fact growing quickly. Not what the press says is growing quickly, or the venture capitalists or the entrepreneurs or the CEOs. But try to figure out what’s happening very quickly. And in wireless, 802.11b is happening very quickly. Linux deployment is happening very quickly. Internet adoption, especially outside of the U.S., is happening very quickly. Various things involving imaging and digital photography are happening very quickly. Because those things grow so quickly, they tend to create interesting new spaces that you can exploit. It’s much easier to ride one of those waves than to create your own completely distinct one.

Also read Why VCs Love Young Blood