Much Ventured, Much Gained

Born in 1954 in Wales to Jewish refugees from Nazi Germany, Michael Moritz attended Howardian High School in Cardiff and studied history at Christ Church, Oxford. After college, he moved to the United States, getting an MBA from Wharton and then working as a reporter for Time. In 1984, he published an early history of Apple Computer, and in 1986, he joined the Silicon Valley venture capital firm Sequoia Capital. Over the past three decades, he has been an early stage investor in an extraordinary string of companies, including Cisco, Google, Kayak, LinkedIn, PayPal, WhatsApp, Yahoo, Zappos, and many others. He has pledged to give away the majority of his fortune and has already donated hundreds of millions of dollars to various educational institutions. Foreign Affairs editor Gideon Rose spoke to him about entrepreneurship in his office in late October.

You’ve been as successful as any venture capitalist in history. What are the qualities you look for in a start-up? Remarkable people on a mission that is not widely recognized by others.

Has that changed over time, or are you looking for the same things now that you looked for 25 years ago? It’s exactly the same as 25 years ago, with the one big exception that there are far more opportunities today than there were a quarter of a century ago, because of the digitization of everything.

Most start-ups and most entrepreneurs fail, and only a tiny handful become giant successes. Are there actual, predictable differences that separate the successes from the failures, or is it just a question of luck and timing? Companies have to get the timing right, because everybody knows what happens if a company gets started years before a market develops or after too many others have sought to exploit a similar opportunity. So timing is clearly a very important part.

When we make extremely early stage investments—really, really early, when it’s perhaps one or two people with an embryonic idea, and we invest a small amount of money, maybe $250,000 or $500,000—the mortality rate of those sorts of endeavors is very different from where we commit more serious amounts of money, say, from $2 million to $6 million. As the size of the investment increases, the mortality rate decreases, because there’s more certainty associated with it.

Over the years, we’ve had our share of bloody noses and made some terrible mistakes, either companies that we invested in or companies that we should have invested in but chose not to. But we have a reasonably decent record of not losing gobs of money investing in companies that are past a very embryonic stage.

How about the great successes? Do you know from the very beginning, when you first hear the pitch, that a Google is going to be a Google? No. It’s the PR people and the marketers and the revisionists who proclaim that everything was obvious from day one. On day one, nothing is obvious, because all you’re doing is trying to concentrate on getting through the first six months and surviving for the first year. Sequoia invested very early on in Apple, but I won’t talk about that, because Apple had two different incarnations. It was a public company during its incredible rebirth, and that portion was well after the venture stage. But I can talk about Cisco, or Yahoo, or Google, or PayPal, or Flextronics, or YouTube—any number of those sorts of companies. And if we or the founders are honest about what we thought was possible on day one . . . I think collectively we have a wonderful ability to underestimate the potential of a company that becomes great. And we do that extremely consistently.

We invested in Cisco towards the end of 1986, and never in a million years, when we met with the founding team—which was six or seven or eight people at the time—did we ever dream that that company a decade later would be worth $100 billion.

When we invested in Google, the predecessors of the Twitterati were very busy saying that it was far too late to invest in a search company, there were any number of search companies around, that market was already spoken for. There were many naysayers. And certainly, the first 12 months of Google were not a cakewalk, because the company didn’t start off in the business that it eventually tapped. At first, it went in a different direction, which was selling its technology—selling licenses for its search engines to larger Internet properties and to corporations. And that was an extremely difficult market. Cash was going out of the window at a feral rate during the first six, seven months. And then, very ingeniously, Larry [Page] and Sergey [Brin] and others fastened on a model that they had seen this other company, Overture, develop, which was ranked advertisements. They saw how it could be improved and enhanced and made it their own, and that transformed the business.

I think the only thing that we really understood with great clarity in the beginning—whatever it was, 1999—was that the need for search on the Internet was only going to go in one direction. We’d been investors in Yahoo. We knew about the proliferation of more and more sources of content that would need search. We understood that. But if you’d said that Google would at some point be more valuable than Microsoft, or that it would become as recognized around the world as Coca-Cola or Nike, we would have thought that was dreaming the impossible dream.

Did you imagine WhatsApp would be as big as it became? I think it was easier to see that for those who traveled overseas. If you looked at WhatsApp in America, it was very difficult to imagine how popular this was. But I remember going to India fairly soon after we’d made the Whats-App investment, and I noticed how prevalent it was there. We also understood when we invested that it was the best of breed for this new form of SMS, and that these communications networks, if they struck a chord, could grow at extraordinary rates. We did not anticipate the scale of the sale to Facebook. Nobody did. But we’d watched e-mail and the messaging apps and Skype and all these other communication applications over, you know, 25 years, and we’d seen what was going on in China, so we had a reasonable sense of what would happen.

What are the most important qualities for an entrepreneur to have? Clarity of thought. The ability to communicate clearly. A great sense of mission. A massive willingness to persevere. A willingness to make painful decisions. Extraordinary energy. And a belief that he or she has embarked on their life’s work. Those are the hallmarks of the truly wonderful entrepreneurs behind the handful of fantastic companies.

There are lots of other virtues of entrepreneurs for companies that are nice companies, that everybody would be proud to be associated with, but that aren’t up in the stratosphere, where only a few companies orbit.

Economists such as Schumpeter argue that entrepreneurship is crucial not just for individuals and firms but for the broader economy as a whole—that it’s the engine of dynamism and innovation. Do you think that’s true? Oh, clearly. And [its effect is] not just on the economy. It’s on the way people live, work, entertain themselves, travel. There isn’t an aspect of human life that technological entrepreneurialism doesn’t touch.

Is technological entrepreneurialism different in some significant way from entrepreneurialism in other sectors of the economy? I think it’s very hard today to detach any form of entrepreneurial activity from technology, because whatever business you start is launched on some form of technology. You may just want to start a small bakery, but you’re buying really good equipment, you’re using software to run your business, you’ve probably got a website.

Today, we pigeonhole technology and associate it with the sorts of things that come out of Silicon Valley. But we forget about looms and steel furnaces and automobile assembly lines and the telegraph and the refrigerator and the washing machine and the airplane and all these other things. You could make the argument that nothing happened in the universe until around 1725, 1750, and then all hell broke loose with the arrival of technology. And the speed has only increased since then.

What is the connection, if any, between entrepreneurship and innovation? Rupert Murdoch puts it well. If you ask him about his company, which has been extremely entrepreneurial, he says his company has its roots in intuition, innovation, and opportunism. I think that’s as good and succinct a definition of entrepreneurial activity as you’re going to find anywhere. That’s the hallmark of most of these companies. Everybody knows the stories about Steve Jobs visiting Xerox and seeing something and thinking that he was going to be able to do it better than Xerox, or Bill Gates fastening on an opportunity to sell IBM an operating system he didn’t even own, or the Google guys jumping on the possibilities that had been illustrated by Overture.

What about the role of the state in innovation? That’s often underplayed in some of the Silicon Valley narratives. What people always forget in the ritual whining and moaning of the technology industry about the intrusion of the state and regulation and the endless red tape associated with doing things with the government is the effect of the state on the university system, particularly how much of the imaginative spark kindled in universities actually rests on programs that (perhaps unbeknownst to the participants) are financed in whole or in part by government. I think that’s where government has played a huge role in the creation of Silicon Valley—because of Stanford, because of Berkeley, because of Caltech, because of some of these other universities.

So the state has a major role to play, not so much in directly driving innovation and technology but in providing for education and basic research? Absolutely. I think the state’s role in the evolution of technology is best aimed at fueling adventures of the mind into the impossible reaches. That is very long range, and it’s the sort of thing that almost no companies have the wherewithal to contemplate.

You’ve increasingly been investing on a truly global scale—in China, in India, in Israel, even in Europe. The world has changed dramatically in 30 years. The most imaginative entrepreneurial people in the world used to have to come to Silicon Valley. Now the U.S. share of the creation of fresh, new technology value is declining. That’s part of the reason that about 15 years ago, we decided here at Sequoia we had to follow technology where it was being developed by entrepreneurs, in different places around the world.

Is it easier to be an entrepreneur in some countries than others, and if so, why? I sometimes tell people who ask us how we can possibly do business in China, “Have you ever tried doing business in the state of California?” Look, every region has its challenges. And if you’re starting a company with big dreams, that is the hardest endeavor in business, irrespective of whether you’re in Beijing, Bangalore, Mountain View, Edinburgh, or Tel Aviv. It’s just an enormously difficult undertaking.

Clearly, proximity to a large market is a big help, which is why so many U.S. companies have flourished, because of the size and prosperity of the United States. And it’s why so many of the Chinese companies have flourished in the last decade, because of the growth of the Chinese economy. So companies and entrepreneurs playing in their home markets clearly have a massive advantage over others who have got a great idea but may be hundreds, if not thousands, of miles away from the people who really want to buy whatever it is that they’ve designed.

So the Internet hasn’t eliminated geography as a factor? It’s clearly helped a tremendous amount. A lot of things are way easier. But it’s [still] harder to start a [global] company in Reykjavik than it is right here or in Beijing.

What can governments do to increase the scale and quality of entrepreneurship in their countries? First, help to underwrite the cost of fundamental basic research that occurs within universities. Second, have a clear set of priorities regarding big areas that are worth serious investigation. And third, stick to those agendas, rather than flipping like a horsetail in the wind. All the other stuff—the regulatory environment, tax incentives, rule of law—all of those are subsidiary to those three things.

Is creative destruction always a net plus for the economy and society? It’s very easy from our sanctimonious perch here [in Silicon Valley] to say yes. I think it’s much more difficult for the toll taker on the Golden Gate Bridge who’s been replaced by a laser scanner, the fellow on the assembly line who’s been displaced by a robot, the paralegals who have been replaced by software, the person that used to do typesetting on newspapers and learned the craft for six or seven years. It is extremely painful and distressing for people who are unfortunate enough not to have the education or the skills or be of an age where they can retool themselves for a new endeavor. I actually had a meeting just before this that was about a factory automation company. Boy, I wouldn’t want a future as a forklift truck operator, because they will be extinct.

So are you becoming a Luddite in your old age? No, not at all. But it places a huge onus on government to provide a fantastic educational system so that people have the skills and wherewithal to be able to make a living for themselves in a world where manual endeavor is no longer valued and where increasingly [even] forms of intellectual endeavor that have previously been considered impregnable are now being taken over by machines. It’s cold and brutal.

Many of your great successes have involved huge gains with companies that have only a handful of owners and employees. Do you worry about that being a broader trend and contributing to rising inequality in the economy and society more generally? Like everybody else, I read the Piketty book. And I think the world has always been a very unfair place. I think the middle of the twentieth century is the aberration over the course of history, where there was compression between the wealth of the top one percent and everybody else. If you look further back, that was not the case. And obviously, it isn’t a good thing for vast amounts of people to feel disenfranchised. That has never led to a happy result.

So do you worry about the [unequal] world we’re moving into? I don’t. Why don’t I? Partly because there’s nothing I can do about it. But it’s very easy for people like us here not to understand how extraordinarily fortunate we’ve been. It’s just preposterous how lucky we’ve been to be in this place, at this time, associated with all the different things that have happened here.

You often favor very long-term holdings, where possible. Are the qualities that make a good founder the same as those that make a good executive more generally? The issue with companies that lose their way is that they’re run by people who do not act like founders. I’ve thought about that a fair amount in regards to, say, the automobile industry, when the original engineers who started all these companies—Ford and Chrysler and the others—were [replaced] by the so-called professional manager, who, on the whole, didn’t have an engineering background, wasn’t that interested in technology, like the founder of the company, and forgot to take care of the future. It would be wonderful for some of these big companies if they were run by people with real entrepreneurial instincts. If you look at the massive change in composition of the Dow Jones index over 30 or 40 years, and you wonder where all those big companies went, they went away because the people at the top of them didn’t have an entrepreneurial bone in their body.

So it’s not that founders don’t make good managers; it’s that managers actually don’t act enough like good founders? The last thing that many companies need are managers. Most companies would be way better off with more entrepreneurs than managers. It’s fine to have things that aren’t perfect and have some rough edges and have a reasonably chaotic environment that’s a bit unpredictable but is vibrant, is developing new products, and is moving very quickly. That’s far preferable to having a well-managed, predictable, slow-moving company.

You’ve been in the Valley through several decades and investment cycles. What’s been constant, and what’s changed over time? Today, it’s easier than ever to start a company and harder than ever to build a company. It’s way easier than it was in the ’70s and the ’80s, because of all the things that we know, the way the price of computing has declined, the availability of open-source software, the ability to have creative and major contributors working for your company even if they are located in remote places scattered around the world. All of that stuff is so much easier to orchestrate today—distributing products, particularly software and services, over the Internet rather than having to do it with atoms and with people and with boxes.

But I think it’s much harder today—certainly in Silicon Valley—to build a company that endures, because of the dearth of engineers and the enormous competition for their services. So retaining these people is extremely difficult. I’m not saying it necessarily was the healthiest of things, but 30 years ago, there were not as many mercenaries around. [Today,] the majority of people who work between San Jose and San Francisco don’t work for a company. They work for the Valley. The company where they are roosting is a temporary nest, and they will change their nest every three or four years, depending on their vesting schedule.

So high-quality engineers are the critical constraint? And if so, how do you get them? Grow them? Import them? You do all of those things. You modify the immigration laws. That probably would be the biggest single thing that would help ensure the future health and prosperity of American industry. I realize all the political implications associated with it. But America was built on immigrants. The single easiest thing to do to ensure the future here is to have a much more generous immigration approach to very talented individuals and ensure that the Ph.D.s from overseas educated at the very best universities in America are not summarily deported as soon as they receive their magical piece of paper.

There’s been talk in some places of the death of innovation or “the great stagnation.” Do you see innovation and economic dynamism moving forward, or are their best days behind us? When you’re thinking about the evolution of technology, I don’t know why today is any different from the last 200 or 300 years. I don’t understand why tomorrow should not be brighter than it is today. But I do wonder what America’s relative place will be, because so much of the dynamism in the world of technology is now taking place outside of the United States, and people here are just not aware of the scale of the achievement or the extent of the ambition of the entrepreneurs there.

You’ve said that a key point in your career was in your 20s, when you were told by [a potential employer in England] that if he were a young man, he would go to America. If you were talking to a young person today, would you tell them to go somewhere else? This is so much easier to say than to do. But if I was a Westerner, age 22, and felt that I either could make my way with my Mandarin or had sufficient confidence that I was going to master it, I’d be in China.

Note: This interview has been edited and condensed.