Michael Moritz, partner in the legendary California venture capital firm Sequoia Capital, wouldn't seem to need anyone's investment advice.
The Wales native was the original investor in Yahoo! when that company employed only its two founders. And he became a director of search-engine giant Google when its employees numbered only a dozen. Sequoia was an original investor in Cisco Systems.
But he drew upon the inspiration of former First Lady Nancy Reagan and Oakland A's General Manager Billy Beane in giving his keynote speech at the 10th Annual 2004 Venture Capital & Private Equity Conference, held at Harvard Business School February 7.
Calling Beane's baseball team "a new, unknown West Coast venture capital firm," Moritz said would-be venture capitalists would do well to observe Beane's strategy of discovering winners among undervalued players. The Athletics in recent years have achieved great on-field success despite having one of the lowest payrolls in baseball.
Outlined in Michael Lewis's book Moneyball, Moritz said Beane's principals sound like "a handbook for the venture capitalist business."
| While there is danger in the venture business in getting too far away from the crowd, it can often pay to be unconventional. |
| — Michael Moritz |
Parts of Beane's philosophy that Moritz said investors would do well to take to heart involved scouting out "misfits and oddballs," who may have been written off by other teams (and investors); paying attention to players who most frequently get on base rather than those always swinging for the fences; experimenting in the minor leagues, not the big ones; and not following the crowd.
"While there is danger in the venture business in getting too far away from the crowd, it can often pay to be somewhat unconventional," Moritz said.
Funding misfits and oddballs
He said when Sequoia considered funding Cisco, "which was staffed by a misfit and an oddball," the venture firm went ahead with the investment even though the conventional wisdom was that the networking business with big players like IBM was too crowded.
"I can't tell you how many people over the years we've bumped into in the venture business who say, 'Yes, we saw Cisco but we decided to pass on the investment,'" Moritz said.
He said the same went for Yahoo! "Everyone was mystified about how it would ever make any real money."
On Beane's theme of choosing players who frequently find ways just to get on base, Moritz said: "It is kind of interesting that Beane runs his club not on slugging percentages, but on on-base percentages."
"We do not think about hitting out-of-the-park homers; we're just struggling to get our little investment in our little company on first base, and then we'll worry about getting to second and third and eventually home," he said. "Never for a moment in our wildest dreams did we ever think that they would amount to what in later years they became."
Test for success
Finally, Moritz said, "Be somewhat cautious. Billy Beane doesn't start his new players in the wonderful Oakland Coliseum; he sends them into the hinterlands and tests them out."
"That's how we got one of our major investments very wrong. We forgot to tread cautiously; we forgot to test," he said.
That investment was the now-infamous Internet bubble-era flop Webvan, Seqouia's most spectacular failure. At the time of its IPO, Webvan had raised $850 million. Two years after going public, it went bankrupt.
Moritz said Webvan was a victim, like many Internet startups, of too much money and a too-ambitious plan. The conventional wisdom was that the grocery delivery service had to grow fast to beat other competitors to market, but Moritz said the company might still be around had it stuck to the "minor leagues" and built a business in one market before opening in others.
"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,'" he said.
In retrospect, Moritz said, Sequoia should have listened to venture capital's "guardian angel"—Nancy Reagan—and just said no.
Moritz also said that while venture capitalists have a reputation for always keeping their eye on the nearest exit, it pays to wait for investments to ripen. "Patience is required in our business," he said.
"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," Moritz said.
Moritz gave several examples of companies that took five to ten years after their IPO to reach their full potential for valuation. For example, $2.2 million of private capital was invested in Cisco before it went public in February 1990 with a market cap of $270 million. It now has a market capitalization of $170 billion.
"It takes a long time for sales to grow and it takes a long time for true value to be achieved," Moritz said. 