Sequoia Capital partner Michael Moritz, a leading figure in Silicon Valley, visited Israel this month to attend the Ernst and Young’s Journey 2005 Conference for Venture Capital and Entrepreneurs of Emerging Growth Companies. He also met representatives of the fund’s portfolio companies and candidates for investment.
Founded in 1972 by Donald T. Valentine, Sequoia Capital is considered one of the world’s outstanding venture capital firms. Its portfolio includes great successes such as Apple Computer (Nasdaq:AAPL), Cisco Systems (Nasdaq:CSCO), Google Inc. (Nasdaq:GOOG), Oracle (Nasdaq:ORCL), and Yahoo! (Nasdaq:YHOO).
Moritz is a director at Google. Thanks to his investment in Google, “Forbes” ranked his number 2 on its “Midas List” of the world’s top venture capitalists. Moritz invested $12.5 million in Google in June 1999. He is also a former journalist and co-founder of Technologic Partner. He joined Sequoia Capital in 1986, after serving in a number of positions at Time Warner Inc. (NYSE:TWX). A year ago, “Time” magazine said he was responsible for financing companies that now account for a tenth of Nasdaq’s aggregate market cap.
Moritz says, “In Israel, we seek investment opportunities in early-stage companies offering creative solutions for the Internet. Entrepreneurs with ideas in the sector should contact us.”
“Globes”: When you look at Israeli high-tech, what do you see?
Moritz: “In terms of technology and markets, the world is in the midst of change. There are more people who are potential customers, and more markets that can be reached than there were 30 years ago. This is also true for Israel, which is part of the world’s technology fabric. On one hand, there are more opportunities in Israel, but there’s more competition on the other. The good news for Israel is the steady growth in Internet and mobile communications worldwide. Markets are growing, which give power to entrepreneurs with new ideas. On the other hand, entrepreneurs must keep their eyes open and look around. It’s no longer enough to look at markets and competition in the US and Europe. Today, Asia is definitely the place with both potential markets and competition for every new product.”
Moritz says the international element is extremely significant. “To found a new company today is not like setting up shop on the town’s main street. A new company must open its doors to the whole world. It’s very different from the way it was 25 years ago. Information flows fast, competition is tougher, and it’s not possible to maintain a low profile.”
”Stay hungry and alert”
What companies are you interested in?
“We’re always interested in very early-stage companies. We tend to invest in companies when they have only a few employees, and we help them grow and get organized. We’re definitely interested in companies with ideas for the Internet. Many people have lost money in this sector, but we’re definitely hot to find good companies in the sector, hotter than we were five or six years ago. We’re interested in every Internet area: services, equipment and infrastructure providers, and communications of every kind. We think that there are opportunities in this field.”
What do you think about E-Bay’s (Nasdaq:EBAY) acquisition of Skype? Will it become a milestone?
“This might be another example of a company that didn’t exist five years ago; an example of two entrepreneurs with an excellent idea who succeeded in running with it. They started out during hard times, and succeeded with their product. Their success can encourage entrepreneurs throughout the world.”
E-Bay basically bought Sype’s customer base. Do you think that the price was reasonable, and that the deal will ultimately be closed?
“I naturally don’t know the details, but Sequoia was involved in another company E-Bay acquired (PayPal). At the time, it was said that E-Bay paid an exorbitant price ($1.5 billion in 2002), but in retrospect, I don’t think that they regret it. I assume that they examined Skype carefully, and concluded that the acquisition was logical for their business.”
Do you think that this acquisition will affect the mood in the high-tech industry?
“I think it’s another sign for entrepreneurs that it’s possible to found a company and succeed, if the idea is good. There are quite a few examples. There’s Yahoo!, Google, and E-Bay, all of which were unknown ten years ago.”
As a venture capitalist, how do you find these companies at the early stage, the companies that will be the next Skype?
“Stay hungry and alert. Every day brings a new challenge and opportunity. When investing in a company, do everything in order to raise it right.”
How do you decide to invest in a company? What are the considerations?
“When there’s an idea that can clearly solve a problem for a lot of people.”
That is the venture capitalist’s stock answer. Before Skype offered its telephony service via computer, no one knew there was a problem. We spoke on the telephone.
“You raised a more general and philosophical question. Does the technology improve our lives, or does it make them harder? True, maybe we were less stressed out before, when we couldn’t be found so easily all the time, but quite a few technological innovations make it easy for us to trade and communicate. True, not every product and company is a cure for cancer, but they connect people around the world who previously could not be easily reached.”
“We’ve made mistakes”
What characteristics do you seek in an entrepreneur? How do you determine that this entrepreneur is the right person?
“When they understand the challenge, when they are passionate for success, when they’re prepared to devote themselves to the task. In truth, it’s very hard to the point of being impossible to know in advance. We’ve made mistakes more than once.”
In an interview a year ago, Moritz talked about bitter experiences about picking wrong entrepreneurs. “We never imagined that we’d have a CEO of a company who kept a gun in his drawer and whose hobby was training wolves. Another CEO was addicted to drugs, which we knew nothing about when we made the investment. There was an entrepreneur of a company in Santa Clara who one day tried to kill his partner by driving his pick-up truck through a window. We often err in our evaluation and judgement.”
Moritz believes that both entrepreneurs and venture capitalists should pay close attention to developments in the new world - China and India. “It doesn’t matter where you’re based, in Israel or in California, developments in China and India will have far-reaching effects on business. It’s possible to see this as a threat or as an opportunity. There are companies in these places that will grow and become multinational giants.”
It’s said that the character of the Israeli entrepreneur will help Israel preserve its place.
“I believe that entrepreneurship exists everywhere. It’s true that China is more prominent than India in the field, but both are becoming great powers. Sequoia recently raised a fund that’s about to invest in Chinese start-ups, which clearly demonstrates our attitude.”
How will developments in China affect Israel?
“China is creating a new standard of costs and efficiency, a standard that every country in the world will have to meet if it wants to keep its position. This might be comparable to what happened when Japan entered the auto industry. The quality and design of products was initially different, but constantly improved. Japanese companies now have a significant market share that they didn’t have 25 years ago. China and India will need less money to raise large technology companies, which will undoubtedly affect the industry worldwide.”
“Globes” readers, Israeli high-tech employees, won’t be pleased to hear this.
“It’s better to adjust to the idea now, than for reality to hit you in the face later.”
In early July 2005, Sequoia Capital raised $200 million for its third fund, which was over-subscribed. Active since 1998, Sequoia Israel manages almost $400 million. It started out in partnership with Cisco, managing just under $10 million, and then raised a $150 million fund in 2001. In Israel, Sequoia Capital focuses on telecommunications, information technology, enterprise software, and the Internet. Its portfolio includes BitBand, Followap Telecommunications Inc., HyperRoll Inc., Olive Software, Personeta Inc., PortAuthority Technologies, Traiana Inc.. Actona Technologies, Pentacom and Riverhead Networks were sold to Cisco. Three portfolio companies have closed down: CT Motion, Excedo, and OrAccess.
Sequoia Israel is managed partner Haim Sadger, formerly of Intel Israel; Shmil Levy, former president of Lucent Technologies Internetworking Systems Division and CEO of Lannet, which Lucent acquired; Banny Hanigal, a co-founder of Lannet, and partner in German-Israeli venture fund Star Seed; and Randy Ditzler, formerly CEO of Actona.
The Skype deal may have revived hope, but upon deeper examination, there is still little likelihood for Israeli exits. Companies are being sold for fairly low prices, and large IPOs are nonexistent. Aren’t you worried?
Shmil Levy: “We’re worried because in the end, we’re supposed to return money to our investors. On the other hand, we believe in our abilities to give entrepreneurs the help they need to build better and more successful companies. Sequoia has proven its ability to do this. The Israeli team, together with the US team, is committed to entrepreneurs and companies. Israeli entrepreneurs are more mature and experienced, and we believe that they’re capable of creating successful companies.”
Published by Globes [online], Israel business news - www.globes.co.il - on September 28, 2005