From: Rohit Khare (Rohit@KnowNow.com)
Date: Sun Jul 16 2000 - 12:28:41 PDT
Featured in May, 2000 Newsweek Special Issue of e-LIFE
How To Get My Money
Secrets from the Silicon Valley venture capitalist who discovered the
Yahoo gold mine: passion, smarts and a great big potential market
The pitch begins with words that might seem familiar if
you're a Hollywood studio chief listening to a hungry screenwriter
selling an idea for a movie: "Play... Concept... Bet... Story." But
for a Silicon Valley venture capitalist like myself, they sound as
ominous as the wailings of an air-raid siren. In the last couple of
years, as my partners and I have listened to hundreds of
presentations of new business proposals, these words seem to have
slithered into the Valley's vernacular. They are now as common among
people from Sunnyvale or Mountain View (birthplaces of many Silicon
Valley companies) as they are for people who devise the mechanical
illusions of the movie industry and come from Bel Air or Beverly
Hills. They have replaced down-to-earth nouns like "business,"
"idea," "investment" and "company." A venture capitalist's fixation
with a few seemingly innocuous words may seem like an absurd way to
make decisions about investments involving millions of dollars, but
it does serve to show how our world is changing.
Figuring out how to make a great investment never seems to get
easier. But deciding which opportunities should be declined is a good
place to start. Short-term wonders are immediate candidates for
rejection-hence our interest in listening intently to the words
people use. Any suggestion of a quick flip or a quest for instant
riches is not something that will ever grow into a great company. The
better venture capitalists know that it takes considerable patience
to organize, develop and build a substantial and lasting business;
indeed, some will equal Warren Buffett in the length of time they are
prepared to own shares in a company.
One test we often apply to a new business is the ease with which it
can be explained. If someone is able to summarize his company's plan
on the back of a business card, it usually means that he will be able
to describe its purpose to employees, customers and shareholders. A
proposition that takes a paragraph to describe or 10 minutes to
explain is dicier. One thing I remember from 1988, when we provided
the start-up financing for Cisco Systems, is the stunning clarity
with which the company's founders, Sandy Lerner and Len Bozsack, were
able to explain their business. The entire mission was summed up in
three words: "Cisco networks networks." While that might seem
abstruse for the man in the street, it was a description that has
stood the test of time.
The get-rich-quick artists-and there are a lot of them roaming
Silicon Valley-don't have the faintest clue how to describe a
company, let alone build one. Some are arrivistes for whom forming a
start-up is little more than a fashion statement. People who might
have blindly joined an investment bank, consulting firm or law office
a few years ago are now panting for some dot-com pixie dust. This
isn't a phenomenon limited to 26-year-olds dressed in black; it's
also a virus affecting CEOs of many large companies. These artful
dodgers cruise around the Valley in their black limos, seeking a way
to append the magical two syllables-"dot-com"-to their company in an
effort to conceal poor performance in their main business. In this
latter case we have detected two cautionary signs. Many of these CEOs
don't even have an e-mail address on their business cards. Others
drone on for an hour, explaining how they seek to "unlock shareholder
value" (code words for a fancy financial shuffle), without making a
single mention of their customers or products.
Both these caricatures-Ms. Dressed-in-Black and Mr. Shareholder
Value-lack the most important ingredient of a company founder: an
unquenchable passion for an idea or a product. An entrepreneur
without passion is an empty vessel. Anyone who starts a business-and
wants it to last-needs this quality. It is a journey against all
odds. Every business starts with one or two people, an idea and
nothing else-no employees, no money, no product, no customers and no
shareholders. It is an existence where sometimes everything that can
go wrong, does. Force venture capitalists to choose between a
well-heeled Ivy League student and a smart and impoverished
immigrant, and we'll pick the latter every time. The lily-livered
need not apply for life at a start-up. Tenacity is a necessity.
Passion is one thing. Misguided or misdirected enthusiasm is another
matter. The most propitious beginning for any company is the marriage
of extraordinary passion with an enormous market. One of the cruel
facts of life is that even the most talented people will fail to
prosper if they start a company aimed at a small or slow-growing
market. We venture capitalists sometimes say, in undiplomatic
moments, that great people cannot overcome mediocre markets, but a
company started by mediocre people can flourish in a great market.
The best of all worlds is to pair talented, articulate people with a
large market. This combination stands a good chance of becoming a
leading company. One of the laws of venture capital is that the
leading company in any market is eventually worth more than the sum
of its competitors.
Companies often get started by people who develop a product for
themselves or their close friends. It's almost accidental that their
product becomes something that millions of other people want. Almost
all of our best investments have sprung from this personal impulse.
Two unknowns named Jobs and Wozniak, developing a product as a hobby,
turned their diversion into Apple Computer. Jerry Yang and David Filo
started Yahoo as a way to keep track of their favorite Web sites.
When Toby Lenk started eToys, he did so, in part, because he had a
nephew and niece clamoring for birthday gifts; shopping for gifts at
ordinary toy stores and then figuring out how to pack and mail them
across the country was not something that Uncle Toby found enticing.
Similarly, when Louis Borders began Webvan, a massively ambitious
online retailer that delivers to businesses and homes, he did so
because he thought there was a better way to sell the goods that
people frequently need.
Technologists often fall into the trap of infatuation with their work
or invention. This blinds them to the cruel realities of the
marketplace. We sometimes ask people: "Who needs your product?" This
might seem like a simple question, but it is surprising how often it
serves to ferret out fuzzy thinking. If an entrepreneur cannot
describe who really needs his product, it presages trouble. We far
prefer to support an entrepreneur with a simple product and lots of
prospective customers over a person with a patent-protected device
and a very limited number of potential customers. Our business is to
develop companies rather than invest in science projects.
The company founders most appealing to venture capitalists are those
who understand what they do not know and that they need all sorts of
companions if they are going to turn an idea into an enduring
company. The DNA of a company usually gets established within the
first 100 days of its existence, and is composed of three strands:
the one brought by the founders, a strand brought by a
venture-capital firm and a strand brought by the people whom the
founders and investors recruit. It helps enormously if the agenda and
sensibilities of all three groups are complementary. It saves time;
it allows decisions to be made quickly; more important, it infuses a
company with a particular feel.
Every company comes to echo the sensibility of the few people who
were present at the creation. If arrogance was apparent at the dawn,
it will inevitably permeate the company. If frugality, confidence,
humility and a desire to develop a wonderful product or service were
evident when an idea got started, then these will weave themselves
into the corporate fabric. If modestly talented engineers were there
at the beginning, the only people they will be able to hire will be
the lame. If a CEO insists on obtaining the safety blanket of an
employment agreement and a golden parachute, everyone of any
consequence will demand one. (People often ask for the secret of
Yahoo's success. There isn't one big answer; there are hundreds of
little answers. But if somebody absolutely insists on getting a sound
bite, my answer is simple: Yahoo CEO Tim Koogle does not have a
complex employment agreement, and neither do the other 1,832 U.S.
employees.)
My partners and I have invested in hundreds of companies, but we
still make expensive mistakes. Occasionally we fall victim to the
glibness or simplicity of an artfully designed slide presentation.
Other times we fail to assess a market correctly or misjudge the time
it will take to design a product. But what stumps us most frequently
is people. We go to great lengths to try to assess people correctly,
but we are perpetually surprised. We've been startled by the fatal
coronary of a CEO just a few weeks after we invested in his company,
and by people who go AWOL after they come to understand the demands
of a start-up. There was even the CEO who kept a loaded gun in his
desk drawer, and the company founder who drove his pickup truck
through the ground-floor windows of an office building in an attempt
to eliminate his cofounder.
Despite the topsy-turvy nature of our world, at the moment it is
breathtakingly easy to obtain financial backing. Over the last two
years, our partnership has invested in three companies that we first
heard about via e-mails sent directly by entrepreneurs we had never
met. Reams of financial projections appended to glossy business plans
aren't necessary to capture our imagination. Similarly, it should be
reassuring to know that the boxes of chocolates, baseball bats,
simulated treasure chests or $100 bills that sometimes accompany
business plans usually have the opposite effect of what was intended.
And there definitely is no requirement to do what one entrepreneur
recently promised if we endorsed his idea: run naked across the
parking lot. Casual dress is fine, but we have yet to finance anyone
clad in his birthday suit.
MORITZ is a partner of Sequoia Capital, a Menlo Park, Calif.,
venture-capital firm that has helped form companies such as Apple
Computer, Cisco Systems and Yahoo. Sequoia Capital was the founding
investor in companies that account for almost 20 percent of the value
of Nasdaq.
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