Tuesday, November 21, 2006

The Brit with the Midas internet touch

Mike Moritz of Sequoia Capital has made stellar returns from investing in online ventures but warns against too much optimism in the sector. Paul Durman reports from San Francisco
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YOUTUBE has been good to Mike Moritz — and not just because his investment firm made an estimated $500m (£260m) when the video-sharing website was bought by Google last month.
Moritz, a senior partner at Sequoia Capital, is Silicon Valley’s pre-eminent venture capitalist, whose successes include both Yahoo and Google, where he remains a director. But he grew up in Cardiff and, unlike his accent, his affection for British sport has survived more than 25 years in California.
“The greatest thing that’s happened is that now on Monday morning I can watch all the soccer highlights on YouTube,” he said last week. “That’s what technology brings. You never used to be able to get the Premiership here.”
Online video is much more than just a good way of catching up with last night’s game. “I used to follow Glamorgan as a little kid,” said Moritz. “I remember vividly Gary Sobers hitting six sixes in a row. I didn’t know a video existed of that — and found it on the web in black and white. It was wonderful.
“There’s stuff from Bob Dylan and the Rolling Stones from the early 1960s. It’s fantastic — a treasure trove of personal memories that are being rediscovered.”
YouTube was the poster child of last week’s Web 2.0 summit in San Francisco — a showcase for the companies that are inventing our digital future. The sell-out conference, now in its third year, was attended by 1,000 entrepreneurs, venture capitalists and representatives of the big technology firms.
The organisers had to turn away 5,000 more who were willing to pay $3,300 to hear from a stellar cast of speakers that included Google’s chief executive Eric Schmidt, Amazon founder Jeff Bezos and Yahoo co-founder David Filo.
Just as compelling for many of those attending was the chance to learn from the new wave of internet entrepreneurs who have helped to define what has become known as Web 2.0 — people like Jim Buckmaster of Craigslist, which has revolutionised classified advertising; Caterina Fake, who founded the photo-sharing site Flickr; and Kevin Rose, the founder of Digg, a fast-growing news site.
The mood, if not triumphalist, was full of optimism. Fittingly it was Schmidt, the head of the web’s most important company, who put the case most succinctly. “Don’t bet against the internet,” he said.
In America at least, the term Web 2.0 has become so widely used in business and technology circles that it is in danger of being drained of its original meaning. At its simplest, Web 2.0 is a collective noun for the new generation of internet companies that includes Wikipedia, Flickr, MySpace and YouTube.
What these companies have in common is that they have all grown explosively fast thanks to the contribution made by their users. The encyclopedia entries written by the Wikipedia community, the profile pages created by MySpace users, the photos and videos uploaded to Flickr and YouTube — all this activity creates services that become richer, more compelling or more useful with every day.
This powerful feedback loop — known by technologists as a network effect — helps to explain the rapid growth of these start-ups. Wikipedia (founded in 2001), MySpace (2003) and YouTube (2005) are among the 20 most popular sites on the internet.
Tim O’Reilly, the technology publishing guru whose company helped stage Web 2.0, and which coined the phrase in 2004, said the key was “harnessing collective intelligence — harnessing network effects to build applications that get better the more people use them”.
The companies behind the new web-based applications are constantly making refinements and improvements, guided by feedback from their users.
The contrast with Microsoft’s traditional approach could not be more stark. Last month, Microsoft finally released the latest version (7.0) of Internet Explorer — more than five years after the browser last underwent a major upgrade. Rival browsers, notably Firefox, have long been offering better features than Microsoft’s dated product.
Even more embarrassing for Microsoft have been the delays to Windows Vista, the new version of the dominant computer- operating system. Ironically, it was during Web 2.0 last week that Microsoft announced that Vista was at last ready to be “released to manufacturing” — years behind schedule. The company admitted that Vista’s five years in development did not mean that it would be free of bugs when it is launched.
Many of the companies displaying their wares at Web 2.0 were offering new ways to manage, organise or share content. For example, Vox is a new blogging service that allows users to incorporate audio, video and other content from other web services such as Amazon, YouTube and Flickr.
Instructables is a website that allows users to share their knowledge of how to make things — from cakes to cupboards, and from kites to kayaks. Klostu, a sister company to Israel’s BoardTracker.com, is a message-board specialist that enables you to find and interact with people who have similar interests to your own.
3B — the only British firm among the 13 featured in Web 2.0’s launchpad workshop — offers a way to turn your MySpace profile page into a three-dimensional space. So instead of just having a list of your friends, you — or your avatar — can “walk” round a virtual room whose walls are papered with your friends’ profiles, or with pictures imported from Flickr.
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Chief executive Nicky Morris, who previously ran Formula1.com before selling out to Bernie Ecclestone, said that 3B’s browser could also be used to create 3-D shops — taking online shopping into a new era.
Outside Silicon Valley’s technology capsule, many of these innovations would probably be greeted with bemusement. But an older, more conservative generation struggles to see the attraction of MySpace and its rivals, even as the networking sites bite chunks out of the time previously given over to watching television.
Mike Moritz was not among the deal- hungry venture capitalists looking for the next YouTube at San Francisco’s Palace Hotel last week. Asked what Web 2.0 means to him, he replied: “Nothing — less than zero. Falling romantically in love with buzz phrases tends to be a fairly painful experience in our business.”
He added: “People don’t see the carcasses and the smouldering ruins on the side of the road. And there are plenty of those.”
Sequoia has a virtually unmatched record that stretches back decades. Its many successful investment vehicles — some proudly displayed on a tape-loop playing on a screen in the reception of its offices — include Apple Computer, Cisco Systems, the contract manufacturing giant Flextronics, the graphics chip designer Nvidia and the database software company Oracle.
Moritz prefers to talk about the investments that went wrong. “We could run a long reel of failures as well,” he said. “Maybe it’s just that we have made more mistakes than everybody else and try not to make the same mistake twice. If we’re so good, I keep wondering why we still have write-offs.”
There is more to this than British self- deprecation. Moritz said Sequoia has “a perpetual fear of going out of business”, and constantly tries to “bake” anxiety into its partners, “hour by hour”.
“It’s like any business that’s been around for a long time. It’s all too easy to become complacent, to ease off, to delude yourself into thinking that the world won’t change, to forget about the fact that there are people far hungrier than you. Before you know it, you’re in a death spiral.”
Moritz is unimpressed by the optimism sweeping through Silicon Valley. “This comes in waves,” he said.
“Right now, people have forgotten how bleak things were when they were really dark, and you have a whole set of newcomers who didn’t participate in the last debacle. It’s right there, a little bit further down the road.”
He was equally keen to puncture the impression that Silicon Valley is an easy place to make money in the venture-capital business. “Much of it is a fa├žade,” he said. “In many places in the venture-capital business, life is grim or worse. The results of 25 years don’t lie. The returns on the whole broad swath of the venture industry are miserable.”
What he does believe in is great entrepreneurs — wherever they come from and regardless of their experience.
Sequoia’s website states: “Almost everyone we have ever invested in has been a complete unknown at the time we met. Many have been immigrants or first-generation Americans with barely a penny to their name.”
This belief in undiscovered talent partly reflects Moritz’s own experience. After studying history at Oxford, and moving to America to take an MBA, he spent four years as a journalist working for Time magazine before establishing a company that published technology newsletters.
Despite his lack of a relevant background, Sequoia was prepared to give him his break in venture capital “It’s no coincidence that Steve Jobs was 19 years old when he started Apple, or that Larry [Page] and [Sergey] Brin at Google were 23 and 24, or [Yahoo founders] Jerry Yang and David Filo were in their mid- twenties. There’s nothing that beats the spirit of those sorts of people. That isn’t something that is acquired with experience and with age. That’s the stuff you cannot supply. All the other stuff can be supplied — the money, the management, the filler.”
He cites, as “the most shining example”, the revival at Apple since Jobs returned to the company in 1997 — “what happens when a founder is sent into the wilderness and then when he returns. That’s such an extraordinary story and an illustration of the impact of one person. Steve is one incredibly magnificent businessman.”
Similarly, Moritz is dismissive of his own role in the building of Google. “99.99% of whatever has been accomplished at Google, which has been so spectacular, should be laid squarely on the doorstep of Larry and Sergey.
“I know I failed to appreciate the depth of the insight that they conveyed, and also failed to understand the size of the business that might be assembled.”
Moritz is unwilling to discuss his role in the acquisition of YouTube, or to spell out the sectors where Sequoia sees the best opportunities in the years ahead. However, the firm has opened offices in India and China in the past couple of years and clearly sees a shift in the centre of gravity in the technology business.
“Over the past 30 years America has had a virtual monopoly on the construction of the most valuable technology companies in the world, and that grip will lessen over the next 20 years. We want to be shareholders in the most valuable technology companies, wherever they are,” said Moritz.
On page 3: Why Silicon Valley can't be copied...
SILICON VALLEY CAN’T BE COPIED
AS one of the world’s most successful technology investors, Mike Moritz is often asked how other countries can recreate Silicon Valley in their own backyards.
In his office on the Sand Hill Road near San Jose — venture-capital country — Moritz said last week: “People come by or send letters or ask about how to re-pot what works in Silicon Valley in some municipality in
Japan, or in South America, or parts of Europe, or in Britain.”
George Osborne, the Conservative shadow chancellor, is one of those who has dropped in to see Moritz.
Politicians are not the only visitors. Danny Rimer of Index Ventures, fast emerging as Europe’s leading technology venture investor, has offered to arrange a meeting to give Moritz a chance to inspire British entrepreneurs. Rimer said last week: “Mike Moritz is probably the best investor in venture-capital history. Whether it’s his own companies, like Yahoo and Google, or his firm’s, like YouTube, Mike has been associated with the majority of the most important companies on the internet.”
Moritz has so far resisted Rimer’s entreaties, even though both men have invested alongside one another. And he is sceptical about the chances of exporting Silicon Valley.
“People don’t understand. Most of our companies are not overnight successes even when they become very well known. It’s the same with Silicon Valley. You’re not going to be able to put it in a bottle and go and sprinkle it on parched earth that hasn’t been properly fertilised.”
Moritz said the biggest single requirement is a willingness and desire to start companies.
An immigrant himself, Moritz also places great importance on the drive that is found in the many newcomers to California. “You couple visible examples of success with an immigrant’s drive, and all that pent-up need and hunger, and I don’t think it gets a lot more complicated than that.”