Picking Winners with Sequoia’s Michael Moritz: Cheap Is Chic

Last time, I highlighted some key takeaways from PEHub’s interview with ex-Googler Aydin Senkut, who went on to launched his own VC firm without previous experience in venture capital. This time, I’m doing the same with another investor – the famously frugal Michael Moritz of Sequoia Capital.

In a recent interview with The Mercury News, eminent VC Michael Moritz gives us a clear look at how he invests, and how he’s been so successful with companies like Flextronics, Cisco Systems, Yahoo, Paypal, and Google.

Moritz is known for investing in startups that are thought to be unfundable. Google was a small company with lots of competition and no business plan. Flextronics was operating in an industry that was supposed to be dead in the water. His current investment, in an India-based company called 24/7 Customer, seems to be a “same-old” investment. Yet, the numbers don’t lie: 16% of the NASDAQ’s value comes from companies that were nurtured in some way by Sequoia.

Below are some highlights from the interview, insights that angels can tap into:

• Funding “unfundable” companies is a murky, unclear effort. It never looked like the “world’s greatest idea” in the beginning. It was almost always the marketing and PR who glamorized the startup’s history. And, things nearly always get worse before they get better.
• Moritz always invests in entrepreneurs who embrace frugality. The current economic situation separates the “get-rich-quick” startuppers from determined entrepreneurs. Entrepreneurs who launch businesses during recessions are usually genuinely interested in founding companies.
• Having a belief in the founding team is a big deciding factor. He invests in founder(s) who he believes has the ability to not just build companies but also to provide products or services in a way that hasn’t been done by others before.
• Moritz also feels that the best companies to invest in are the ones whose founders would stick around for a long time. A long-term vision can be an important indicator of potential success.
• In recessionary times, startups have an easier time hiring staff and finding locations. Moritz adds that it’s also easier to find customers because people are willing to take more risk with a small company if they perceive a time- or cost-savings return on their investment.

Reference:

• The Mercury News Interview: Sequoia’s Michael Moritz on long shots and how he picks companies