Letter #225: Michael Moritz, Paul Graham, and Guy Kawaski (2009)
Letter #225: Michael Moritz, Paul Graham, and Guy Kawaski (2009)
Sequoia Heritage Partner, YC Cofounder, and Canva Evangelist | Revenue Bootcamp Fireside Chat
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Individually, Michael Moritz and Paul Graham are writers, painters, and investors. Together, they’ve funded some of the most successful startups ever built. And they’re careers have been intertwined. Michael joined Sequoia Capital in 1986, the year Paul graduated from college. In 1995, Michael invested in a company called Yahoo, and Paul started a company called Artix, which quickly became Viaweb. Three years later, Yahoo acquired Viaweb. In 2005, Paul cofounded Y Combinator, which has funded companies such as AirBnb, DoorDash, Dropbox, Instacart, and Stripe—each of which also received investment from Sequoia. They also both invested in Loopt, which was Sam Altman’s first company. Paul worked with all of these companies through YC, and Michael was the lead Partner for Sequoia’s investments into Instacart and Stripe. In 2009, and again in 2010, Sequoia invested in Y Combinator itself—not so much an equity investment as providing funds for YC to manage (akin to being an LP). It was the first time YC took external capital, and it opened the doors for YC to increase their batch sizes, expand operations, and raise further external capital.
Michael Moritz is Senior Advisor to Sequoia Heritage. Previously, he was a Partner at Sequoia Capital. Paul Graham is a Cofounder of Y Combinator. Previously, he founded and sold Viaweb. Guy Kawasaki is the Chief Evangelist of Canva. Previously, he was the Chief Evangelist of Apple and Special Advisor to the CEO of the Motorola division of Google, as well as a serial entrepreneur. Like Michael and Paul, he is also a writer and investor (Michael has written five books, Paul three, and Guy 15!).
Today’s letter is the transcript of a fireside chat with Michael Moritz and Paul Graham moderated by Guy Kawasaki (and shared by another notable evangelist and writer: Robert Scoble). This was a particularly interesting conversation because YC was still in its early days while Sequoia was already one of the great investment firms in history. Furthermore, YC had only announced Sequoia’s investment just four months prior.
In this conversation, Michael and Paul introduce themselves and their respective firms before sharing what they look for in companies they fund, secrets to success, whether they care about startup forecasts and revenue, their co-investment in Dropbox, what sets off their BS detectors, how to present a competitive analysis/landscape to investors, the importance of being earnest, and what types of founders they look to fund. They then turn to more tactical matters, such as what founders should expect from Sequoia/YC, if there’s a point in a company’s life that they should give up and return capital, what makes an ideal board meeting, and delivering and dealing with bad news. Guy then opens up the conversations for questions, where Michael and Paul (and Guy) discuss where they think the next big wave of innovation will be, lessons from Cisco, how to identify the next big wave, how to think about valuation, handling difficult situations, operating through gray areas, thoughts on husband-wife teams, the difference between startups in China vs the US, whether their expectations for founders have changed with the lowering cost of starting a company, an update on Sequoia’s RIP Good Times memo, and advice for older entrepreneurs.
I hope you enjoy this conversation as much as I did!
[Transcript and any errors are mine.]
PS/ If you want a longer biography of Michael/Sequoia, see the intro for Letter #134: Michael Moritz and Robert Lacher (2023).
Related Resources
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Michael Moritz Compilation (642 pages)
Don Valentine Compilation (347 pages)
Y Combinator
Jessica Livingston Compilation (173 pages)
Sam Altman Compilation (1,008 pages)
Letter #70: Paul Buchheit and Jessica Livingston & Carolynn Levy (2023)
Letter #85: Paul Graham and Jessica Livingston & Carolynn Levy (2023)
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Transcript
Guy Kawasaki: Thank you. We're going to get started with our last session of the day. This session features two investors... you call yourself an investor?
Paul Graham: Yeah.
Guy Kawasaki: Okay. Paul Graham from Y Combinator and Mike Moritz of Sequoia Capital. Arguably the--sort of, well, not exactly two ends of the spectrum, but towards the beginning of the spectrum. Two very prominent, very interesting, and in Sequoia's case, very successful investors. Paul is just early in the game--
Paul Graham: We have a lot of potential.
Guy Kawasaki: Yeah, yeah. And I thought that there could be no better two people in the world to discuss early stage tech investing, the role of revenue in investing, those kinds of topics, and these two gentlemen. So I'll first let Paul introduce yourself and explain Y Combinator. And then I'll let Mike...
Paul Graham: Y Combinator invests in a whole bunch of startups, all at once, sort of mass production for startups. So we'll invest in like 25 or 30 startups at a time, twice a year, in batch mode, and work with them intensively for three months, at the end of which we have a presentation day where they all present to investors. There's so many of them now they only get five minutes apiece. So that big day is called Demo Day. And then after that, we hope they get the next round of money. So we're just trying to be first gear.
Guy Kawasaki: Okay. And during that time period that they're with you, are they incubated? Are they... what do you do?
Paul Graham: We--the main thing that we do that's useful, is--well, we do a bunch of things that I wish I didn't have to do, like arbitrate conflicts between founders and stuff like that. The main thing that we do that's useful is try and figure out what to build first.
Guy Kawasaki: Okay, Michael, go ahead.
Michael Moritz: So, I'm with Sequoia. And we like--Paul, what's your average investment? It's about $25k?
Paul Graham: $20k.
Michael Moritz: $20k. And we like to invest small amounts of money as well. And I've never really understood why people would say, in the venture business, as they often do, that they have minimum sums to invest, and that it isn't worth their while unless they can invest $5mn or $10mn. I've always thought that if somebody offered you an opportunity to buy 1/4 of a company or a 1/5 of a company for $1mn, I don't know why you'd want to pay $5mn for the same privilege. So, it's always puzzled me. And I think also, companies with very small amounts of money tend to work better over the long term as well, for a whole variety of reasons that we can talk about later, if you're interested. And our business is trying to find and be in business with the most imaginative, most enterprising, most creative souls that we can find within easy range of the offices that we have. And the offices that we have are here. And they're in China, and they're in India, and they're in Israel. Because much of the most stimulating interesting development is happening, unlike 30 years ago, is happening outside of this wonderful place where all of us happen to live. And some of the leading edge applications in particular genres are not built by startups in Silicon Valley. They're built by startups that get there, that are based elsewhere. And so we think over the next 25 years, that's going to be... while Silicon Valley is always going to be an incredibly important place for us and we have as many people here in Silicon Valley as we have ever had--the currents of history are undeniably running fast elsewhere.
Guy Kawasaki: If you ask most venture capitalists what are they looking for in a company they fund, they will tell you that they want a proven team with a proven technology with a proven business model. So if I were to ask Mike Moritz of Sequoia that question, and Paul Graham of Y Combinator, what is the answer?
Michael Moritz: When we invest, nothing seems to be proven. The market isn't proven. The people usually are unknown. And the product, or the technology, at the time that we invest in, in the venture business, frequently barely works, or perhaps might just, on its most elegant day, barely limp. So I think if you're looking for proven things, you wind up too much in the conventional portion of the universe where uninteresting things tend to happen.
Guy Kawasaki: Do you think that completely different orientation for most VCs is an essential part of Sequoia's success?
Michael Moritz: I don't know. We've always tended to have an affinity for the underdog, the off beat, the immigrant. [Guy and audience laughs]. Oh, that's a very serious observation, actually. It's part of the reason we're in China and India and Israel, because those people don't come to Silicon Valley anymore.
Paul Graham: And you yourself are an immigrant. As I am.
Michael Moritz: I am. There's only one person, and it's no accident, there's only one person who works at Sequoia in Silicon Valley, who was born in Silicon Valley. Everybody else has come from...
Guy Kawasaki: Who is that?
Michael Moritz: Kvamme. Mark. He's our minority hire.
Guy Kawasaki: He's the tall white guy?
Michael Moritz: Yeah.
Guy Kawasaki: He's the white boy, huh? Okay. Paul, what qualities are you looking for? Because you get many more applicants than the people you take, obviously. So what are you looking for?
Paul Graham: We look for people who are determined, smart, have a sense of design, and get things done. And so, we do look for certain kinds of proven-ness, but not the kind you might think. You talk about proven entrepreneurs, right? What we want is evidence that someone really likes to build things. We want people who are really good at building stuff, technology. And to be really good at something, you have to actually like it. You can't just be doing it out of a sense of duty because it's your job, because it's something you have to do in a class. And so, it's very hard for someone who really likes programming, for example, to get to age 23 without having built something outside of school or work. So the big question we ask is, what have you made outside of school or work because you liked it? Because if you don't like it, you're not going to do well as a startup founder.
Michael Moritz: And it has to be something other than the opposite sex.
Guy Kawasaki: That you do well? [Laughter] Okay. And in this--we're at something called Revenue Bootcamp, so we're talking about revenue. Mike and Paul, do you really give a shit about their forecast or their revenue ? Do you believe an ounce of what they say? Do you care? Just make a guess. Are you crunching your HP-12 and looking at the internal rate of return for their four year forecast? I mean, how do you interpret the lies they tell you about revenue?
Paul Graham: We have a Don't Ask Don't Tell policy about revenue projections. We don't even ask. I mean, Sequoia, you guys probably ask, at least to see what they're gonna say, right? We don't even ask.
Michael Moritz: But we don't inhale. Certainly not the forecasts. I think it's much more important to feel that the company is positioned in an area where the currents are flowing in its favor, and you have no idea how strongly those currents are going to flow. And when we look at forecasts as you alluded to, we take them with a grain of salt. Our premise really is, how do we get through the first year? Do we think that the company has the wherewithal, the means, enough money, to be able to survive the first year if things don't happen as forecasted? Because they usually don't. And if we survive the first year, we can worry about the second year, and so on. Five years plans aren't worth the ink cartridge that they're written with.
Guy Kawasaki: Now, now--but we have to be very specific and careful here now. You're saying you don't rely on the Excel spreadsheet printed out plan. But can someone come in to both of your organizations and say, "We're just a bunch of young immigrants. And we finished a lot of projects in our time. And now we want to build this cool thing. And we have no freaking idea if we can have any revenue doing it." Would that... not necessarily said that way, but would it work?
Paul Graham: To us, yes.
Michael Moritz: I think if somebody said it with the blaseness that you just said...
Guy Kawasaki: So they have to fake...
Michael Moritz: Would be [tearen]--
Paul Graham: No, no, you have to care. It's not that you have to lie, you have to care.
Michael Moritz: You have to be determined, and you have to have a passion, and you have to have an intensity about it. And you have to leave people feeling without faking it, that you're sincere, that it is the single most important thing in your life.
Paul Graham: You shouldn't say, like, we have no idea how to make money and it's not a problem. But it's okay if you say We have no idea how to make money. We're worried about that, we know that's a problem, talk to us. Let's figure out how to make money. You guys are supposed to be investors, tell us how to make money. Then it's fine.
Michael Moritz: Together we invested in a little, I mean, this is a wonderful example of it, right? Dropbox, a little company...
Paul Graham: How do they make money?
Michael Moritz: Um... so... but, this was two people at the beginning, right?
Paul Graham: Yeah.
Michael Moritz: Who had come from MIT. They came from Boston because they just didn't feel that the environment and the atmosphere there was right and they'd be able to hire all the people they needed. These are two young guys from MIT. They relocated to the West Coast, thanks to Paul and his offices. They set up shop with an idea about cloud based storage and backup and syncing and services. And my goodness, these two characters, they're really smart. They had an incredible passion. They were doing something enormously useful for people where there was real value in it. And it was very obvious that if they could crack the code and deliver something of value, people would pay for it.
Guy Kawasaki: So is it fair to say that, in a sense, the best kind of financial forecast that an entrepreneur could present is one that... it's a picture that they paint where you fantasize about the revenue potential, not because they've drawn it out on some spreadsheet.
Paul Graham: I've heard people give that advice specifically for convincing investors, and it works fairly well.
Michael Moritz: I think the best financial forecast is a sense that you're developing something that people will really care and want. And if they really care and want, the money will follow. But if you're developing something that no one cares about, or is just like everything else, there's going to be no money.
Guy Kawasaki: But Mike, I mean, you'd have to be a real idiot to walk into your office and say, "We're presenting something that people really don't care that much about, but we want funding to do it." I mean, doesn't every entrepreneurs say we really believe in this and it's gonna be great, and our beta sites are loving it?
Michael Moritz: Yeah, but we have... look, we have fairly tuned antennas, and red flashing lights that come on, and alarms that go off when the BS level rises. And maximum alert, maximum alert. So...
Guy Kawasaki: What sets off your BS detector?
Paul Graham: Nobody wants to answer this. There's so many things.
Guy Kawasaki: Well, just give us a few.
Paul Graham: Well, when people use generic language. Like when people describe how they feel about their idea using the word passion. Never use the word passion. I mean, you should show passion--you shouldn't tell, you shouldn't say the word passion, you should just seem like you care.
Guy Kawasaki: Okay, so don't use the P word.
Paul Graham: Don't say that you care. Just care.
Guy Kawasaki: How about the R word? Revolutionary.
Paul Graham: You know...
Michael Moritz: I don't think there's anything revolutionary. Now, the PR meisters and the marketing departments, will tell you--and the evangelists, of yesteryear [points at Guy], the reformed evangelists--will tell you that there are lots of revolutionary companies and revolutionary products. But I think if we're all very candid with ourselves, almost every single company that gets organized in Silicon Valley is an evolutionary company and evolutionary product. I don't think you can fake sincerity, and I don't think you can fake the pursuit of excellence for a cause to which you have devoted more time and thought than almost any other--than other people around you. I just... you may be able to fake it for a few minutes, but it's not going to survive close scrutiny.
Guy Kawasaki: Okay. Another very sticky topic with entrepreneurs is how do we present our competitive analysis? So, the typical entrepreneur puts up a grid, and guess what? Their column is everything's checked off, and their competitors' columns, nothing's checked off. At Garage, we've never had anybody come in where their column wasn't fully checked off. So what's your advice for how entrepreneurs should present a competitive landscape?
Paul Graham: Well, all of these questions, it depends on the kind of investor they're talking to. Basically, the smarter the investor, the more you should just be candid. Because a smart investor will just like, if you lie, they'll notice you're lying.
Guy Kawasaki: Are you saying that the entrepreneurs that came into Garage thought we were stupid, so...?
Paul Graham: Well, they might have mistakenly thought you were stupid. I'm not saying whether they were correct or not.
Michael Moritz: But did you live up to expectations?
Guy Kawasaki: We exceeded them. In several cases, we exceeded them. Yes.
Paul Graham: But the smarter the investor, when you're talking to really smart investors, which are the kind whose money you presumably want, then you should just tell them what you would say amongst yourselves. Like, we're worried about such and such company, because of such and such, but we think we have an edge because of this. Just tell people what's going on. It's like, the better the investor, the more it should be like going to the doctor. Like, don't lie about your symptoms. Tell them exactly what's going on.
Guy Kawasaki: Ok. Paul? Oh, not Paul. Mike?
Michael Moritz: I agree with what Paul said.
Guy Kawasaki: Yeah? Just be honest about the competitive landscape? Because most entrepreneurs would say, Well, if I admit that our competitor is better, they won't want to fund me.
Michael Moritz: No. I think it's better for everybody, and we always say this to people, and they never believe, or they rarely believe us, but we tell them, "Look, you don't want any surprises, or you want to minimize the number of surprises that you have about us if you'd like to choose us as your partner in business. So go out and talk to people that we've been in business with and make up your own mind." And we also would just... we know that they're going to be bumps, and we're gonna hit potholes and have hiccups in the... as the way that the business develops, but the fewer surprises, the better off everybody's gonna be. So, it's a very unhealthy way to begin a long business relationship where an investment is won, and then in the first formal meeting after the wire has crossed the line, the bad news and truth is conveyed. So it's way better just to be forthright, minimize the surprises. The entrepreneurs aren't going to have all the answers, we're certainly not going to have all the answers. And I think people have to understand that when you make a very early stage investment, a very early stage venture investment, it's the entrepreneurs and the investors against all odds. And it's a very small group of people, entrepreneurs and investors, waging this massive battle where everybody, the large companies, the competitors, parents, friends, relatives, other people in the investment community, think it's a wacky pursuit that you're offering.
Guy Kawasaki: I've obviously watched many of Sequoia's successes. I've been to... I've spoken for you at Y Combinator several times. And I'm always struck that the people that both of you fund, the companies that both of you fund, are 25 or younger. There's no old people there, right?
Paul Graham: We've had some. We've had some.
Guy Kawasaki: Okay, is that a random observation of mine? Do you believe there's some causative relationship? On the other hand, you hear many VCs, they say, "Well, we would love this senior team that worked at Microsoft, and he was senior VP of Engineering, and now he's going to start a startup. That's a proven guy, proven gal." So, what's age got to do with this?
Paul Graham: Well, I think the reason we've... I mean, the average startup founder we fund is probably 25 or 26. But I think the reason is just more people start startups at that age. By the time people are in their 30s, they have families and mortgages, and their friends that they wanted to start the startup with are more tied down too, right? So you get this sort of exponential effect of tied downness as people get older. 25 year olds, they can just say, what the hell? We'll try it. Right? So there's just more 25 year olds starting startups.
Guy Kawasaki: Mike?
Michael Moritz: Mozart was dead at 35. Or 33. I don't know.
Paul Graham: But he was proven.
Michael Moritz: He was a proven composer at that point.
Guy Kawasaki: So... so what--are you saying... Is the sweet spot for Sequoia Larry, David, Jerry, PhD student at Stanford University, not business school, engineering department...
Michael Moritz: Bingo, bingo, bingo. Yep. No doubt about it.
Guy Kawasaki: Are they creating products that they themselves want to use? Or they believe they read that there's a huge market, so we're gonna go after that market? What are they doing?
Paul Graham: It's ideal if they're building something they themselves want to use. The next best thing is something that someone very close to them, like their wife or sibling wants to use.
Michael Moritz: That's right, that's right. It means you have a very deep understanding of what's essential in the product, which is something you can't intellectualize. And I agree with Paul. And obviously, there are examples of people at later stages of life, who develop very interesting ideas, but you think across...
Guy Kawasaki: Like who?
Michael Moritz: Well, I'll leave you to come up with it. But extraordinary people--you can go across all of the sciences, and most people have done most of their incredibly fertile, imaginative, and creative work because of the reasons that Paul mentioned. Because of the lack of distraction, because of--Evelyn Waugh said, in a different business, he said, The greatest enemy--he was a writer, obviously, he said, The greatest enemy to good art is the sight of the perambulator in the hallway... the sight of the perambulator, converted into English, in the hallway.
Guy Kawasaki: You lost me there for a second.
Paul Graham: The stroller.
Michael Moritz: The stroller.
Guy Kawasaki: The stroller! I got it.
Michael Moritz: The greatest enemy, Guy, the greatest enemy to good artists, the sight of the stroller in the hallway. And I think that's it's a similar issue very much with young companies.
Guy Kawasaki: How about the cane? For the benefit of this audience, I would love you to explain what they should reasonably expect a Y Combinator or Sequoia to do for them?
Michael Moritz: My answer is very simple, which is, beyond all the promises and everything, our goal is simple. And if we don't live up to it, our business perishes, which is Ms. or Mr. Entrepreneur, if X number of years from now, five years, seven years, eight years from now, you can't say to a buddy of yours, or an acquaintance or a friend, that having us as a business partner was one of the very best decisions that you made in your business, life, or in the evolution of your company, then we failed you.
Guy Kawasaki: Okay, that's a good general answer. But does this mean you're giving them five hours a month, 10 hours a month? Are you opening up your Rolodex? Are you calling up Jeff Bezos to put in a new server from two guys in a garage? What can they reasonably expect from Sequoia to do?
Michael Moritz: I think these companies all have their arcs. The needs and challenges of three people are very different from the needs and challenges of if everything goes well and the company three years later is 300 people and it's got a completely--think of the little company where it's three people and you're trying to convince a few engineers to join you and the engineers don't want to leave. And then you're trying to convince the management to join you and the management doesn't want to leave, and then you've got a product and the customer says, "Why should we buy from this rinky dink little startup?" Those are very different challenges to the ones that the more mature company is going to have. And we have got to be able to help the really small startup with answering those sorts of tasks and challenges. They may want... we're an investor, I noticed, in one of your sponsors here, Rackspace. They may want a special deal from Rackspace, for example. Well, we're going to see what we can do on... it's all those little nitty gritty things at the beginning. And with a great intensity in the first 12 months, in particular, of one of these companies, because you get the first 12 months right, chances are the next 60 months and the next 10 years are going to go right. If you get the first 12 months wrong, you're gonna have a really tough time changing it around. And I think also you got to recognize, we're investors, we're not managers, we're not confused. Our job is to bring the people into the company, help get the company into the market, help--if we've got to go out on customer calls, go out on customer calls. But then, the very best thing for all of us is, the company is able to recruit its own people, the company is able to point to its own customer list to bring in new customers, and then the nature of the challenge changes. And you're five years into the company, and then you'll find that there's some massive, huge deal that they can't get where there's an emergency call and things happen, or the conversation changes to how do we enter the Japanese market or what's the best way to figure out how we survive in China or what are the perils of outsourcing a whole bunch of stuff in India, and then the issues of raising more money or going public. All of those sorts of things. So the nature of it all changes over time, as does the relationship. And the relationship with a startup that runs the arc, I mean, in the first few months, we can be on the phone every day, or have meetings every day, or certainly be on email every day. And then the frequency of the contact, as the startup survives, the frequency of the contact in the healthy relationships should diminish, not unlike the sort of experience everybody has as they--like all analogies, this is a little tired, it's a tired analogy, but it's the evolution of a family, if you're a parent, where there's--every moment, early on, you're attuned to the needs of the infant. And then over time, by the time it's college age, you don't want to know anyway.
Guy Kawasaki: Your answer to that question about--well, specifically Y Combinator, but in general, I mean, is the Y Combinator You're with me for 90 days, I help you, we push you out, sink or swim, Aloha ʻOe?
Paul Graham: No, no, we stay in touch with people after the 90 days. All that stops after 90 days is we don't have dinner once a week. We have dinner with everybody once a week for the first three months. Until a year ago, I used to actually cook the dinner. But it got to the point where it was really ridiculous. I think everybody's glad I'm not actually doing the cooking anymore. We focus on two things, because we're so early, right? Like a VC fund, like Sequoia, they can give you advice about how to do an IPO. I don't know anything about IPOs. What I know about is the kind of problems that people face in the very beginning. Like for example, there's three of you starting the company. Oh, no, sorry, it's two. That's the kind of thing that happened.
Michael Moritz: Well, that happened at YouTube. YouTube was three people when we encountered them. And within the first week, there was a headcount reduction of 33%. And it was two people. And that's our life. And the YouTube people needed more than $25,000. But the intensity of the relationship when it's just two people, it's--if you haven't been involved with it, if you haven't lived it, if you haven't seen it day to day, it is hard to imagine the extent of the emotional connection we have with these things. And you may interpret that as just venture BS, but believe me, talk to the people that we've been in business with.
Guy Kawasaki: A subject that very few people ever discuss, is--you always hear about the story about perseverance and gutting it out and all that, but is there a point in a company's life where it really should give up? It should return the money that it has, if any, it should sell its assets. It just wasn't meant to be, not necessarily that people were bozos or whatever, but just is there a point? And when do you... how do you know what is it?
Paul Graham: If the founders have given up. As long as the founders haven't given up, they can morph the company into anything. I mean, maybe you could get into some case where you'd like, gotten deeply in debt, and there was no way to dig yourself out. But as long as you're in the early phase, and you're just like a couple of guys in an apartment eating beans and writing code, you can turn the thing around tomorrow if you want to. So sometimes founders will come to me and say, Can I give up now? And basically, if they're asking me, probably the answer is yes. Because if they're asking me, they've already decided they're giving up and they just want me to be okay with it. But as long as they're willing to say, like, we're a year in, our software still sucks, we have no customers, but we're not giving up. I'm like, Okay, keep going. I'll help you. I'm willing to help them as long as they're willing to keep fighting.
Guy Kawasaki: What about you, Mike? Because you're willing to help them as long as they're willing to keep fighting, but they want your money to keep fighting.
Michael Moritz: Well, the year one answer is an easy answer. Where it gets hard is year five, and where things just haven't worked, perhaps. And where everybody was very well meaning, but the market has rejected the product, the next product doesn't look very promising, and there's not much hope for it. And everybody understands that including the founders. There are people prepared to continue investing money in what seems like a futile charge and a futile battle. That's where the issue is very difficult. We had a... I can think of two companies, they're both actually chip companies, where we had calamitous experiences early on. The best known one of these is Nvidia, which everybody knows today. But people don't remember 1993 and 1994. And Nvidia's first device was a bomb. It failed in the marketplace. This was a semiconductor company. Semiconductor companies you can't finance with two people writing code, living on rice and beans. They're more expensive endeavors to get off the ground. And there it would have been very easy to say, My goodness, the original idea didn't work, and it's curtains. And Jensen and the rest of the people there had another product that they were very convinced about. And ourselves and Sutter Hill, in that case, continued supporting the company. But it would have been very easy to blink and say, Look, the original premise didn't work. But also, I think there are some battles that are worth fighting, and some battles that aren't worth fighting. And we may well be wrong about both. We may be well eventually have our nose bloodied in the battles we want to continue fighting, we may well perhaps give up too early on the things that that we think are futile. But as long as we think there's a way that we can survive and then eventually prosper, and it makes economic sense to do so, we're going to do it. Where we think it's futile, where we think--and frequently, the conversation, or actually, as infrequently as you can have these conversations, but frequently, the conversation when you have to have these horrible conversations with the people who've just worked so hard for four or five years, haven't seen that families, they're up to their eyeballs in debt, they're overweight, they're stressed out, they haven't been on vacations--I mean, this is a dreadful... it's a dreadful, dreadful thing. But the conversation is, You're only going to live once? Do you want to waste the next three to--we may be wrong, sir--but do you want to waste the next three or five years of your life on something that's an enterprise that is doomed to failure? That's the conversation.
Guy Kawasaki: A real tactical question. What makes a good board meeting? What should happen in the board meeting, an ideal board meeting? Because I've been in many of them, and...
Paul Graham: We're not in it. For me, that's ideal.
Guy Kawasaki: Ok. Simple answer.
Paul Graham: We're not there. I have never been on a board and I never will. We don't take board seats. And I think you can do a lot of the things--not all of the things a board member can do, maybe, but I think you can do a lot of the things a board member can do without being a formal board member. I mean, any advice you want to give as a board member, you can give not as a board member. It just doesn't have any standing. Like if it's good, they'll listen, one hopes. That was a silly answer. You should... you can give a serious answer.
Michael Moritz: No, I think the most interesting and most important things at companies happen between board meetings, not at board meetings, and the board meetings usually just ratify those sorts of things. And if the involvement is just the investors showing up at the board meeting, it--from my point of view, I'm not very interested in that. It's just not a very interesting or fulfilling thing to do. So I--usually the best ones are brief, they're short, there are no surprises. But that's because all of the important things have basically been discussed, talked about, chewed over beforehand. And sometimes, if they're different parties and constituencies associated with a company, you have to resolve those during board meetings. But our obligation is pretty intense with these companies. If Y Combinator elects--if Paul elects not to invest the next $25,000, his company is not dead. If we've made a commitment to a company and said we're going to be your investor, and sign up, and if we don't invest the next $2mn or $1mn or something, that company is going to have a very, very, very tough time. So there's an enormous obligation. It's easy--Paul's in a slightly different part of the business to us, but we can't abdicate the responsibility that we've signed up for with these companies.
Guy Kawasaki: What if a CEO specifically has bad news? Sales are down, big sale didn't happen, product is late, whatever. How do you play that scenario? Do they call you up before the board meeting? Are you spring it at the board meeting? Obviously not. What do you do?
Michael Moritz: CEOs usually do not have good news. I met with one this morning, who emailed me two days ago, saying, Need to--when you see the phrase in the email "Need to get together". Need to get together means the VP sales just quit, we missed the quarter, or I'm actually far closer to running out of money than I thought I was. I was not disappointed at 7:30 this morning. So it happens all the time. And that is usually... people tend to want to give good news when there's a big crowd around, they can celebrate, not to impart it one on one. But most of the time when people do call, and they want to have an urgent meeting, it's always bad news. I've never heard anyone say, "I really need to come to see you to tell you how great everything's going."
Paul Graham: Yeah, same here. I've noticed this in the news, actually. If you look at headlines, bad things happen more suddenly than good things, right? Unless you have some artificial thing, like a publication deadline for some research study or something like that, that makes it artificially happen fast. All the news about sudden changes? It's because it was a plane crash, not because...
Guy Kawasaki: Plane landed?
Paul Graham: Right.
Michael Moritz: Yeah.
Paul Graham: Or air safety statistics gradually got better. That's the bigger story. I mean, the Air France crash is just anecdotal evidence. Actually, plane traffic travel gets gradually safer and safer. That's a boring headline.
Guy Kawasaki: No plane landed in the Hudson today. I saw that tweet. Yeah. Let's take some questions from the audience.
Audience Member: Hello, yes. Can you hear me there?
Guy Kawasaki: Yep.
Audience Member: Okay, yeah. I just like to know, all three of yours' opinion on what do you think the next big wave of innovation is going to be in the next five, seven years as you see it?
Guy Kawasaki: Okay. Who's going first?... This kind of silence...
Paul Graham: If I knew what it was going to be now, I would be making all the companies we fund do it. So kind of by definition, you can't answer that. It's like asking, If there's a new paradigm for physics after the Standard Model, what's it going to be? Well, if you actually knew the answer to that, you'd be eligible for a Nobel Prize. Just submit it to some journal. So it's never--it's hard to answer questions like that. I can tell you a specific version, though. Like, I was thinking about this while people were talking about Twitter, before. I can tell you what platforms are going to be big. If you want to know how to predict what platforms are going to be big, look at the ones that hackers themselves use, because they build stuff for the platforms that they use. We have a ton of companies building stuff for iPhones right now. And it's because they all have iPhones. Not one is building stuff for the BlackBerry, because none of them use Blackberries. Blackberries have some amount of market share, but like, not among startup founders. So look for the platforms that hackers themselves use, and those the ones exciting things are gonna happen to you. And that's like, really bad news for RIM, by the way.
Guy Kawasaki: How about Nokia?
Paul Graham: Nokia? What's that? They're like this Finnish company that makes cell phones?
Guy Kawasaki: How about Pre?
Paul Graham: Yeah, nobody's building anything for Pre either.
Guy Kawasaki: How about Android?
Paul Graham: They would like to build things for Android. But like, where are the Android phones?
Guy Kawasaki: And Michael, your prediction?
Michael Moritz: I don't know what the next--people frequently asked what the next big thing is. I don't know. And one of the truisms of the business that we're in is that when--if we've done our homework before an investment, we're rarely ever surprised if the business teeters or doesn't succeed. It's when the business really takes off that we're surprised. In all candid, it's true. I'd been at Sequoia for about a year when, at the end of 1987, there were four or five people from Stanford who had an idea about how to network networks. And the company had sold $400,000 or $500,000 worth of products. One early customer had been Hewlett Packard. The Hewlett Packard engineers were very upset with this little company, and they were threatening to return a few of these early units. There was a fair number of strains and tensions inside the company. And if anybody had said, This company is going to be known around the world as a company called Cisco Systems, I mean--and all of these things that happened to that company happened over the ensuing 18 years, I mean, we would have thought we'd landed on a different planet. We were just looking and trying to survive the first year.
Guy Kawasaki: What's the lesson to learn from that Cisco--I had never heard that story. That's a great story. So, was it...?
Michael Moritz: But I think It's true of most companies. I was not at Sequoia when Don helped to organize the original financing of Apple, but somebody sent me, in the last few months, sent me--and I've read it years and years ago for a different reason, sent me the original Apple business plan. Actually, it was the gentleman who had helped with--Mike Markkula, who had written the original Apple business plan, and we were chatting about it. And he said, We were sitting down there needing to devise and invent things that we could put in here, because we couldn't get to a market size that was large enough. We had absolutely no idea. We thought the original application was going to be for people keeping their recipes at home. And they had no idea about--so here-- the most stunning revelation, back to the point Paul was just making about the iPhone, the idea of the independent software developer back then, even before you joined them, Guy, 76, 77, nobody had conceived of the independent software developer. Nobody had conceived of a company writing VisiCalc for a computer like the Apple. It was completely, completely blindsided. So I think trying to imagine what the next big thing is--I long ago gave up on.
Guy Kawasaki: And I will offer my opinion. I also don't know.
Paul Graham: You know what? I'll tell you--if you want the source of a really good idea, think of something that you guys, yourselves, have needed in some company that you worked for that didn't exist, and you were sitting in the company, saying, Boy, if somebody would just make blank, we'd pay a lot for that. If you can think of any answer to blank, you are onto a goldmine.
Audience Member: I have that. Mike, I'm a software programmer, and I have a--I've [invented] computers that go in golf cars.
Guy Kawasaki: What?
Audience Member: My question--I put $500,000 into my own business, into my software developing company. The question I have is, I'm looking to raise $2.5mn. I put $500,000. What does a venture capitalist look like as far as evaluating a company? How do you determine what the value of a company is and what percentage of that company you're going to own in the developing stages, moving forward?
Guy Kawasaki: Valuation, valuation.
Michael Moritz: It moves around. Depends how much perceived risk is seen in the company. But I can tell you what we don't like. And this will sound really weird, but it's true. We don't like owning too much. Because it means several things. It means the company probably needs too much money. But more particularly, it means that the founders aren't very shrewd. And it also means that there isn't enough left for all the other people that we need to bring into the company and incent. So usually, we wind up--I'll give you a very direct answer for a very early stage company. The low band is around 20%. And it tends to go up to around 35%. But I get very nervous if we own more than 35%.
Guy Kawasaki: I'll give you an answer. The observation I would make is that for every full time engineer, you have a pre money valuation of half a million dollars. For every MBA, you subtract a quarter million. (Laughter) If you have three full time engineers and two MBAs, three times half a million is a million and a half, you subtract two times 250, you're back at a million. So that's how you figure it out. It's very simple. Next question.
Audience Member: Yeah. Mike, you've already mentioned that you start to get nervous about the five year point. There are twin themes I'd like you to comment on: our current theme of socially responsible investing and the theme of patient capital.
Guy Kawasaki: Both oxymorons.
Michael Moritz: Well, there are businesses that we don't invest in because they appear unseemly. And we don't want to wander into a gray zone. We've worked very hard over a very long period of time building our reputation, and it's reputation that can get eviscerated if you make the wrong choice. And the question of patient investors, I think Guy to some extent is right. Look, it's a mixture of both patience and impatience. When you're running a company, when you're an investor in a company, things can never happen quickly enough. You want the next product out, you want to get more sales, you have all these impulses about how you want to go quicker and how you want to go faster in a presumably organized fashion. But simultaneously, you also know--I always chuckle when a newspaper, or on the net these days, and in the times when IPOs occurred, as they will occur again, and inevitably, the media will say, Here's a particular company--and in the next sentence: another Silicon Valley overnight success story. And they've forgotten about the preceding six years. I think--we've learned that it actually takes considerable patience to endure the overnight.
Guy Kawasaki: How do you handle a situation where it takes... if we could go back in time, you find out that, Wow, lots of porn sites are buying Cisco equipment. Or there's lots of copyrighted material going up on YouTube, and you're trying to remain this squeaky clean investor, but what do you do? Tell Cisco not to sell to porn sites? Or you tell YouTube--what do you do?
Michael Moritz: Well, we also had the issue of PayPal, where we had--there, the issue was that the site was being used for gambling, and aroused the ire of every attorney general in the country, including the ones, interestingly enough, in Mississippi, who, I'm not sure that they had a background of moral rectitude. But--
Guy Kawasaki: How about New York?
Michael Moritz: Yeah. Well, they did in New York City, it was just when they ventured out of the state that they ran into problems. Look, we want to--you look at the early traffic at Yahoo. And sex queries were probably among the highest. But we're not going to--we're not on a mission to improve the human character. I mean, our--
Guy Kawasaki: That's a quote: "VC not interested in improving human character."
Michael Moritz: But... so, our companies, they operate clearly within the confines of the law, but they come, inevitably, to represent all the good things about the society that we live in and they also inevitably come to represent some of its flaws as well. It's just life.
Guy Kawasaki: Okay, next question.
Michael Moritz: This is actually for all three of you. How do you feel about husband and wife teams? And have you ever funded one?
Paul Graham: Yes. Both male-female and male-male.
Guy Kawasaki: Up to the repeal, Prop 8.
Paul Graham: They seem to work fairly well. It's better if it's--what you want to have, what you want to make sure is that the husband-wife team would have both been in the startup even if they weren't married. You don't want the case where someone's doing a startup and they drag their spouse in because they're their spouse, and not because it is the right person for the startup. As long as they're the right people, then it seems to be okay.
Guy Kawasaki: Okay. Mike?
Michael Moritz: We financed companies like that. Cisco. Sandy Lerner and Len Bosack. The two founders were husband and wife. I can think of other places where we've had brothers or sisters, or in some cases, sons or daughters working inside of the same company as well. I think it does require heightened sensitivity, because clearly, it creates a certain set of social dynamics that aren't apparent in most companies. But it's clearly something that we've learned to live with... but on the whole, look, 98% of the companies that we finance, they don't have, that sort of setting anyway.
Guy Kawasaki: But you certainly wouldn't view it as a positive that husband and wife are starting a team, would you?
Paul Graham: Ideally you shouldn't care either way. Ideally, they're just good people and the fact that they have X relationship to one another or not, it shouldn't make that much difference. Ideally.
Audience Member: Hi, Guy. So this is the token China question. I think we met nine years ago on the 60th floor of the Grand Hyatt in Shanghai. But anyway, so--
Guy Kawasaki: I thought you looked familiar.
Audience Member: Yeah, what was I doing there? I don't know. So, at that time, Sequoia had not entered China. They entered China, I think a few years later. And I kind of watched it methodically and how you guys did that. So my question now is, four or five years later, after you've really cut your teeth there, what are the obstacles you're going through now? How is that different from what you go with in startups here in the US? And then is your horizon longer? Because my feeling about China is, barring some speculative backdoor listing on the Hong Kong stock exchange, the M&A market is a lot less. So, what is your horizon on these investments?
Michael Moritz: Well, there are multiple questions there. And when we went to China, we didn't, for a moment think it was an--the first business that we built outside of California was in Israel. And it took us multiple years, and Israel obviously has a much more confined geography, smaller population, less of a language barrier than one contends with in China. But it also informed us and taught us a lot about what was required to operate in an arena we're in a different time zone, thousands of miles away. And so when we went to China, we knew that this was not an overnight undertaking. This was a big move for us. We were signing up for a very long term commitment, and the business, and it was a move for the next 15 or 20 years, not for the next three or five years. And so think of all the things that you have to do. Build a team, build a presence, begin to make investments, develop--and we felt that the investment process that we've worked on so hard here can be translated into other places. What we cannot translate, or pretend to hope to translate, is all the network of connections and understanding of the market and the nuances of the local setting, which are completely, obviously foreign to us. We knew too that there would be all sorts of surprises. Bad surprises, bad news. Didn't know what they would be, but we knew--we'd braced ourselves for that. But also felt that my goodness gracious, despite all of those things, despite the unpredictability of the topography, the underlying trends were so dramatic, so wonderful. The hunger, the desire, the ambition, the work ethic. So intense in China compared to anywhere else in the world, that we really wanted to do it. And we're now five years or so into this and feel very, very vindicated. In fact, literally on the way here, or just before I left the office, I was writing a little note that we're circulating internally. We distributed holdings today from two investments that we made in China three to four years ago. And I can tell you, I was in China a few weeks ago, and there was a CEO of a company who was very, very apologetic about his growth rate. And... you will chuckle. He said, "Yeah, you know, it's a really bad year." "What do you mean it's a really bad year?" "Last year, revenues--it's a profitable company--last year, revenues were $120mn. This year, revenue is $180mn. And if you haven't been there, if you haven't spent time, if you haven't immersed yourself there, it's difficult to translate to the US, the scope of what is happening in China. And in particular arenas--I mean, we're investing in a broader swath of companies than we invest here, because some of these markets that we'd consider mature here, are obviously embryonic in China. But there are particular applications, particularly in mobile, where China is leagues ahead of anything happening in the US or in Europe.
Guy Kawasaki: So when he told you that, did you act pissed off?
Michael Moritz: No, I told him the truth. I said, Companies like yours--this was a retailing company--they'd be delighted to be growing 5% or 6% a year in America.
Guy Kawasaki: With open source, and just the lower cost of everything, when a company comes to Sequoia or Y Combinator and pitches you, do you have higher expectations that they're further along, that they have a working prototype whereas five years ago they would just having an idea, and not a prototype. But now, because of MySQL, and Drupal, and Rails and all that good stuff, you have higher expectations of when they first pop into your door?
Paul Graham: They ought to be able to at least make some sort of demo, unless they're building something that's really going to take a long time, like some kind of hardware device or something like that. I mean, between the point where we invite them to interviews. And when the actual interview comes, we give them like three weeks so they can get cheap plane tickets. In three weeks they ought to be able to throw together something so we don't just have to talk. You got to be able to look at something. It's a good sign if they do.
Guy Kawasaki: What about you?
Michael Moritz: It hasn't changed very much. And I think--we also we invest in networking companies and systems companies where, as Paul mentioned, it's much more difficult to have a working--Okay, you're going to build a firewall that takes on Cisco--you're not going to cobble that together in the time that it takes you to reserve a cheap airfare from the East Coast. So I think it's true. But we've also been--over the years, we've invested in, we've made the mistake of investing in snazzy looking prototypes or sexy looking PowerPoints. And I think you also have to make the big leap of--you've got to have the judgment too for what lies behind turning the idea or the product or the prototype or the PowerPoint into something that is real and works.
Guy Kawasaki: Next question.
Audience Member: As a follow up to the email to portfolio CEOs from not too long ago, what would be the prognosis that you guys have for the economy right now?
Michael Moritz: Well, in our great innocence, this was a slideshow that got much wider dist-- people--we chuckled. People thought it was a PR stunt. Actually, what happened was we had a meeting up on Sand Hill Road last September where we invited CEOs and founders to come and listen and then do what they chose with the information to our views about what was happening in the world around us. And then a couple of people asked us to email this slideshow for a very interesting reason. A couple of CEOs asked us to email--several CEOs as email the slideshow. We said why? They said, "Well, I believe you, but none of my management team will believe me when I go back and tell them this. I need the materials." So it got wide distribution. The really good news about that event was that people understood. And I think a large part of it was because CEOs and founders of companies had lived through 2000, and remembered it. And boy, people adjusted, in the grand scheme of things, incredibly quickly. But I think everything that we said back then about a really dreadful patch was correct. And I think what we said back then about an extreme recently slow, torturous recovery, I think that's also right. For us, the really bad news from companies probably--the rate of bad news, decay, it started to really tail off towards the end of February. And for the most part, everybody has adjusted to a world where they have to be self sufficient. They know that they can't rely on cheap outside money. And everything has been adjusted. And, in part, particularly for the younger companies, we've actually been pleasantly surprised by revenue and bookings in the last couple of quarters, because one of the benefits, and it's quirky, of a real setback, an economic setback like this one that we've gone through is, oddly enough, it makes it easier for the small company, particularly if they're selling to the enterprise, to get a hearing. Because the customers are in such desperate need for either increased performance or lower cost. Whereas in far better times, when they have money to burn, the little company won't get a hearing. So it's oddly enough, a little easier for the unknown company to get a foothold in a market than in times that are really flush.
Guy Kawasaki: Okay. How about one last question? Who's got it? Yep.
Audience Member: So I found the remarks about kind of the prototypical CEO a little sobering because I'm not a 25 year old engineer. I mean, what advice do you give to someone who's more experienced, if you will? I mean, would you... should I be going out to recruit some 25 year old to take my place?
Michael Moritz: I don't think that was actually the answer. I think the question that Guy had asked was about founders. It wasn't about CEOs.
Guy Kawasaki: He's the founder though.
Michael Moritz: Ah. Well, we live in a state where there's no discrimination.
Guy Kawasaki: In investing or in employment?
Michael Moritz: In both, actually. I mean, all jesting aside about Mozart dying at the age of 35, we've also invested in a company that was started by a grandfather.
Audience Member: That's avoiding the question. Look at your audience. How many people here are entrepreneurs, and are over 30 years old? Raise your hands. Would any of us be able to present to you?
Michael Moritz: Absolutely. The honest answer to that is absolutely. Absolutely yes. The easiest way to get a response is send direct email either to Paul or to myself. And if the idea has, in our warped mind, real merit, absolutely guarantee.
Guy Kawasaki: The problem is, they all heard, Oh, he's interested in my deal. Which is not exactly what Mike just said.
Michael Moritz: No. To quote our departed leader, Bring it on.
Guy Kawasaki: So, thank you very much. Please join me in thanking both Paul and Mike.
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Wrap-up
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