Michael Moritz KBE on Zombie Unicorns and his favourite investments

From the football field to the unicorn glades of Silicon Valley, famed venture capitalist Sir Michael Moritz KBE can spot a winner a mile away. Speaking exclusively to Growth Business, he counters industry speculation that high valuations may foretell the beginning of the end for billion-dollar unicorn businesses.

Calling Sir Michael Moritz one of Silicon Valley’s top dealmakers is an understatement.

In his role at the helm of Sequoia Capital in Silicon Valley, the Welsh-born venture capitalist has invested in or served on the boards of companies such as Google, Yahoo, PayPal, LinkedIn, and Airbnb. Sir Michael has helped mould these businesses from fledgling start-ups to household names they are today. Growth Business spoke with Sir Michael at the sidelines of a fundraising business breakfast to talk tech investments, unicorns and the UK.

Who is the ultimate leader in your opinion? Steve Jobs or Bill Gates?

Well, neither Steve Jobs nor Bill Gates were capable of scoring goals for Scotland. They were capable of lots of other things, but neither of them had a distinguished left foot (like Sir Alex Ferguson). But all of them share many of the traits that make for Silicon Valley successes. Whether it’s Steve, or Bill or Sir Alex, each of them were obsessed with the thing that caught their attention, at a very young age. For all three of them, they spent their entire lives learning more about their particular pursuits, closing out the rest of the world and eliminating distractions, and then in their own different ways becoming leaders.

I gave a copy of Leading (a book co-authored by Sir Alex Ferguson and Sir Michael) to Arthur Rock, one of the best technology investors ever. Arthur Rock was the first investor of Intel, and one of the first investors in Apple. He sent me a very sweet note having read it, saying he would welcome Sir Alex to be the chief executive officer of any business that he has backed. That says a lot.

Which investments make you the most proud?

I think pride actually is the beginning of the end. If any of us at Sequoia should feel proud, we should be taken out to the back stoop and severely whipped. Because ours is an intensely competitive business with no room for complacency. again it’s not unlike football. I don’t want to stretch the analogy too far, but it’s not unlike trying to play at the top of the Premier League. As soon as you become complacent or keep looking backwards at past successes you can almost certainly write the script of your own demise.
I realise this sounds glib, but for me, it has a lot of meaning.The very best investment I’ve made for the last thirty years is in Sequoia Capital, helping develop it and build it. Because without any of that, none of the rest would have happened.

What would you say is the next revolutionary technology?

The honest answer is I have no idea. Anyone in the investment business in Silicon Valley or the tech investment business in Europe who says they can predict the next big company is either smoking dope or too full of themselves. I will give you two current examples of household names no one could predict a few years ago.

One is Uber and the second is AirBnB.

Ten years ago, who would believe that a couple of characters in San Francisco would will build a company which threatens the future prospects of the entire automobile industry?

We are fortunate to be the first investor of Airbnb back in 2009. We invested in three people who had decided there’s a business in figuring out where to find air mattresses for people to sleep in. If you had said that by 2017, more rooms will be booked per night on Airbnb than in all the major hotel chains around the world combined, nobody would believe that back then.

We can identify trends and talk about how the power of computing can really change the way we live and do business, but I long ago gave up thinking that we can identify the particular company that will be significant ten years from now.

Any investor in California who says they are able to predict the next company that will be worth even a tenth as much Apple, Google, Microsoft or Facebook is being less than forthright.

How do you make sure you pick winners?

If you think of a little company with three people–think of Airbnb, for example –it seems like a journey against all odds. Certainly in the first 12 to 18 months, (most people would be) very sceptical to working in a start-up, so it’s extremely difficult to find bright engineers. If (start-ups) are selling to corporations, very few would want to buy from companies they don’t know. And consumers are very reticent about buying from a company whose service they aren’t aware of.

As part of the gestation of these companies, we spend a lot of time trying to persuade potential customers, employees, or other investors of what it is that we see in that particular opportunity – right or wrong. In the beginning, nobody expects these companies to succeed. They are tiny little mice droppings on the face of the universe that can easily be eliminated by one of the big competitors.

How can companies like Uber explain their high valuations? Are we living in an age where to make money, we have to lose money?
There’s been much debate about these so-called unicorns, the companies that have a purported value north of £1 billion–or in some case a billion in monopoly money. You are absolutely right there will be a whole bunch of companies that seem to have a very high valuation today, and some time in the future it’ll melt down to nothing.

They’re losing money, they don’t have a firm grip on their business models, the management team is out for lunch, and it’s only a matter of time where the enthusiasm will die out. There’s a very short list of companies, I would wager, around the world including China, that are going to be monumentally valuable enterprises ten years from now.

Uber does lose money, but in its first market, North America, it made a substantial amount. The losses are coming from newer markets where Uber is engaged in ferocious competition for market share. To some extent in Europe, a large extent in China and to a lesser extent, India, it’s a bloodbath in these markets. I’d love to revisit this topic in ten years and have the same conversation about companies like Uber or Airbnb. Yes, £50 billion sounds like a lot of money today, but I’d wager that it would seem like a fairly small valuation ten years from now.

And to put that in context, when Google went public, it had a valuation of $24 billion which everyone thought was as absurdly high as Uber’s valuation. To go further back in history, in 1986 when Microsoft went public with what was supposed to be a preposterous valuation, people thought that there was only one possible route for that company. And that was a valuation of $400 million 30 years ago.

You look at those companies now and the enormous businesses they’ve built, and it makes sense. There will be four or five companies today that have similar sized market opportunities that are losing money now, and people are understandably sceptical of these valuations, but these are the businesses that will become formidable.

What do you think is holding the UK back when it comes to producing global tech giants?

The issues that countries in Europe tend to have is the market size. If you look at the 20 most successful internet companies in the world you won’t even see American companies. They’ll mostly be from China because of its market size. There are 1.3 billion customers to serve with a specialised offering. It’s easier to get off the ground.

It’s also easier to develop a business when you’ve had experience building a successful business before. With the right approach, nothing is impossible. There is a company that started with a few people in Europe that has global reach today. It’s a five-letter household name – it’s called Skype.

Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.