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>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